Sunday, 11 September 2016

Dual class shares: another really bad idea

Both the SGX and Bursa seem to contemplate allowing companies to list with a dual class share structure. That sounds like a really bad idea.

Luckily quite a few parties have spoken out against it, for instance:

David Webb wrote about the same issues in the Hong Kong context.

The arguments in favour of a single class of shares are rather obvious: a simple, clear structure, which has been proven in time. With enforcement that is not "that great", a lack of shareholders activism in both countries, at least (in some rare cases), minority shareholders do have a chance.

What are the arguments of the people supporting a dual class share structure? They are often rather "vague", for instance:

  • "The envisaged dual-class share structure listing framework is intended to enhance SGX’s attractiveness as a listing venue and to broaden and deepen Singapore’s capital market" (article)
  • "This is about SGX and the Singapore authorities realising that tech companies need a space where they are safe and able to grow, at every stage of their development" (article)
  • "The approval of the dual-class share structure in Singapore has shown our Garden City to be a progressive financial hub and might help bring in more listings here in the future." (article)
  • ".... founders of companies often have a longer term vision in mind compared to investors who tend to be more focused on short-term gains. The structure hence, protects the founders against short-term pressure for returns" (article)

The argument about tech companies is really strange. Most tech companies will raise money from VC (Venture Capital) firms before they list on an exchange. The VCs will invest their money in exchange for shares, not the normal shares, but (rather ironically) preferred shares which will have much more rights attached than the founders, not less.

For instance they are entitled to a "liquidation preference", besides that they often have a veto right over corporate restructuring, sometimes they even have the right to fire the founders and/or push a deal through which they like and the fouders not.

Founders still accept those deals, because the money is good. So much for the "short-term pressure for returns" argument.

The other argument about attracting companies from outside: the regulators should ask themselves how far their enforcement reaches in case of a dispute, especially considering the many "failures" of China based companies on the SGX and Bursa. If you can't enforce, then there is no deterrent, the exchange will attract the wrong kind of people and fraud will happen.

I hope both exchanges will not introduce a dual class share structure. If founders really have a problem with the "one share, one vote" rule, they simply should not take outside money.

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