Double-edged tool

THIS WEEK'S TOPIC: How do you see the pros and cons of introducing dual-class shares in Singapore?

Loh Boon Chye CEO Singapore Exchange

SINGAPORE and the Singapore Exchange (SGX) embrace innovation and entrepreneurship; we want to help businesses who choose Singapore as a launch pad to the region and beyond. As we move into the New Economy, we are excited to have a dual-class share (DCS) structure in place that allows companies to raise capital quickly and optimise growth opportunities. DCS provides an alternative to how companies can structure their businesses to succeed and deliver value to shareholders, while investors who understand and accept the risks and rewards of DCS will have the chance to invest locally in these businesses.

Kelvin Lee Co-Founder & CEO Fundnel

THE introduction of dual-class shares won't be sufficient in attracting world-class initial public offerings (IPOs), neither would it address long-term concerns such as courting investors and churning more liquidity in the stock market. DCS also brings about complications such as unequal voting rights, giving owner-management more power over the company. It is highly dependent on the integrity of its leadership.

While Singapore remains a leading global financial hub, the fact remains that other stock markets are larger and see much more regular trading volumes. SGX needs to create more interesting investment choices, such as its Catalist listings for smaller cap companies. Combined with active public engagement, this will attract better listings to appeal to millennial investors who have all but lost interest in listed opportunities.

Richard Hayler Senior Managing Director FTI Consulting

WHILE there is an obvious benefit to the Singapore Exchange in terms of remaining relevant, just because other exchanges have adopted dual-class structures does not mean it is necessarily a good thing. One should consider why a second share class might be required. All too often, the answer seems to be because those in control of the company want investors' money but are unwilling to cede control or permit a check and balance on their control.

SGX faces a constant dilemma in that to be successful it needs to attract companies to list and remain listed - but it also has a duty to protect investors. If a dual-class structure removes a check and balance on a company's management, will the remaining SGX regulations and oversight be sufficient to protect investors?

Roger Barker Managing Director, Barker and Associates Ltd Chairman, Global Corporate Governance Advisory Council

IT is appropriate to view dual-class shares with some suspicion as their effect is often to reduce the voice of a significant proportion of the shareholder constituency.

However, in some circumstances - and for defined periods of time - such a share structure may be a valid option. During a growth phase, it may be reasonable to use DCS to shield companies from the short-term demands of capital markets, thereby enabling them to invest in risky projects and innovations.

But such shielding from shareholder accountability is unlikely to be a good long-term solution. Constructive shareholder stewardship is ultimately a key part of good corporate governance, and dual-class shares should not be used to prevent this from ever taking place.

Yeoh Oon Jin Executive Chairman PwC Singapore

THE dual-class share structure helps to widen access to the Singapore capital market by opening up to a more diverse range of issuers, primarily to new economy enterprises which focus on innovation and technology as key drivers for growth and business success. Its introduction will enhance the diversification of Singapore's capital market while maintaining its relevance, competitiveness and attractiveness among the international exchanges.

There needs to be adequate safeguards against entrenchment and expropriation risks arising from this structure as set out in the listing rules. But ultimately, the admission of DCS aspirants and their subsequent enforcement require a lot of judgement - including a set of rules that are sufficiently robust yet flexible enough to protect minority shareholders while not being overly burdensome so as to attract quality DCS listing aspirants.

Tan Chong Huat Managing Partner RHTLaw Taylor Wessing LLP

WE are very glad that Singapore Exchange has taken the bold step to introduce dual-class shares, allowing us to better compete with the likes of Hong Kong and New York. We are also glad that SGX has not restricted it to only tech companies, as conceivably other businesses that are in an early stage of growth may also want to retain a higher degree of management control to ensure that their founder's vision can be shepherded to maturity.

Two years ago, in a BT article on this topic, we suggested possible mitigating measures to address the problems of entrenchment and voting imbalance, such as a sunset provision.

SGX has clearly made a considered effort to balance management autonomy with providing a relatively level playing field for minority shareholders, especially on key matters affecting the company.

David Gerald Founder, President and CEO Securities Investors Association (Singapore)

SOME see the introduction of dual-class shares listing as lowering of governance standards, moving away from the traditionally held view of one share, one vote.

With growing disruptions and the need for businesses to differentiate and invest in new technologies, a dual-class structure provides more flexibility in capital management, encourages innovation and the pursuit of long-term growth.

However, safeguards, such as the sunset clause, is necessary. A study in the US found that after seven years firms with perpetual dual-class stock trade at a significant discount to those with sunset provisions. Nevertheless, one needs to understand the company fully before investing.

Lawrence Loh Director Centre for Governance, Institutions and Organisations NUS Business School

BEYOND the issue of structure, undergirding dual-class shares are actually more fundamental concerns such as transparency and choice. Even with the requisite safeguards, it is vital that proper disclosures are made transparently to the stakeholders. Investors, in particular, must have access to the key information so that they can enter the market with their eyes open. Providing alternative choices is always good as long as the risks and returns can be properly weighed.

From a systemic perspective, economies are revolutionising rapidly all across the world. Singapore's capital markets have to keep up and keep pace. Liquidity is competitively fluid across borders. Singapore needs to be both attractive and safe as a financial hub as it transforms itself for the future economy.

Sheena Chin Country Director, Singapore Veritas

THE introduction of the dual-class shares fits well with Singapore's push to position itself as a fintech and new technology hub. By doing so, SGX joins the global league in terms of offerings to attract DCS listing aspirants led by founder entrepreneurs, such as tech companies which are innovative and have high growth potential.

While the DCS structure insulates the controlling stakeholders such as founders from a short-term mindset, it is still critical for the regulators to exercise proper due diligence to protect the interests of the general investors. After all, there is always a risk where the DCS structure might allow management to make decisions with detrimental consequences for the general investors who are usually at the shorter end of the stick.

Maren Schweizer Director Schweizer World Pte Ltd

SINGAPORE Exchange played the cards right to move towards a more liberal stance with dual-class shares. This contributes to turning Singapore into a capital-raising centre of high-tech companies.

Singapore's high standard of corporate governance is essential to safeguard against entrenchment and expropriation risks. We have to keep in mind that corporate governance is nothing more than guard rails. Now it is the role of the C-levels to play their cards right. Doing so is every leader's responsibility for a common good and future in Singapore.

Chris Burton Country Managing Director Vistra

DUAL-CLASS shares have become an increasingly common feature in family-owned and technology companies. The main advantages are that DCS can help bolster the performance of early stage companies (in particular), by protecting the business from short-term external investor demands.

The corollary of this is that DCS companies may not be subject to robust shareholder challenge and standards of corporate governance. The Singapore Exchange has introduced anti-expropriation and entrenchment measures to mitigate the risks around this, and in general the new structure should ensure that Singapore remains an attractive location for startup companies.

Lim Soon Hock Managing Director Plan-B ICAG Pte Ltd

NOTWITHSTANDING the risks of potential abuse by insiders and the concomitant perceptions of inequality from the control vis-a-vis shareholdings perspective, the Singapore Exchange has little choice but to follow in the footsteps of the US and other competitive regimes, to attract more listings, especially pre-profit companies in the new economy.

The reality is that even without the dual-class share structure, the concerns already exist. In a way, SGX is formalising this, while ensuring full compliance with corporate governance. Such companies would want to offer more investment options for investors, hopefully contributing to enhancing vibrancy and liquidity in the market.

Hari V Krishnan CEO PropertyGuru Group

IN my view, it is a positive move and lends good impetus to Singapore's economic diversification strategy. Making the technology industry a core part of Singapore's future and offering competitive advantages on the global stage are moves in the right direction.

Technology companies, especially local startups, covet structures that allow them to continue to invest in sustainable long-term growth, while providing good returns to shareholders. In some instances, it has been proven that dual-class shares allow tech company executive teams to focus on long-term growth decisions such as investing in research and development rather than make short-term decisions to support quarterly earnings.

Annie Yap CEO AYP HR Group

WITH dual-class shares, owners can execute their long-term goals without being voted out by smaller shareholders looking for short-term gains. The DCS structure also provides more investment opportunities for investors who believe in the company's growth prospects and leadership.

However, the authorities need to keep an eye on the management of the companies listing with DCS to ensure good corporate governance. Capping the founder's votes at 10 votes per share helps to prevent entrenchment, but this still means that smaller investors have less say in company decisions.

Dora Hoan Group CEO Best World International Ltd

THE implementation of any policy has both pros and cons. With today's volatile market, it is good that Singapore introduces dual-class shares structure which allows business owners or management to place long-term interests over near-term results. On the other hand, it may also seem unfair to those with less voting rights.

However, I am confident that safeguards are in place to address such risks to protect shareholders with less voting rights.

There is no doubt that a DCS structure can be an effective means of solving the problems that affect many companies. However, choosing and implementing a DCS structure requires careful consideration to ensure that it can have a positive effect on the company's operations.

Henry Tan Managing Director Nexia TS Group

Whether or not we will see an influx of listing aspirants to Singapore Exchange is a function of liquidity, valuation and investor base. Having a dual-class share structure is just a step towards ensuring that we tick the IPO-aspirant boxes. We can now be on a par with the major exchanges of New York, London, Hong Kong.

Going deeper into DCS, Singapore has created safeguards to ensure that there is no abuse by insiders. This is a good balance in ensuring that while allowing DCS, it does not compromise free market and minority shareholders' rights - very important for governance. I am quietly optimistic of some big issues coming to Singapore.

Magnus Grimeland Founder and CEO Antler

THIS is a strong and smart move from the Singapore Exchange. For fast-growing technology companies, losing control of the direction of the company too early can be decremental - and detrimental. I believe that SGX has found a good balance between investor protection and enabling great companies to continue to grow.

Toby Koh Group Managing Director Ademco Security Group

THE dual-class share structure seems to be an inevitable journey for SGX. In order to play in the big league, we have little choice but to offer what stakeholders want. Henceforth, the Singapore Exchange is one of the possible choices for business owners to consider.

I am sure SGX will continue its emphasis on corporate governance and disclosure to protect investors under the DCS structure. Compliance will be even more important in this new era. I am confident that we will get our fair share of high-growth companies launching their IPOs here in the near future.

David Leong Managing Director PeopleWorldwide Consulting Pte Ltd

DUAL-CLASS shares impact different investors and shareholders. Typically, retail shareholders are the weakest with the least advocacy strength and power, unlike institutional shareholders, who by way of their shareholding can negotiate for better terms, including board seats.

Governance risks are large for the retail shareholders who have no voting rights. On the flip side, most of these retail investors ride on the boom of these new tech companies which they see as smart bets that will hopefully have sharp capital appreciation. It is like riding on the back of these dragons or unicorns. They are not in to influence the companies.

These new economy, high and deep tech companies need a constant infusion of new money to grow. Hence the board and leadership of these companies must retain control, despite large dilution to their shares, so as to steer the business to new, uncharted territories.

SGX will do well with this class of shares as they will attract new high-tech businesses.

Zaheer Merchant Regional Director (Singapore & Europe) QI Group of Companies

DUAL-CLASS shares demarcate classes where founders and/or controlling shareholders have greater voting rights and control essentially. The simple rationale is that the vision of the founders relating to the company's long-term profitability and survival outweighs the short-term gains usually desired by the public. The DCS structure allows founders to steer the company's direction in line with their vision, and the public equity market to provide the requisite financing. Further, it removes voting uncertainty, and ensures proper dividend distribution.

The cons however are similar though. There are arguments (including legal ones) to be made of "abuse of power" given the control exercised by few; less independence and oversight; poorer decision making and ability to hold out distribution.

Like everything else however, it is all a matter of balance and better governance - which will alleviate such concerns.