MAS should say no to dual-class shares

Published August 26, 2016


First published in Business Times on August 25, 2016

By Mak Yuen Teen

WHEN the Companies Act was amended to allow public companies to have dual-class shares, there was a sense of inevitability about the Singapore Exchange (SGX) opening its doors to listed companies with dual-class shares. I am therefore not at all surprised that the report “SGX close to allowing exceptions for dual-class share listings” (BT, Aug 23) now tells us that the Listings Advisory Committee (LAC) is set to propose that dual-class shares be allowed for companies listed on the SGX. What did surprise me was that David Gerald, president and CEO of the Securities Investors Association (Singapore) (SIAS), speaking on behalf of the association, expressed support for dual-class shares – because they are “well established in the United States and Europe” and necessary to attract companies to list here. What about investor rights and protection, which is the core mission of SIAS?

I have already written extensively on this subject. In my commentary “Say ‘no’ to dual class shares” (BT, Nov 27, 2015), I laid out in some detail the historical context of dual class shares in the US, the empirical evidence against them, the dangers of importing dual class shares into our market without considering the differences in legal and institutional environments, and the difficulty of implementing meaningful safeguards without defeating the raison d’etre for them. Those who cite Google and Facebook as examples of companies with dual-class shares do not cite Amazon, Apple, Microsoft and other technology companies as counter-examples of those that do not. Citing companies like Google to make the business case for dual-class shares is a bit like citing Warren Buffett to make the business case for appointing octogenarians to run companies. Hugh Young and David Smith of Aberdeen Asia have recently written a compelling piece “Dual class shares are double trouble” in their July 2016 newsletter, setting out an institutional investor’s perspective. Most institutional investors are against dual-class shares, and we should brace ourselves for criticism if we allow it.

While proponents of dual-class shares may point to Google, Alibaba or Facebook, we may wish to remind ourselves that when we opened our doors to foreign listings, particularly S-chips, we did not end up with companies like Ping An or Bank of China. Instead, we got China Gaoxian, China Sky, Eratat Lifestyle, Sino-Environment and well over a hundred of others, many that we would rather not mention. Scandals in these listings have undoubtedly contributed to a loss of confidence in our market, impacting liquidity and valuations. We risk allowing history to repeat itself. Investors do not want to feel like they are victims of “bait and switch”, with promises of bluechip dual-class shares only to be burnt by those that are only using dual-class shares to entrench and enrich themselves.

Danger of compelling reasons

In the BT report, it was stated that the LAC is expected to allow dual-class structures only when there are compelling reasons to do so, and that such reasons would include whether there are certain individuals who play indispensable roles in the company or when an uneven ownership structure is long-standing practice. The danger is that the case can be easily made, especially in founder-controlled companies, that certain individuals play indispensable roles. Many people think they are indispensable until they are gone. Over time, the list of “compelling reasons” may get longer.

In my earlier commentary, I had also highlighted that in a dual-class share structure, the monitoring function will effectively be outsourced to the government, the courts and the regulators, imposing a greater expectation and burden on them. This is because corporate governance mechanisms such as board of directors and shareholder meetings would be rendered largely ineffective. With dual-class shares, it will be even easier to control the appointment of independent directors and to pass resolutions at AGMs. Investors would rightly expect regulators to step in to protect their rights if things go wrong in companies with dual-class shares, with other corporate governance mechanisms being ineffective, and shareholder enforcement being costly and largely impractical in Singapore.

In the forthcoming volume of the Corporate Governance Case Studies published by CPA Australia which I edit, there is a case on a Swiss company called Sika AG about the founding family exiting the business by selling their shares with superior voting rights to an outside investor at a huge premium to the existing market price. The family owned 16.1 per cent of the shares but controlled 52.4 per cent of the voting rights. The company had a provision in its articles that allowed the outside investor to circumvent a mandatory takeover offer even though it was acquiring a majority of the voting rights. Minority investors’ rights were trampled over.

Before the LAC makes its recommendation, it would be well advised to carefully study and understand the features of dual-class share structures and their different nuances, their impact on corporate governance mechanisms such as independent directors, and the legal and institutional environments in countries where they are allowed. Allowing dual-class shares just because some other countries do so is simply not good enough.

Finally, while the LAC should be accountable when it allows a company to list with dual-class shares, the buck ultimately stops with the SGX and the Monetary Authority of Singapore (MAS), which supervises SGX and our capital market. Calling the LAC “autonomous” or “independent” does not change this fact because ultimately, SGX and MAS must agree to them. The Hong Kong Securities and Futures Commission firmly rejected dual-class shares when the Hong Kong exchange was considering allowing them, and I would urge MAS to do the same.

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