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Dual class shares: there should be minimum market cap of S$500m at time of listing

THE consultation paper on the listing framework for Dual Class Shares (DCS) structures recently issued by the Singapore Exchange contains important conditions which can help to protect investor interests.

For companies with DCS, the biggest risks for shareholders are the lack of say on the company's governance and the expropriation danger. Therefore, the main safeguards should be the protection of the public shareholders in these two areas.

The SGX paper proposes that three key board committees - Audit, Remuneration and Nominating - have a majority of independent directors (ID) and be chaired by an ID. In addition, the removal and appointment of any ID has to be on a one-share-one-vote basis. These two conditions, put together, will help to promote independent-mindedness among IDs as well as help ensure that these committees function more independently.

Assuming that under the one-share-one-vote structure, the DCS holders are in the minority, then it is the outside shareholders that have the biggest say in the appointment of these IDs and we should then expect that the IDs will have to safeguard the interests of ordinary shareholders as their appointments are determined by them.

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Another important proposal is that there will be a sunset provision whereby in any sale or transfer of DCS, the DCS become ordinary shares. This can help to prevent DCS shareholders from getting a better deal on their shares than ordinary shareholders in a sale situation.

However, there is also a suggestion that a vote be taken on whether the DCS structure can continue after the sale. I would suggest that if this is going to be the case then the DCS holders should not be allowed to vote on the matter due to a conflict of interest.

In order to further protect ordinary shareholders, I suggest that a market capitalisation requirement be imposed on the DCS structure.

(SGX is currently proposing that 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.)

I would think that the very fact a DCS structure exists is to enable DCS holders to hold a small stake in the company while still having large voting rights. Therefore, the holders should still have a rather large "skin in the game" in terms of a high equity value. In other words, I believe that allowing a shareholder to have a controlling voting interest in a company while holding only $10 million or $20 million worth of equity is too low.

Rather, DCS holders should have at least $50 million, if not more, of equity at listing. Working backwards this translates to at least around $500 million or more of a listing market capitalisation for the company.

I feel that while the proposed safeguard conditions can help to protect ordinary shareholders, if my suggestions - particularly the imposition of a market capitalisation minimum of $500 million - can be included, it will go further in helping to balance the needs of DCS holders with those of ordinary shareholders.

Ang Hao Yao