“Dual-class” Share Structures

The recent NYSE listing of Alibaba has
once again brought to the fore the issue of dual-class share structures, as
discussed in this column
in the Economist. Alibaba’s founder and a group of insider shareholders have
control rights that are disproportionate to their economic rights. The wave of
dual-class structures in tech-IPOs was triggered by Google’s IPO in 2004, which
was followed by another large listing of Facebook in 2012 and now Alibaba (in
what has been dubbed the largest IPO ever). The Economist indicates that
dual-class structures are quite common in US public companies, with “55% of the
524 such companies in the global database of MSCI” giving disproportionate
rights to shareholders.
The advantage of dual-class
structures is that it allows companies to raise capital and at the same time
preserve the control held by founders and insiders. At the same time, it also
carries certain concerns. From a corporate governance perspective, the
deviation from the customary “one-share-one-vote” rule places control in too
few hands thereby rendering limited protection of the interests of the
remaining shareholders. The ability of persons with limited economic interests
to exercise greater control over the company may exacerbate agency costs that
operate in the corporate governance sphere. Moreover, and related to governance
as well, dual-class structures operate as takeover defences and allow
incumbents to enjoy protection from hostile takeovers that may act as a curb on
inefficient management. Using dual-class structures, the incumbents may enjoy
favourable protection against such corporate raids.
Despite these concerns, why are
jurisdictions permitting the use of dual-class structures that are increasingly
becoming more common? It seems the answer is to attract listings on their stock
exchanges. As the Economist notes, it is not surprising that Alibaba decided to
list on the NYSE rather than the Hong Kong Exchange given that the latter does
not recognise dual-class structures. Hong Kong itself seems to now be
succumbing to the pressure to attract listings and is reviewing its own
position through a concept
that is a precursor to a public discussion on the issue. Similarly,
while Singapore does not currently permit dual-class structures, it is
considering legislative
to its company law to introduce the concept. After substantially
dilly-dallying on the issue, the Companies Act, 2013 in India now recognizes
the concept of shares with differential rights (sections 43(a)(ii)), although
SEBI has imposed further curbs in the ability of public listed companies to
issue shares with superior
All of these beg the question
whether the urge to attract listings and provide more flexibility to issuers
and investors may result in eclipsing the concerns pertaining to structures
both from the perspectives of corporate governance and takeovers, so as to
result in the phenomenon of a “race to the bottom”.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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