The prospect of whether companies listed on the Singapore Exchange (“SGX”) might be able to adopt dual or multiple class share structure has been a topic of much consideration. Singapore and most other Asia-Pacific markets typically have share class structures that are predicated on one-share, one-vote.
That may soon change.
On February 16, 2017, SGX released the highly anticipated consultation paper (the “Paper”; PDF) on possible listings of dual class share structures (“DCS”). The Paper addresses six main areas that frame the context and debate surrounding DCS, which will ultimately shape any future rules for DCS in SGX-listed companies. Interested parties are invited to respond by April 17, 2017.
The stated impetus for a DCS framework reflects difficulties in attracting new high-profile listings, as seen with the IPOs of Manchester United and Alibaba in the United States, instead of on the SGX and the Hong Kong Stock Exchange (“HKEX”). In both instances, the decision to list in the U.S. was reportedly due largely to the allowance for dual or multiple class share structures, which serve to preserve management and/or founder control over companies through superior voting, while raising funds through the listing of ordinary shares that may carry reduced or no voting rights.
While companies that are primarily listed on the SGX do not have DCS, the Singapore Government, though the Companies (Amendment) Act, 2014 (the “Act”), which became effective from January 2016, laid the foundation for allowing changes to share class structures. Notably, under Section 64A of the Act, companies are allowed to issue different classes of shares, provided a company’s constitution permits multiple share classes. Moreover, companies would be free to assign special, limited, conditional or no voting rights to additional share classes, provided that shareholders approve the adoption of a new share class by way of a special resolution, representing a 75% majority.
Since the implementation of the Act, companies have been actively adopting new constitutions at general meetings which provide the ability for companies to adopt dual or multiple share class structures. However, companies have not been able to change their share classes without additional rules from the SGX. The Paper aims to determine whether a DCS framework should be pursued and, if so, what that framework would look like.
The first area the Paper addresses is the background of DCS in jurisdictions around the world. The Steering Committee for Review of the Companies Act (the “Committee”) considered DCS structures in markets including the U.S., UK, Canada, Sweden, Hong Kong, and Australia, in the context of seeking to increase competitiveness in attracting new listings while balancing shareholder rights.
The Paper’s second area of focus includes arguments for and against the implementation of DCS and potential frameworks and admission criteria. For those opposed to DCS, the main arguments point toward the impact on shareholder rights and corporate governance practices; further, they argue that DCS do not always correlate with new listings or improved company performance. In contrast, proponents argue DCS will allow for increased innovation through flexibility in capital management and increased market competitiveness and financing channels, along with improved performance and disclosure regimes. Lastly, a discussion of the criteria for admission is provided that assesses the deliberations of the Listing Advisory Committee (“LAC”) that initially reviewed whether SGX should allow for DCS.
The third area of discussion focuses on the risks and regulatory considerations that could become necessary under DCS. In light of concerns regarding potential abuses by owner managers, the Paper looks at steps taken to avoid such situations, such as implementing safeguards against expropriation based on recommendations from the OECD’s Steering Group on Corporate Governance.
The fourth section, evaluations of safeguards against entrenchment, addresses shares classes that carry multiple votes. The Paper indicates that the LAC advised for a maximum vote differential of 10:1, which is most common in markets. Similarly, post-listing issuances of multiple vote shares could be limited to rights issuances only in order to support minority shareholders. To further protect minority shareholders, the Paper notes the LAC’s recommendation to require automatic conversion of multiple vote shares into ordinary shares in instances of takeovers, the selling or transfer of multiple vote shares to other investors, or changes in owner manager positions from executive chairman or CEO. Lastly, the section considers whether it would be appropriate for sunset clauses to be part of the DCS structure.
In respect of safeguards against expropriation risks, the Paper discusses the LAC’s view of potential changes to corporate governance practices. These include mandating board and committee independence thresholds that are reflected in Singapore’s Code of Corporate Governance 2012. Additionally, the LAC is of the view that for DCS companies, independent directors would be voted on through an “enhanced voting process” which would see ordinary shareholders voting for independent directors, while shareholders with superior voting rights (namely management owners) would be limited on voting on independent directors. The LAC viewed this approach as a means to enhance “the independent element in the appointment of independent directors”. Other revised governance practices could include a mandated risk committee, comprising a majority of independent directors. Further, in instances of change in control, coat-tail provisions would see different share classes being treated equally to prevent abuse of the DCS structure by owner managers.
The last portion of the Paper indicates measures that would be taken to ensure proper disclosure and investor awareness. For disclosure purposes, shareholders of DCS companies would be required to approve share issuances with different voting rights through a special resolution. Also, companies would be responsible for providing information on voting rights in meeting notices and for specifying the different rights based on share class in a company’s constitution. For the purposes of SGX, it would clearly demarcate the different share classes in trading screens as well as the DCS companies in a “distinctive manner.”
DCS structures are increasingly common in high-profile listings, particularly within the tech sector; yet such voting structures may exacerbate governance risks by distorting the relationship between ownership and control. The risks are considered severe enough that in 2015 the Hong Kong Stock Exchange nixed the potential implementation of DCS before it even got to the consultation stage. The SGX appears to be sensitive to such concerns, as illustrated by the variety of structural features it is considering to provide some protection for minority interests should a DCS framework be implemented. Nonetheless, it is unclear whether such features will be sufficient to mollify investors who are opposed to the adoption of DCS rules. Interested parties are invited to respond at the SGX website through April 17, 2017.