Firms go for dual class shares to protect rights

The Google logo is seen on a door at the company's office in Tel Aviv. Google's 2004 IPO sparked a series of dual class tech listings.
The Google logo is seen on a door at the company's office in Tel Aviv. Google's 2004 IPO sparked a series of dual class tech listings. PHOTO: REUTERS

Such shares give high-tech firm owners an influence that is bigger than their financial stakes

Biopharmaceutical, life sciences and high-tech firms that require funding before an initial public offering (IPO) tend to opt for dual class share structures to protect their voting rights, say observers.

Companies in these sectors need a lot of financing to develop products before listing. Because banks are not likely to lend, capital will likely come in the form of debt instruments from venture funds and private equity or institutional investors.

"Once the company is able to show good progress, the financiers will convert the debt financing to equity, resulting in very substantial dilution of the founders' shareholdings," said corporate lawyer Robson Lee. "Upon IPO, the founders' shareholdings will be further diluted, as too many shares will be in the hands of outsiders. These companies therefore need dual class shares to maintain management control."

Dual class shares concentrate certain rights in the hands of owners, giving them influence that is bigger than their financial stakes. These rights vary but could include a higher voting percentage, and the right to control matters such as the composition of the board.

These structures are controversial because companies with such shares are usually perceived as being less responsive to shareholder demands.

Google's 2004 IPO sparked a series of dual class tech listings, including Facebook, LinkedIn and Groupon, all firms whose voting rights are dominated by company founders. This structure enabled Google's founders to retain control of the firm, while taking risky bets on new technology and growing its search and advertising business.

Dual class shares are justifiable if they allow founders critical to the success of a business to retain control, lawyer Stefanie Yuen Thio of TSMP Law Corp said.

She added that it is possible to structure the rights such that ordinary shareholders retain their say on corporate governance issues such as board oversight and how conflicts of interests are dealt with.

But corporate governance expert Mak Yuen Teen said: "The safeguard of mandatory requirements for independent boards and committees and independent directors being voted on one share one vote suffers from lack of accountability of independent directors here.

"I would recommend imposing fiduciary duties on those who control companies through dual class shares and allowing contingency fee-class action like in the US."

Regulators also need to raise their game, he noted, adding: "If we start having foreign listings coming, these safeguards may not work.

"Can you imagine trying to enforce your rights, say, against a Russian company with dual class shares listed here, if things go pear-shaped?"

While some lamented the loss of the Manchester United football club, which bypassed the Singapore Exchange for the New York Stock Exchange, Prof Mak said "it's no great loss".

"Manchester United has not done well since listing. It has poor governance," he said.

A version of this article appeared in the print edition of The Straits Times on September 02, 2016, with the headline 'Firms go for dual class shares to protect rights'. Print Edition | Subscribe