Dual-class shares: Safeguards needed

Hong Kong's recent move to reject dual-class share listings could spell an opportunity for Singapore to fill a gap in the market, according to some market watchers.

This would help the Republic boost its moribund stock market, especially as competition to woo initial public offerings (IPOs) continues to intensify globally.

Dual-class shares are different classes of shares that carry different or weighted voting rights, and grant one class of investor more voting rights or the right to make certain strategic management decisions - as opposed to the traditional "one vote per share".

Corporations such as Facebook and Groupon Inc, for instance, offer two classes of shares, with one type carrying more votes than the other.

These special shares are generally held by founding shareholders, directors and key employees, who are thereby accorded more control over decisions of the company.

When Hong Kong threw out proposals from its bourse operator to allow dual-class listings last month, it retained a stance that had also lost Alibaba Group's record-breaking US$25 billion (S$35.5 billion) listing to New York last year.

The Chinese e-commerce giant, in looking for a different governance structure, took its listing to the United States instead.

Ms Stefanie Yuen Thio, who handles IPOs and mergers and acquisitions at legal firm TSMP Law Corporation, noted that Singapore, too, in not welcoming companies with dual-class shares, could be beaten by competitors as a result.

Already, the local stock exchange has lost out on some high-profile listings, including that of Manchester United, the world's best-supported football club, which in 2012 ditched plans to list here, again in favour of the US.

The local market has faced a difficult path, in line with equity markets in many parts of the world. The benchmark Straits Times Index has lost 23 per cent in the past year, while the bourse has seen only 10 IPOs so far this year, all of them smaller-sized companies.

She noted that Singapore and Hong Kong both rank as "the key stock exchanges" for corporates wanting to list in Asia, especially with much of the world's capital being managed and sited in the region.

"Now that Hong Kong seems to have shut the door to dual-class shares, Singapore would be a natural listing venue for (these companies)."

Allowing dual-class listings, added Ms Yuen Thio, would then open up a unique opportunity for Singapore to "pull ahead of Hong Kong and become the pre-eminent listing destination in Asia".

The Singapore Exchange's (SGX) existing stance does not allow companies to list dual-class voting shares here. But the bourse had said in 2012 that it was looking into whether such share structures should be permitted, together with the Monetary Authority of Singapore (MAS).

Mr Robson Lee, a partner at Gibson, Dunn & Crutcher, was in favour of the idea, noting that allowing dual-class listed share structures would "engender a more complete and dynamic market".

Specifically, the move could allow the SGX to draw high-technology companies as well as those in the bio-pharmaceutical and life sciences industries, he said.

Mr Lee noted that the management shareholders of such high- tech firms - which invariably hold a number of pre-IPO financing rounds - tend to want more voting rights in their shares to prevent a hostile takeover of their firms.

But veteran investor and activist shareholder, Mr Mano Sabnani, firmly believes Singapore should steer clear of dual-class shares.

"The implication is that small shareholders will be second-class in such companies," he said. "You invest in them only for dividends and capital appreciation.

"But when it comes to a special situation relating to a merger or acquisition or corporate governance, you have to allow the major shareholders to have their way."

Mr Sabnani noted that already, minority shareholders here have the odds weighted against them on corporate governance matters, as their concerns are usually "brushed aside" with the ordinary vote count.

Voicing similar concerns, Securities Investors Association Singapore chief executive David Gerald noted that the potential risk of corporate abuse is "a real one".

"Minority controlling shareholders would be able to vote down takeover proposals at general meetings at their discretion - this means that potentially lucrative takeovers will be next to impossible to conduct and a poorly performing board or management could prove difficult to dislodge," he said.

Still, if Singapore were to go down the route of dual-class share structures, corporates should not be given carte blanche to list dual-class shares, noted Ms Yuen Thio.

She said that Singapore should relax the rules "only where there are compelling business reasons", as is the case with technology firms.

These companies have "a different DNA from traditional brick- and-mortar companies" and are very dependent on key personnel - "management structures which enable key executives to drive the direction of the business may be necessary for the company's growth strategy".

She added that Singapore regulators should liberalise the regulatory framework in a calibrated way, rather than adopt the US model of dual-class structures wholesale.

"For starters, limit these share structures to super-sized listings. Large IPOs will attract institutional investors and savvy fund managers who are better equipped than retail buyers to evaluate the company's business and management," said Ms Yuen Thio.

"Also, consider building in 'gates'. Make the dual-class structure subject to renewal by a shareholder vote after, say, the first five years post-IPO.

"This will force the management team to prove the worth of the structure to the business and prospects of the company and obtain a fresh mandate periodically."

Corporate lawyer Bernard Lui, a partner at Morgan Lewis Stamford, agreed that strong safeguards and restrictions should be put in place to "balance entrepreneurship and good corporate governance".

Such rules, he noted, should consider factors such as reputational risks, including the profile of the company's management, its controlling shareholders and its track record, among others.

Shares with additional voting rights should also come with certain features such as restrictions when a conflict arises and when there are perceived interested transactions.

"Ultimately, it will be a case of 'buyer beware' - and it will be largely dependent on the culture and values of management or the controlling shareholders who own the shares with additional voting rights," said Mr Lui.

The latest amendment to the Singapore Companies Act - which allows companies to issue shares with more than one voting right on a conditional basis come the first quarter of next year - could spark the beginnings of a more flexible and welcoming capital market for companies, noted Mr Lee.