Dual-Class Shares A Useful Addition To SGX’s Listing Strategy

Foreword from ShareInvestor

This article “Dual-Class Shares A Useful Addition To SGX’s Listing Strategy” by Lee Su Shyan was first published in The Straits Times on 18 Jul 2018 and is reproduced in this blog in its entirety.

Hong Kong may have snared a mega IPO with Chinese smartphone maker Xiaomi under its dual-classstructure, but Singapore’s focus is broader and aiming for a range of companies

Singapore’s financial sector was watching closely from the sidelines last week when the Hong Kong stock exchange pulled off a US$54 billion (S$73.6 billion) listing coup.

It came in the form of Chinese smartphone maker Xiaomi, which splashed its way onto the exchange in what was one of the year’s most highly-anticipated initial public offerings (IPOs) since Alibaba in New York in 2014.

The listing added to the impressive US$7 billion tally in IPO proceeds from tech listings Hong Kong has racked up so far this year.

Xiaomi founder and chief executive Lei Jun was quoted by Reuters as saying at the listing ceremony: “We are an Internet firm. From day one, we’ve set up a dual-class share structure. Without the innovation of Hong Kong’s capital markets, we wouldn’t get a chance to go public in Hong Kong.”

In Singapore, while the traditional one-share one-vote system has been firmly established, the Committee on the Future Economy had said early last year that the dual-class structure could play a role in the development of capital markets which would aid in the transformation of the Republic’s economy.

Fast forward to June 26 and the Singapore Exchange (SGX) announced that the dual-class structure was open to companies seeking a mainboard listing here. So far, no firm has launched an IPO under this option although sources say there are several potential candidates – local and overseas – waiting in the wings.

The dual-class share structure allows two classes of stocks, each with different voting rights although both are entitled to the same equity and same cash flows. A Class A share may have 10 votes, for example, while a Class B stock may have one, yet both receive the same dividends. While this structure is new, the concept of another class of shares is not entirely unknown in Singapore. Previously, shares of “strategically important” companies were split into local and foreign tranches and traded separately.

The dual-class option, however, has been in place for many years in the US where it is accepted that such a share structure is appropriate as it allows founders to remain in control and run the business.

For example, the News Corp shares that are publicly traded do not carry any voting rights while the class of shares held by Rupert Murdoch and his family carry the voting power.

The dual-share structure has been in the limelight in recent years as companies such as Google and Facebook have listed using it. Under Facebook’s model, founder Mark Zuckerberg holds a fraction of the social-media giant’s publicly traded shares but has majority control of its voting rights.

Detractors say this structure raises risks that such companies undertake deals that may not be in the best interests of the shareholders but are approved due to the higher voting rights of key stockholders.

Safeguards And Listing Requirements

Financial centres have put in safeguards to ensure that ordinary shareholders are not disadvantaged. For example, there are sunset clauses in Singapore which say that multiple-vote shares must be converted to one-vote shares under certain circumstances. Both Singapore and Hong Kong have said that only new listings will be eligible under the dual-share structure.

Mr Chia Kim Huat, Rajah & Tann’s regional head of corporate and transactional group, noted that Hong Kong requires a dual-class firm after listing to set up a corporate governance committee and appoint a compliance officer. This is to enhance protection for the ordinary shareholders.

He added that Singapore does not appear to have such mandatory requirements although in practice some Singapore-listed firms also have corporate governance committees as well as compliance officers to assist them.

The dual-class companies, as with all listed firms, will be subject to the SGX Listing Rules and the Code of Corporate Governance. It is possible that the SGX could require a listing aspirant to set up such committees.

One point of difference is that Hong Kong has put in place separate market capitalisation criteria for dual-class listings as it makes no secret of its determination to attract the Xiaomis of this world. It states that a company can employ the dual-class structure if it has a minimum size of HK$40 billion (S$7 billion) at listing.

There are fewer than 30 firms on the SGX with a market value of that size, so it does indicate that Hong Kong is indeed going for the giants. Hong Kong also allows a much smaller listing size of HK$10 billion but a second condition is that the company must have an annual revenue of at least HK$1 billion.

There are no such specific market capitalisation prescriptions in Singapore for dual-class listings. They will be assessed on the existing criteria, which means that smaller companies could avail themselves of such a structure if they can satisfy the exchange’s requirements. And Singapore’s reputation for its high standards of corporate governance will mean it will likely continue to attract quality listings, be they large or small. In that vein, Singapore’s approach indicates that it is not confining itself to huge listings.

Attracting A Range Of Companies

Associate Professor Lawrence Loh, director of the centre for governance, institutions and organisations at NUS Business School, noted that Singapore’s focus is broader and “is looking for the range of innovative start-ups and established companies to seed and strengthen the future economy”.

Rajah & Tann’s Mr Chia reckons that the IPO net could extend to start-ups and companies from Indonesia that may have traditionally eyed the Nasdaq or the New York Stock Exchange route. “With many of the investors hailing from Asia, it may make sense for these companies to list closer to home in Singapore instead,” he added.

While some commentators point out that Hong Kong is being more prescriptive than Singapore in its regime, there is also support for the strategy employed here.

Fewer rules allow the SGX to adopt a more holistic approach of assessing candidates. They also give it more leeway on which companies may be accepted.

But Withers KhattarWong lawyer Leong Chuo Ming noted: “SGX places more emphasis on having the final discretion in approving dual-class share structures. While it gives SGX more control, it may create a perception amongst issuers of lack of accountability or transparency in its decision making.”

More clarity should emerge, however, once several firms have successfully listed. SGX has said it plans to make public the guidance on the suitability factors as contemplated in precedent cases. It also told The Straits Times: “The feedback from the market is that by adopting a dual-class shares model that is not over-prescriptive, SGX has shown itself to be more open, flexible and aligned with the Singapore vision of embracing the New Economy.”

Ultimately, while the dual-class structure gives another weapon in Singapore’s arsenal to attract listings, the listing structure is only one of several factors a company looks at when it wants to list.

Prof Loh said: “Having a dual-class share system does not automatically bring in the mega-IPOs. It is a necessary but not a sufficient condition for this to happen. There is a whole spectrum of factors that goes beyond the stock exchange and its specific policies. This has to do with the overall attractiveness of the place in terms of the overall capital market liquidity as well as access to the big hinterland markets.”

But there is no doubt that one of the key obstacles faced by a high-growth company in its quest to list in Singapore has been removed. And while the shares of Xiaomi had a rocky debut, they are now trading above water, indicating that investors are receptive to investing in such structures.

Still, it is also competition, timing, market conditions, among many other factors, that will determine if Singapore will in the near future see the next Alibaba list on the SGX and hopefully repeat the success the exchange enjoyed with the real estate investment trusts.