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SGX lowers entry for dual class share listing, safeguards up

Candidates won't be early stage companies; market participants laud SGX's proposed safeguards against expropriation and entrenchment risks

Singapore Exchange (SGX) on Wednesday kicked off the final consultation stage for dual class share (DCS) listings, unveiling detailed rules and safeguards described as comprehensive by most experts.


SINGAPORE Exchange (SGX) on Wednesday kicked off the final consultation stage for dual class share (DCS) listings, unveiling detailed rules and safeguards described as comprehensive by most experts.

"Singapore is restructuring and transitioning to a new economy. The Committee on the Future Economy has made clear in its recommendations that everyone has a role to play including capital markets. Our role is to provide a capital structure in which new economy companies have the best chance of success," Tan Boon Gin, chief executive officer of SGX Regulation (SGX Regco) said at a press conference.

"What these companies need is the ability to raise substantial funds in order to grow quickly as well as the freedom to focus on long-term growth. We therefore agree with the committee's recommendations to allow certain companies to list using dual class share structure," Mr Tan shared.

SGX plans to allow firms with an expected market capitalisation of S$300 million to list with DCS structure, versus an earlier proposed threshold of S$500 million, a move that could give the city-state an edge over Hong Kong, which is mulling a market cap of at least HK$10 billion (S$1.6 billion).

"The feedback received has been that the main board admission criteria should apply. Therefore, any DCS aspirant still needs to meet the mainboard entry requirements, and so isn't an early stage company," Michael Tang, SGX's Head of Listing Policy & Product Admission, told The Business Times when asked why the Catalist board was not considered.

DCS companies must meet SGX's main board entry criteria.

"The minimum S$300 million market capitalisation is just one of the three criteria. There are three alternative admission criteria... and the company needs only meet one of the three." For instance, "if the company is able to have S$30 million pre-tax profit for the latest fiscal year with an operating track record of at least three years, then there is no requirement to meet the market capitalisation requirement."

Companies seeking to list under the DCS structure must demonstrate and convince SGX that they need the structure to succeed. SGX will look at the role and contribution of the holder of multiple vote (MV) shares, the company's track record, growth trajectory and participation by sophisticated investors.

"The one-share-one-vote structure will continue to be the default structure. The DCS structure will be the exception," Mr Tan stressed.

Also proposed are safeguards against the two main risks presented by DCS structure - expropriation and entrenchment risks.

On expropriation risk, where owners seek to extract excessive personal benefits from the company, SGX will be giving non-controlling shareholders the power to vote in their own independent directors (IDs) and these IDs will chair and form the majority of key governance committees such as audit, nominating and remuneration committees.

To prevent founders from entrenching themselves, the SGX has proposed allowing each multiple vote (MV) share to carry a maximum of 10 votes, and limiting initial holders of MV shares to only directors. There is also an event-based sunset clause requiring MV shares to be converted to one-vote (OV) shares once the MV shareholder ceases to be a director, or sells or transfers the MV shares.

However, Robson Lee, partner at Gibson, Dunn & Crutcher LLP, said safeguards against entrenchment and expropriation should be tightened.

"The rules for DCS should clearly state that in a scheme of arrangement, MV shareholders shall form a separate class vis-a-vis OV shareholders for purposes of ascertaining the decision of shareholders in a proposed scheme. The rules in the Takeover Code should also be synchronised with the Listing Manual to clearly define whether all MV shares should be treated pari passu with OV shares in a takeover situation."

For Stefanie Yuen Thio, Joint Managing Partner at TSMP Law Corporation, SGX's proposed safeguards are more comprehensive than she had expected.

"What I particularly appreciate about the proposed rules is that they have been structured with an eye on mitigating risk, rather than on rule observance. For example, there are no limits put on which industries can adopt DCS; rather the SGX will look at the business case for each applicant and the role the founders have played.

"This recognises that we operate in a disruptive economic environment where industry boundaries are shifting and business modalities are changing rapidly."

Eng Seat Moey, Head of Capital Markets Group at DBS, said the proposed safeguards would be sufficient to mitigate and limit risk concerns.

"An important point to note here is that such dual class structures must be evaluated in the context of having the right safeguards in place and a very stringent eligibility criteria for admission, balanced with the flexibility to allow genuine companies with the right mindset and compelling reasons to list with such structures.''

Choo Oi Yee, managing director, Head of Singapore Investment Banking at UBS AG, agreed that SGX has provided a good framework.

"Investors are also likely to take these into consideration, amongst others, when they make their investment decisions,'' Ms Choo said.

David Gerald, founder of Securities Investors Association (SIAS), believed that at the end of the day, retail investors need to make their own judgement on DCS companies and their management.

"It's buyer's beware. If you go in, you need to go in with your eyes open. No one is forcing you to invest,'' Mr Gerald advised.

Ms Choo said that at the end of the day, Singapore must stay competitive as a financial hub, and its regime must allow for a rapidly evolving technological and capital markets environment to stay ahead as a leading, world class exchange.

"This means we need to balance between being nimble and responsive, and having the appropriate minority protections in place."

The consultation is open till April 27. The exchange has said it plans to adopt DCS structure shortly after June.

READ MORE: Commentary: A considered approach to dual class share listings