On 19 November 2020 Chancellor Rishi Sunak launched the UK Listings Review, with the objective of helping UK markets to remain world leading and fit for the future shape of the economy. This post focuses on the proposal to introduce dual class shares for the Premium Listing Segment of the LSE’s Main Market. 

Dual class shares offer a group of shareholders, normally founding shareholders and corporate insiders, certain share classes with weighted voting rights. The weighted voting rights enable these insiders to retain a degree of control over the company that is disproportionate to their equity shareholdings.

Institutional investors are understandably concerned about this movement. The International Corporate Governance Network (ICGN), an organisation for institutional shareholders, expressed their strong opposition to dual class share structures. This is not surprising. On the other side of the Atlantic, the Council of Institutional Investors (CII), an organisation representing more than 140 public, union and corporate pension funds, has also long campaigned against dual class share structures. However, if we look at the recent revival of dual class shares in the US and reforms in the leading financial centres in Asia to accommodate listings with such share structures, it seems unlikely that the resistance from the institutional shareholders will be successful. 

The controversies over dual class shares largely lie in the contention between the benefits and costs of such share structures. While there are contradictory standpoints regarding the implication of separating controlling shareholders’ control from their cash flow rights, it is fair to say that solutions do exist to mitigate the increased governance risks. Measures such as sunset provisions and limitation of voting differentials are designed to restrain the voting control stemming from multiple voting shares and provide mandatory safeguards to holders of inferior voting shares. In fact, these are the measures that the leading financial centres in Asia have put in place when permitting dual class listings. On the one hand, they permit dual class shares in order to gain the benefits of such share structures; on the other hand, in order to limit holders of shares with superior voting power, they impose restrictions, including the introduction of sunset provisions, limiting the divergence between controllers’ voting rights and cash flow rights, and enhanced disclosure requirements. 

The restrictions or safeguards, in general, can be categorized into (i) entry requirements, (ii) disclosure requirements, (iii) restriction on controllers’ special voting rights, and (iv) other protection for shareholders with inferior voting shares. Examples drawn from the recent reforms in Asia’s financial centres are displayed in the table below.

Safeguarding MeasuresShanghaiHong KongSingapore

RESTRICTION TO PARTICULAR INDUSTRIES

(ENTRY REQUIREMENTS)

YesYesNo

MINIMUM MARKET CAPITALIZATION

(ENTRY REQUIREMENTS)

RMB¥10 billion

(circa  GBP£1.05 billion)

HK$10 billion

(circa  GBP£0.97 billion)

S$300 million

(circa  GBP£159 million)

ENHANCED DISCLOSURE

(DISCLOSURE REQUIREMENTS)

Yes, plus supervisory board opinionYesYes

UNIQUE STOCK CODE

(DISCLOSURE REQUIREMENTS)

NoYesYes

EVENT-BASED SUNSETS

(RESTRICTION ON SPECIAL VOTING SHARES)

YesYesYes

MAXIMUM VOTING DIFFERENTIALS

(RESTRICTION ON SPECIAL VOTING SHARES)

10:110:110:1

TEMPORARY CONVERSION ON CERTAIN CORPORATE DECISIONS

(RESTRICTION ON SPECIAL VOTING SHARES)

YesYesYes

MINIMUM EQUITY THRESHOLD FOR SPECIAL VOTING SHAREHOLDERS

(OTHER PROTECTIONS)

10%10%, but only at the time of initial listingNo

MINIMUM VOTING RIGHTS FOR INFERIOR VOTING SHAREHOLDERS 

(OTHER PROTECTIONS)

YesYesYes

 

As a result, in these financial centres the ongoing academic and policy debate over the viability of dual class shares has shifted from whether to allow companies to list with dual class share structures to how to restrain the associated governance risks. The trade-off between the greater capital structure flexibility and enhanced protection of entrepreneurs’ idiosyncratic/long-term vision on the one hand and the hard-earned credibility in corporate governance on the other is not necessarily a zero- or negative sum game. Constraints can be placed on such share structures to limit their negative impact, along with the existing regulations such as related party transaction rules and other disclosure requirements.

Permitting dual class listing is increasingly seen as a necessary step to stay relevant in a time of relentless competition in the cross-border IPO business. New York, London, Hong Kong, Singapore and Shanghai are ranked as the top 5 global financial centres by the Global Financial Centres Index. In 1986 the NYSE permitted dual class listings due to the competitive pressure from the AMEX and NASDAQ. In the last two years Hong Kong, Singapore and Shanghai permitted dual class listings one after another. If London is also eager to attract the most successful and innovative companies to list, especially in the aftermath of Brexit and in the midst of the COVID-19 pandemic, it is perhaps time to relax the limitation on dual class shares on the Premium Segment of the LSE’s Main Market. Inspiration could be drawn from Asian financial centres’ experience as regards the mechanisms to find a middle ground between founders’ focus on the long term and investors’ legitimate concern over corporate governance under the dual class share structures. 

 

Min Yan is an Assistant Professor in Business Law at Queen Mary University of London.