SGX close to allowing exceptions for dual-class share listings

Singapore

THE Singapore Exchange's Listings Advisory Committee (LAC) is set to lay out ground rules in the coming weeks that will allow for multiple-class share structures, according to sources familiar with the matter.

The LAC, an autonomous body that provides independent opinions on unusual listing applications for SGX, is expected to allow dual-class structures only when there are compelling reasons to do so, the sources said.

Examples of such reasons would be when there are certain individuals who play indispensable roles in the company, such as the founders of search engine giant Google; or when an uneven ownership structure is long-standing practice.

The LAC will determine if listing applicants meet the requirements to have dual-class structures.

SGX could not be reached for comments in time for publication.

The new rules will create a practical pathway to a dual-class listing after the Companies Act was amended in 2014 to allow multiple-class share structures. Although the law has been changed, the Singapore Exchange has yet to amend its listing rules and processes.

Allowing dual-class share structures will give SGX something to offer that its rival in Hong Kong cannot. Hong Kong Exchanges & Clearing in 2015 abandoned plans to allow dual-class shares after its regulator, the Hong Kong Securities and Futures Commission, blocked those plans.

The debate in Hong Kong arose after Alibaba.com took its massive initial public offering to the United States instead of Hong Kong because its key owners wanted to retain stronger control of the Chinese e-commerce firm.

Like Alibaba.com, technology companies whose products and strategies are closely tied to their founders have been among the most prominent uses of dual-class structures over the past decade, embodied by case studies like Google and Facebook. SGX will hope to attract some of those companies. "These changes to the listing rules may make us a more attractive listing venue for technology companies, including Chinese technology companies," said lawyer Stefanie Yuen Thio of TSMP Law Corp. "Prior to this, the fact that we did not allow dual-class structures, effectively took us off their radar screen."

But dual-class structures have attracted a fair amount of controversy, with critics highlighting the fundamentally inequitable nature of the arrangement and the potential for governance abuses.

Associate Professor Mak Yuen Teen from the National University of Singapore, a corporate governance expert, has written a number of articles arguing against allowing dual-class shares. He reckoned that it will be difficult to have meaningful safeguards without making dual-class shares so unattractive that there would be few issuers willing to use the structure.

"We need to be aware that institutional investors are generally against it and this will be a real negative from an investor standpoint," Prof Mak said. "We should expect a lot of negative press globally and this may create perceptions that we will do anything to attract more listings."

But the sense on the street may be that the change is inevitable. Ms Yuen Thio said: "SGX would find it difficult to be competitive if it does not open its doors to such companies, not when international stock exchanges like the NYSE have allowed them."

David Gerald, president of the Securities Investors Association of Singapore (Sias), a retail investor advocacy group, noted that dual-class structures are well established in the United States and Europe.

"As a leading financial centre in Asia, Singapore cannot avoid dual-class listings and it also needs to offer these type of fund raising to not only attract companies to list here but also for our own home grown companies," said Mr Gerald, who spoke on behalf of Sias and not the LAC, of which he is a member.

Mr Gerald said it is important to ensure that investors fully understand the features and risks of dual-class structures.

"Investors must understand that they could be buying the 'B Class' shares which comes with no voting rights," he said. "This means they cannot participate in major decisions which will affect the company. Retail investors should, therefore, think very carefully before buying these type of shares."

Regardless of where they stand on the issue of dual-class shares, the observers were of one mind in advocating for safeguards.

Ms Yuen Thio said certain matters should require approval by the audit committee or by a higher percentage of independent directors if certain parties have greater influence over board composition.

She and Prof Mak also pushed for limiting the permanence of special rights.

"There are a variety of special rights attached to dual-class shares," Ms Yuen Thio said. "Some entrench voting rights, giving control to certain shareholders (who are usually the founders). I would recommend that these be reduced over time and should not be entrenched forever."

Prof Mak said all shareholders, on a one-share one-vote basis, should have to vote on a continuation of superior voting rights if there is a change in management. Superior voting shares should also convert to common shares when they are sold to outsiders. Controlling shareholders should also have fiduciary obligations, he said.

Mr Gerald stressed the need to improve public understanding: "Investor education is important for retail investors to know where and how much they should invest according to their own risk profile."