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Dual-class share IPOs still an 'emotive debate', CFA Institute poll finds

SINGAPORE and Hong Kong both revamped their listing rules to allow the use of dual-class shareholdings (DCS) in initial public offerings this year, citing support from a “majority” of stakeholders in their latest round of consultation.

But a new poll of 454 investment professionals in the Asia-Pacific region suggests that DCS remains an "emotive debate", with support for and opposition to DCS pretty much split down the middle.

In a March poll of CFA Institute members conducted by the global organisation, 53 per cent were opposed to DCS structures while 47 per cent where in support of them.  

Warning that DCS structures could be a slippery slope into the erosion of corporate governance standards, the CFA Institute urged exchanges that have DCS structures to consider mandating time-based sunset provisions to safeguard minority shareholders.

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"The single most important safeguard is a mandatory time-based sunset of not more than five years," the CFA Institute wrote in a report on Tuesday.

Time-based sunset clauses would ensure that super voting rights will automatically convert to regular voting rights on a “one-share, one-vote” basis after a period agreed upon between management and investors, it said.

"On the one hand, this safeguard provides enough time for founding shareholders to execute their strategy and create value without undue worries of market vagaries; on the other hand, it protects public shareholders from entrenchment."

The report cited a recent US Securities and Exchange Commission (SEC) study covering 157 DCS IPOs in the United States since the early 2000s, of which 71 had sunset provisions.

"Although the valuations of the two groups were similar at the time of IPO and during the first two years subsequent to the IPO, from the third year onward companies with sunset provisions begin to trade at a valuation premium as compared to those with a perpetual DCS structure. This suggests that whatever advantages a founder or an entrepreneur might bring to a company in its early years would fade over time," the report observed.

"Even in the US where mandatory time-based sunsets are not mandatory, a growing number of technology companies have imposed such provisions voluntarily," the Institute added.

The Singapore Exchange (SGX) has not introduced a mandatory time-based sunset provision. Some respondents to the SGX's public consultation had expressed concerns that a time-based sunset clause would undermine the commercial objective of a DCS structure, said Michael Tang, head of listing policy and product admission at the SGX's regulatory unit.

To be sure, the SGX has other safeguards in place. For instance, IPO applicants are subject to suitability tests. Factors taken into consideration include whether the new issuer has a conceptualised long-term plan, operating track record, as well as the role and contribution of DCS beneficiaries to the issuer.

The CFA Institute also flagged that in the Asia-Pacific region, legal action against rogue companies or management is not an avenue available to most investors. 

"A company may have an excellent track record, but there is no assurance that such outperformance will continue indefinitely. When things go wrong, public shareholders of listed DCS companies have little influence — without a vote, they cannot provide oversight of boards or management," it wrote.

"For family businesses with a DCS structure, it is much easier for major shareholders to abuse their position and take advantage of public shareholders, either through massive executive compensation packages or questionable consultancy arrangements."

Strikingly, the report drew a parallel between the current boom in DCS listings in Asia and the previous high watermarks in DCS listings in the US during the 1920s and 1980s.

Common features across all three time periods include increased liquidity and outsized optimism, the Institute wrote. The booms in the 1920s and 1980s were each followed by a prolonged period of market turmoil.