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Cai Jin

Protecting investors in dual-class listings

For caveat emptor to work, the best safeguard is to have no safeguards

Dual-class shares certainly have their critics - after all, they allow company founders to maintain control by giving them superior voting rights, even after they sell off the bulk of their stakes.

Historically, such share structures were usually confined to family-run enterprises or media companies where they could be justified in the name of protecting journalistic integrity.

But it is now common in the United States to have new listings with dual-class structures. Contentious when Google did it in 2004, it had become less so by the time Facebook had its initial public offering in 2012.

For stock activists and corporate governance experts, this is a step backwards as it can potentially insulate poorly performing managers from calls for regime change demanded by a majority of shareholders.

But bosses of big US tech firms feel the disaster of turfing Mr Steve Jobs out of Apple in 1985 lends moral authority to structures that protect them from being bullied into decisions that would boost near-term stock performance at the cost of long-term goals.

An example of a dual-class share that has not scored with investors is Manchester United which, since its listing four years ago, has risen only about 6 per cent from its issue price. In the case of successful dual-class share listings, taking a bet
In the case of Facebook, buying its shares boils down to believing in its charismatic founder Mark Zuckerberg and the control he wields over the company. PHOTO: REUTERS

The Singapore Exchange (SGX) is debating if it should follow the US as it looks for fresh ways to attract high-profile companies to list here.

An example of a dual-class share that has not scored with investors is Manchester United which, since its listing four years ago, has risen only about 6 per cent from its issue price. In the case of successful dual-class share listings, taking a bet
An example of a dual-class share that has not scored with investors is Manchester United which, since its listing four years ago, has risen only about 6 per cent from its issue price. In the case of successful dual-class share listings, taking a bet on a company is essentially taking a bet on the founder. PHOTO: BLOOMBERG

This comes after a Companies Act amendment allowing public companies to have dual-class structures and the subsequent green light from the independent Listings Advisory Committee, provided certain safeguards are met. These include compliance with the corporate governance code on board composition and independence and that the privileged shares lose their status when they are transferred or when the original owner no longer holds the same role in the company.

To its credit, the SGX hasn't made up its mind yet and it had even convened a panel discussion of industry professionals, academics and market participants to debate the subject.

A public consultation will be launched as well.

SGX chief regulatory officer Tan Boon Gin noted that the issue boils down to one of trust: "How can we trust management if we have no control over you at all?"

If dual-class shares are to be allowed in Singapore, investors must be ready for it and, to that end, investor education will have to play an important role, but Mr Tan feels that what is even more important is to give investors a choice.

Any framework established for dual-class shares will be supplemented by the existing framework for all listed firms, which already has safeguards such as rules governing transactions between the majority shareholder and the company.

Still, not withstanding the forthcoming public consultation, many believe it is only a matter of time before dual-class shares make their way into the SGX's Listing Manual.

Some, like Associate Professor Lawrence Loh of the National University of Singapore, have argued that the market should settle the debate on whether there should be dual-class listings.

He said: "I think the market is the most efficient allocation mechanism, and if we have all the necessary safeguards and regulations and operational infrastructure in place, I think we can benefit from dual-class shares."

Singapore may not be able to attract all the unicorns but it "occasionally may have popcorns and they come with a lot of variety and flavour", he added.

But it is the variety and flavour of the type of companies that may be attracted to the SGX's dual-class listing framework that worry some market pundits.

Veteran merchant banker Daniel Ee expressed concern that if a dual-class listing hits a bump and management is unable to correct the situation, affected investors might be tempted to write to their MPs and press them to do something about it.

He said: "This market is not very liquid. The first few companies that come here will not be the truly global companies. They will be medium-sized companies, probably start-ups, and the chances of failure may be quite high."

So perhaps, it is understandable to find market pundits arguing for fewer, rather than more safeguards, for dual-class shares to ensure that caveat emptor (buyer beware) is upheld to the fullest - and investors fully understand the risks they are undertaking.

Aberdeen Asset Management Asia's head of corporate governance David Smith goes even further, arguing that it would be better not to have any safeguards at all if the authorities were to press ahead with the idea.

"The safeguards simply don't stack up. Each one of those proposed safeguards can be circumvented by a market full of people whose job is to find a way around the rules," he was quoted as saying in a recent Business Times interview.

In any case, adding so many safeguards might make the SGX an unattractive listing venue for an IPO hopeful, considering that other markets such as Nasdaq do not have such inhibitions, he added.

It is a sentiment that I fully share. Loading the system full of safeguards will only give investors a false sense of security that the due diligence they are supposed to do has been outsourced to the regulators.

This also gives them the opportunity to cry foul, saying regulators are not doing their job, when something goes wrong.

But it is entirely up to an individual investor whether or not he wants to buy a particular share, and nobody is forcing him to make an investment against his will.

In the case of successful dual-class share listings, taking a bet on a company is essentially taking a bet on the founder. Consider the case of Facebook. Buying its shares boils down to believing in its charismatic founder Mark Zuckerberg and the control he wields over the company.

But apart from a handful of dual-class listings such as Google and Facebook that make the headlines with their blockbuster business successes, there are plenty of other dual-class companies which have struggled as they do not possess the same star power to excite investors.

One good example is football giant Manchester United, which prompted considerable soul-searching when it ditched Singapore for a New York listing because the rules here did not permit multiple classes of shares. In the four years since it was listed, it has risen only about 6 per cent from its issue price.

When the dotcom bubble burst at the start of the new millennium, the number of dual-class firms listed in the US fell - from 482 in 2000 to 362 in 2002.

Still, dual-class shares may turn out to be a passing fad if the current Internet boom follows a similar trajectory. So much for the angst over whether dual-class shares should be allowed here or not.

A version of this article appeared in the print edition of The Straits Times on December 05, 2016, with the headline 'Protecting investors in dual-class listings CaiJin'. Print Edition | Subscribe