Commentary: Debate on dual-class shares should centre on safeguards

Date: March 31, 2018

First published in Straits Times on 31 March 2018

By almost all accounts, dual class shares (DCS) will soon be part of the local investment landscape. The Companies Act was amended in early 2016 to allow companies to set up such capital structures; the Singapore Exchange’s (SGX’s) Listing Advisory Committee (LAC) then recommended allowing DCS companies to list here; and then SGX sought public feedback on the feasibility of introducing DCS here as well as what safeguards, if any, might be required.

Clearly then, local officialdom is serious about bringing in DCS companies. For Singapore to be a vibrant capital market, the import of DCS appears to be essential as investors cannot be denied their right to participate in these firms.

The reason safeguards are considered is that DCS companies give certain privileged shareholders – usually founders – disproportionately greater voting rights relative to their shareholdings thus violating the traditional “one person, one vote system’’ that has served markets well for decades.

It provides for the separation of voting power from equity in order for “insiders” to maintain control of the company, but enabling them to access the capital markets at the same time. Quite understandably, the question of whether to allow DCS here has been the subject of heated debate over the past two years, with the main opposition coming from corporate governance advocates.

In an ideal world, shareholder protection should count above all else and so the doors of the local market should not be opened to DCS firms. And promising start-ups – technological and otherwise – would still list here. But the realities of today’s business world are far from ideal.

The DCS structure was first introduced in Britain as a measure of protection against corporate hostile takeovers. Today, it is seen in high-tech and social media companies like Google, Facebook and Groupon – the primary reason to justify the structure of these companies is the need for “insiders”, or founders, to implement a long-term goal of the company and the possible impediments that the short-termism may pose to investors.

Although governance concerns are valid – more on this later – at this stage of the game when high and advance technology is widely accepted as the way forward for the local economy, when high-tech companies increasingly favour DCS and when there have been clear overtures by the authorities over the past two years that Singapore should allow such structures, the question of whether to allow or not is now really academic.

The preferred approach in a disclosure-based, caveat emptor market should thus be to provide investors with sufficient information to make up their own minds and for market operators to provide as wide a range of investment options as possible. If DCS companies are gaining in popularity, then local investors should not be denied the opportunity to invest in them. Moreover, there could be a class of investors that is not overly concerned with having equal rights and is happy to invest purely on the basis of potential returns. The simple logic is, those who do not understand these companies and their structure, they should give it a miss. It is a fact that many retail investors have already participated in DCS companies like Google, Facebook and the like with the help of online brokers in Singapore. Nevertheless, retail investors must think twice and do the necessary research before investing in DCS companies. Perhaps, it may be good to consider whether DCS should be classified as Special Investment Product.

This is not to say that governance worries are trivial because minority shareholders who very likely provide sizeable capital could well be disadvantaged or have their rights trampled on by the controlling shareholders. The debate should therefore now centre on what safeguards, if any, are needed and whether whatever is ultimately decided would be sufficient to manage the governance risks.

For example, a welcome and novel proposal in SGX’s Consultation Paper is the “sunset clause” whereby multiple-vote shares are converted to one-vote shares after a certain prescribed period. The thinking behind this is that DCS is widely seen as being suitable for young, promising high-tech start-ups but should not be permitted for mature or existing companies. This suggestion is useful and should be written into the rules, starting with five years but with a view to possibly extending this on a case-by-case basis.

In addition Securities Investors Association Singapore (Sias) encourages the DCS boards to have majority independent directors including, without exception, the chairman. This would be a safeguard against expropriation risks and protect the rights of minority shareholders.

Another area where striking a balance is needed is the proposal on whether to set a minimum market capitalisation of S$300 million, or even whether DCS companies should be confined to the mainboard, given that Catalist is the traditional avenue for high-growth companies to list. Some might argue that there should be no size limit since demanding large size may not be appropriate for start-ups while others would counter that a larger size may help ensure some quality and, by extension, shareholder protection. This has the support of Sias.

As for an argument made previously that if SGX opens the DCS door, others in the region will quickly follow – Hong Kong, for example, has said recently that it wants to revisit the subject after one failed attempt in 2014 – the answer has to be that the exchange cannot operate based on what others may or may not do.

A final word on the inevitability of DCS here. SGX itself said when it announced the Listing Advisory Committee’s grounds of decision that it “is of the view that a listing framework for DCS structures may help to attract high-quality companies which may not otherwise consider Singapore as a listing venue”. About a year ago, the Committee on the Future Economy recommended allowing such firms here in order for Singapore to remain competitive.

Since the DCS structure deprives shareholders of the power to overrule management decisions, what will be the minority shareholders’ recourse if the management changes its composition or changes the course of the company’s direction? Also, the DCS structure may be difficult to dismantle later on. Enforcement tools that minority shareholders could use to discipline the management or corporate insiders might be important in this instance. For example, the US has a strong class action suit tradition that serves as an important disciplining tool. Maybe it’s time for Singapore to have the same. The aforesaid safeguards should satisfy the opponents to introduction of DCS here. Nevertheless, only time will tell whether there will be flood of DCS companies into our market here.

David Gerald
Founder, President & CEO
Securities Investors Association (Singapore)