A considered approach to dual class share listings

AS Singapore Exchange (SGX) moves into the final consultation with detailed listing rule changes to pave the way for companies seeking dual-class share (DCS) structures to list here, the chasm between those in favour and those against remains just as wide as when the debate first started years ago.

Not surprising, some fractions remained unappeased by SGX's proposed safeguards to the two major risks related to DCS structures - expropriation and entrenchment. They clamour for even tighter rules to ensure the those holding the multiple vote (MV) shares do not abuse the structure at the expense of minority shareholders' interests.

Robson Lee, partner, Gibson, Dunn & Crutcher LLP, is among the camp advising tighter rules.

"The rules should minimise the possibility for management shareholders holding MV shares to game the system by procuring their concert parties who hold one-vote (OV) shares to vote for a deviation that could dilute the safeguards against entrenchment and expropriation." "The rules should thus require management shareholders holding MV shares to declare all their concert parties who may be holding OV shares at the time of any such general meeting,'' Mr Lee argued.

Mr Lee believes that no transfer of any MV shares should be permitted to any person who has no clear and defined role whatsoever in the management or development of the business or operations of the group.

In welcoming the controversial structure which allows founders and certain shareholders to have higher voting rights or dividends than others, SGX has taken a very practical and considered approach, balancing the need to support the growth of enterprises in the new economy, while protecting minority shareholders.

As a market infrastructure, SGX should facilitate corporate fundraising activities. Instead of a 'third board' as suggested by some, SGX believes that the current main board regime, with its stringent rules and regulations, coupled with the Code of Governance, is robust enough to ensure minorities are well protected. There is no need to slap on additional admission criteria for DCS structures.

Despite Singapore operating under a caveat emptor regime, the regulator will take the added step of ensuring that companies with DCS structures are easily identified on trading screens. Those who are uncomfortable in investing in companies with such structures can simply avoid them.

With the main board criteria approach, SGX has indirectly lowered the minimum market capitalisation threshold requirements for DCS companies to S$300 million, instead of the original proposed threshold of S$500 million to target unicorns - a move that will give Singapore an edge over rivals like Hong Kong Exchange (HKEx) which is mulling a HK$10 billion (S$1.6 billion) threshold.

It is assuring that SGX maintains that its "one share-one vote" structure would continue to be the default structure. The DCS structure will be the exception. SGX assures investors that it will impose the same level of rigour and scrutiny in its assessment of DCS applicants and that any potential issuer looking to list with a DCS structure will have to vigorously demonstrate a very compelling reason for the special structure.

Admission will be based on very stringent eligibility criteria and the needs of applicants. Factors it will take into consideration include the business model, the role of the holders of MV shares, company's track record and participation of sophisticated investors. This is certainly a more "needs" based and holistic evaluation approach rather than the "prescriptive" approached recommended by HKEx.

The proposal that each MV share carries a maximum of 10 votes is also an attempt to address entrenchment risk. The fact that the controlling shareholder must be a board of director to retain his MV shares gives SGX significant leverage. In the event of an abuse, SGX has the power to stop him from being a director, and his MV shares will convert to become ordinary voting shares; ie, he will lose control of the company. By giving non-controlling shareholders the power to vote in their own independent directors and for these IDs to chair and form the majority of key governance committees such as audit, nominating and renumeration committees, SGX is ensuring that public shareholders are in the driver's seat on key issues.

All things considered, Singapore looks ready to move on from what has been primarily an academic discussion, and resistance, to final adoption with strong regulations and rules in place to meet new market demands.

The message is clear: Singapore is nimble, future-ready and open for business.

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