The myth of dual class shares: lessons from Asia’s financial centres

ABSTRACT

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, has brought the spotlight back to them. While there are contradictory standpoints regarding the implication of separating insiders’ control from their cash flow rights, the ongoing debate over the viability of dual class shares has largely been shifted to how to restrain the associated governance risks. Measures such as sunset provisions and limitation of voting differentials are designed to restrain the control stemming from multiple voting shares and provide mandatory safeguards to holders of inferior voting shares. However, these safeguarding measures may compromise the value of differentiated voting arrangements. The extremely low percentage of new IPOs with dual class shares in Asia’s leading financial centres at least partly reflects the reduced attraction of such share structures when mandatory safeguards are stringent. Thus, this article argues that safeguarding measures are a double-edged sword, which not only help mitigate increased governance risks but also undermine the insulation of controllers from external investor and market influence; it calls for a more cautious use of such ex ante mechanisms in order that the initial purpose of permitting listings with dual class shares is not compromised.

KEYWORDS:

• Corporate governance
• dual class shares
• proportionate voting
• safeguarding measure
• investor protection
• weighted voting rights

Acknowledgements

The author is grateful to Luca Enriques, Umakanth Varottil, Hans Tjio and the anonymous referees for their helpful and insightful comments on the earlier version of this article. The usual disclaimers apply.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1 For example, the newly revised Listing Rules of Singapore Stock Exchange define dual class shares as a share structure that gives certain shareholders voting rights disproportionate to their shareholding. In other words, shares in one class carry one vote, while shares in another class carry multiple votes. Meanwhile, such share structures also extend to triple-class companies like Snap Inc., where Class A shares have no votes, Class B shares have one vote per share and Class C shares have ten votes per share.

2 See e.g. Lucian A Bebchuk and Kobi Kastiel, ‘The Perils of Small-Minority Controllers’ (2019) 107 Georgetown Law Journal 1453, 1459.

3 This can be contrasted with only 1 out of 71 companies going public adopting dual class structures in 1980. See Jay R Ritter, Initial Public Offerings: Technology Stock IPOs (June 2020) <https://site.warrington.ufl.edu/ritter/files/IPOs2019Tech-Stock.pdf>.

4 Andrew Winden and Andrew C Baker, ‘Dual-Class Index Exclusion’ Rock Center for Corporate Governance Working Paper Series No. 233 (2018) at 7. However, following the changes of eligibility criteria for inclusion of shares, companies with dual class shares would no longer be included in S&P Dow Jones Indices after 31 July 2017. For more details see <http://press.spglobal.com/2017-07-31-S-P-Dow-Jones-Indices-Announces-Decision-on-Multi-Class-Shares-and-Voting-Rules>.

5 It is pointed out that many stock exchanges see permitting dual class firms to list as a necessary step to ‘stay relevant in a time of relentless competition in the cross-border IPO business’. Mary Leung and Rocky Tung, Dual-Class Shares: The Good, the Bad, and the Ugly—A Review of the Debate Surrounding Dual-Class Shares and Their Emergence in Asia Pacific (CFA Institute 2018) at 39–41. The motivation for policymakers and stock exchanges will be discussed in greater detail in Section 3 below.

6 According to the latest Global Financial Centres Index (‘GFCI 26’), a widely quoted source for ranking financial centres, Hong Kong, Singapore and Shanghai are ranked in the top 5 global financial centres just behind New York and London. See Mark Yeandle and Mike Wardle, Global Financial Centres Index 26 (September 2019) at 4 <https://www.longfinance.net/media/documents/GFCI_26_Report_v1.0.pdf>. Another three Asian centres namely, Tokyo, Beijing and Shenzhen are ranked 6th, 7th and 9th respectively. ibid.

7 HKEx, Main Board Listing Rules Amendment (Update No. 119) (April 2018) at 5.

8 Section 33 of Companies (Amendment) Act 2014 (No. 36 of 2014).

9 SGX, ‘SGX Launches Rules for Listing of Dual Class Shares Companies’ (26 June 2018) <https://api2.sgx.com/sites/default/files/news-releases/migration/sgx_launches_rules_for_listing_of_dual_class_shares_companies.pdf>.

10 Rules Governing the Listing of Stocks on the Science and Technology Innovation Board of Shanghai Stock Exchange were enacted in March 2019 and the Sci-Tech innovation board, a Nasdaq-style board, was officially launched in June 2019.

11 It is worth noting that dual class shares are also common in Europe. A survey conducted by Institutional Shareholder Services in 2007 showed 24% of 464 sampled companies in sixteen European countries had dual class shares. See Shearman & Sterling LLP, Institutional Shareholder Services and the European, Corporate Governance Institute (ECGI), Report on the Proportionality Principle in the European Union (2007) at 25. Similarly, another empirical study with a larger sample of 4,096 companies in fourteen western European countries found that roughly 23.5% of sampled companies had dual class shares. Morten Bennedsen and Kasper Meisner Nielsen, ‘Incentive and Entrenchment Effects in European Ownership’ (2010) 34 Journal of Banking & Finance 2212, 2214.

12 SGX Stock Screener (31 May 2020) <https://www.sgx.com/zh-hans/securities/stock-screener>. Nevertheless, AMTD International Inc., a NYSE-listed and Hong Kong-headquartered financial institution, had a secondary listing on the SGX with dual class shares in April 2020.

13 See HKEx 2019 Annual Market Statistics (December 2019) <https://www.hkex.com.hk/-/media/HKEX-Market/Market-Data/Statistics/Consolidated-Reports/Annual-Market-Statistics/2019-Market-Statistics.pdf>. There are another 42 companies newly listed in the first quarter of 2020, and none of them have adopted dual class structures. See HKEx Market Data <https://www.hkex.com.hk/Market-Data/Securities-Prices/Equities?sc_lang=en>.

14 As of 31 May 2020, there are 105 companies listed on the SSE Sci-Tech innovation board, another 310 listing applications are currently in progress. See SSE Market Data Overview (31 May 2020) <http://star.sse.com.cn/en/marketdata/overview/>.

15 See e.g. Joel Seligman, ‘Equal Protection in Shareholder Voting Rights: The One Common Share, One Vote Controversy’ (1986) 54 George Washington Law Review 687, 688; Tian Wen, ‘You Can’t Sell Your Firm and Own It Too: Disallowing Dual-Class Stock Companies from Listing on the Securities Exchanges’ (2014) 162 University of Pennsylvania Law Review 1495, 1499.

16 Marc T Moore, ‘Designing Dual Class Sunsets: The Case for a Transfer-Centered Approach’ (2020) 12 William & Mary Business Law Review (forthcoming).

17 Frank H Easterbrook and Daniel R Fischel, ‘The Corporate Contract’ (1989) 89 Columbia Law Review 1416, 1446–447.

18 Frank H Easterbrook and Daniel R Fischel, ‘Voting in Corporate Law’ (1983) 26 Journal of Law & Economics 395, 409.

19 See also Min Yan, ‘Shareholder Control in the Context of Corporate Social Responsibility: A Fundamental Challenge to Modern Corporations’ (2020) 50 Hong Kong Law Journal 1057, 1065–67.

20 See Colleen A Dunlavy, ‘Social Conceptions of the Corporation: Insights from the History of Shareholder Voting Rights’ (2006) 63 Washington & Lee Law Review 1347, 1356.

21 The main economic implications of proportionate voting and its deviations are reviewed by Mike Burkart and Samuel Lee. See Mike Burkart and Samuel Lee, ‘One Share-One Vote: The Theory’ (2008)12 Review of Finance 1–49.

22 See e.g. Colleen A Dunlavy, ‘Social Conceptions of the Corporation: Insights from the History of Shareholder Voting Rights’ (2006) 63 Washington & Lee Law Review 1347, 1354–355.

23 For example, a company may entitle shareholders one vote for every share owned by them respectively, up to the number of fifteen inclusive, and to one additional vote for every five shares from fifteen to one hundred, and to one additional vote for every twenty shares over and above one hundred. ibid 1357.

24 ibid 1354–357.

25 ibid 1358.

26 Dunlavy argued that the plutocratic turn was a distinctively American phenomenon at the turn of the twentieth century as for European countries such as France and Germany restricting the voting rights, especially for large investors, remained common. See ibid 1359–360.

27 Stephen Bainbridge, ‘The Scope of the SEC’s Authority Over Shareholder Voting Rights’ UCLA School of Law Research Paper No. 07-16 (2007) at 4.

28 ibid 41. See also John C Coffee, ‘The Rise of Dispersed Ownership: The Roles of Law and the State in the Separation of Ownership and Control’ (2001) 111 Yale Law Journal 1, 37.

29 Dual class listing (issuance of nonvoting share in particular) was banned on the New York Stock Exchange (NYSE) between 1926 and 1985. Joel Seligman, ‘Equal Protection in Shareholder Voting Rights: The One Common Share, One Vote Controversy’ (1986) 54 George Washington Law Review 687, 688. However, the other two national stock exchanges, namely the American Stock Exchange (AMEX) and National Association of Securities Dealers Automated Quotations (NASDAQ) had less rigorous rules on dual class shares. For example, while the AMEX implemented a prohibition of non-voting shares in 1972, it allowed Wang Laboratories and many other firms to list with dual class shares between 1976 and 1985. And there had been no restriction whatsoever on the NASDAQ. In order to remain competitive with the AMEX and NASDAQ, the NYSE finally permitted dual class listing in 1986. ibid 704–5.

30 See Jeffrey Gordon, ‘Ties that Bond: Dual Class Common Stock and the Problem of Shareholder Choice’ (1988) 76 California Law Review 1, 4. In July 1988 the US Securities and Exchange Commission (SEC) adopted a modified version of Rule 19c-4, prohibiting those corporate actions having the effect of ‘nullifying, restricting, or disparately reducing the per share voting rights of existing common stock shareholders of the company’. Stephen M Bainbridge, ‘The Short Life and Resurrection of SEC Rule 19C-4’ (1991) 69 Washington University Law Review 565, 578. However, Rule 19c-4 was invalidated by the US Court of Appeals for the District of Columbia in June 1990 on the grounds that the SEC had exceeded its statutory authority. ibid 625. See also The Business Roundtable v. Securities and Exchange Commission, 905 F.2d 406 (District of Columbia Circuit 1990).

31 See e.g. Joel Seligman, ‘Equal Protection in Shareholder Voting Rights: The One Common Share, One Vote Controversy’ (1986) 54 George Washington Law Review 687, 687.

32 See e.g. Roberto Tallarita, ‘High Tech, Low Voice: Dual-Class IPOs in the Technology Industry’ Harvard John M. Olin for Law, Economics, and Business Fellows’ Discussion Paper Series No. 77 (2018).

33 Ronald Anderson, Ezgi Ottolenghi and David Reeb, ‘The Dual Class Premium: A Family Affair’ Fox School of Business Research Paper No. 17-021 (2017). Arguably, the persistence of dual class shares reflects to some extent the presumptive efficiency of such structures. See e.g. Paddy Ireland, ‘Defending the Rentier: Corporate Theory and the Reprivatization of the Public Company’ in Andrew Gamble, Gavin Kelly and John Parkinson (eds), The Political Economy of the Company (Hart Publishing 2000) at 162.

34 The majority voting rights will help these entrepreneurs or founders to retain the ability to determine the leadership of the firm. If they are part of the management team, the disproportionately greater voting rights would protect them from being dismissed from leading the management of the firm by other shareholders.

35 See e.g. Zohar Goshen and Assaf Hamdani, ‘Corporate Control and Idiosyncratic Vision’ (2016) 125 Yale Law Journal 560, 577.

36 See Min Yan, Beyond Shareholder Wealth Maximisation (Routledge 2018) at 65–9. See also Jeremy Stein, ‘Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior’ (1989) 104 Quarterly Journal of Economics 655, 668. Moreover, informational asymmetries may also result in the underestimation of entrepreneurs’ idiosyncratic business plans by the outside investors.

37 Simon Deakin and Giles Slinger, ‘Hostile Takeovers, Corporate Law, and the Theory of the Firm’ (1997) 24 Journal of Law and Society 124, 132. Similarly, failure to meet earning targets is seen as a sign of managerial weakness and, if repeated, can lead to a career-threatening dismissal. See e.g. Alfred Rappaport, ‘The Economics of Short-term Performance Obsession’ (2005) 61 Financial Analysis Journal 65, 69.

38 Larry Page and Sergey Brin argued that ‘ … outside pressures too often tempt companies to sacrifice long-term opportunities to meet quarterly market expectations. Sometimes this pressure has caused companies to manipulate financial results in order to “make their quarter”’. Google Inc., Registration Statement (Form S-1) No. 333 (2004) <https://www.sec.gov/Archives/edgar/data/1288776/000119312504073639/ds1.htm>.

39 While this preference is mainly the entrepreneurs’, the lock on long-term vision and control may also benefit the company and the market by protecting innovation and risk-taking from short-term market pressures. Such ability to take a long-term approach is particularly important for high-tech and innovative companies in their early years. Pey-Woan Lee, ‘Dual-Class Shares in Singapore—Where Ideology Meets Pragmatism’ (2019) 15 Berkeley Business Law Journal 440, 445.

40 Daniel R Fischel, ‘Organized Exchanges and the Regulation of Dual Class Stocks’ (1987) 54 University of Chicago Law Review 119, 139–40.

41 Contrary to the argument that the separation between voting rights and cash flow rights causes controllers to lack financial incentives to monitor their companies, it can also be argued that leveraging voting power via dual class shares makes those controllers more effective monitors. Mike Burkart and Samuel Lee, ‘One Share-One Vote: The Theory’ (2008) 12 Review of Finance 1, 26–9. By the same token, it could also be argued that a rational manager with voting rights has an incentive to reject scale-expanding investments in order to continue extracting valuable private benefits of control.

42 Douglas C Ashton, ‘Revisiting Dual-Class Stock’ (1984) 68 St John’s Law Review 863, 925.

43 In other words, those skills or assets that cannot be redeployed to alternative use without a loss of value. See Oliver Hart, ‘An Economist’s Perspective on the Theory of the Firm’ (1989) 89 Columbia Law Review 1757, 1762; Margaret Blair and Lynn Stout, ‘Specific Investment: Explaining Anomalies in Corporate Law’ (2006) 31 Journal of Corporation Law 719, 734. See also Oliver E Williamson, The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting (Free Press 1985).

44 Daniel R Fischel, ‘Organized Exchanges and the Regulation of Dual Class Stocks’ (1987) 54 University of Chicago Law Review 119, 137.

45 The firm-specific investment by management with a long-term commitment can also encourage employees to invest in the firm-specific human capital, which is extremely valuable for firms in the high-technology and innovative sectors. It may also help the firms to ingrain other important long-term stakeholder relationships. See e.g. Bobby V Reddy, ‘Finding the British Google: Relaxing the Prohibition of Dual-Class Stock from the Premium-Tier of the London Stock Exchange’ (2020) 79 Cambridge Law Journal 315, 330–31.

46 Kenneth Lehn, Jeffry Netter and Annette Poulsen, ‘Consolidating Corporate Control: Dual-Class Recapitalizations versus Leveraged Buyouts’ (1990) 27 Journal of Financial Economics 557, 563–64.

47 Daniel R Fischel, ‘Organized Exchanges and the Regulation of Dual Class Stocks’ (1987) 54 University of Chicago Law Review 119, 136–37.

48 Bernard S Sharfman, ‘A Private Ordering Defense of a Company’s Right to Use Dual Class Share Structures in IPOs’ (2018) 63 Villanova Law Review 1, 21.

49 Zohar Goshen and Richard Squire, ‘Principal Costs: A New Theory for Corporate Law and Governance’ (2017) 117 Columbia Law Review 767, 786–88 and 791–93.

50 ibid.

51 Dorothy S Lund, ‘Nonvoting Shares and Efficient Corporate Governance’ (2019) 71 Stanford Law Review 687, 696.

52 ibid.

53 ibid 724–26. The author also argues that the company would incur higher transaction costs when it must manage voting for a larger group, and transaction costs for these weakly motivated shareholders who nonetheless decide to vote. ibid 723–24.

54 ibid 712 and 718.

55 Between 2008 and 2015 investors bought passively managed funds of approximately US$1 trillion, while at the same time selling holdings of actively managed equity funds worth roughly US$800 billion; and as of year-end 2015, passive index funds managed total assets invested in equities of more than US$4 trillion. See Jan Fichtner, Eelke Heemskerk and Javier Garcia-Bernardo, ‘Hidden Power of the Big Three? Passive Index Funds, Re-Concentration of Corporate Ownership, and New Financial Risk’ (2017) 19 Business & Politics 298, 299.

56 ibid 313. The ‘Big Three’ collectively vote about 25% of the shares in all S&P 500 companies. Lucian A Bebchuk and Scott Hirst, ‘The Specter of the Giant Three’ (2019) 99 Boston University Law Review 721, 736.

57 Just ten years ago, active funds had about 75% of market share, and over the past 10 years active funds have had US$1.3 trillion in outflows and their passive counterparts nearly US$1.4 trillion in inflows. Kevin McDevitt and Gabrielle DiBenedetto, Morningstar U.S. Fund Flows: Fed Rate Cut Doesn’t Spur Inflows, Morningstar Research 2 (August 2019) <https://www.morningstar.com/content/dam/marketing/shared/pdfs/Research/Fund_Flows_August2019_Final.pdf?cid=EMQ_&utm_source=eloqua&utm_medium=email&utm_campaign=&utm_content=18776>.

58 For example, the Big Three did not bring any single shareholder proposal advocating governance change (even for the type they generally did support) between 2014 and 2018, during which period approximately 1500 shareholder proposals were submitted. More discussion of this reactive-only approach can be found in Lucian A Bebchuk and Scott Hirst, ‘Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy’ (2019) 119 Columbia Law Review 2029, 2101–105.

59 Dorothy S Lund, ‘Nonvoting Shares and Efficient Corporate Governance’ (2019) 71 Stanford Law Review 687, 697.

60 Dimitris Melas, ‘Putting the Spotlight on Spotify: Why Have Stocks with Unequal Voting Rights Outperformed’ MSCI (3 April 2018) <https://www.msci.com/www/blog-posts/putting-the-spotlight-on/0898078592>.

61 Kenneth Lehn, Jeffry Netter and Annette Poulsen, ‘Consolidating Corporate Control: Dual-Class Recapitalizations versus Leveraged Buyouts’ (1990) 27 Journal of Financial Economics 557, 559–60.

62 Bradford Jordan, Soohyung Kim and Mark Liu, ‘Growth Opportunities, Short Term Market Pressure, and Dual-Class Share Structure’ (2016) 41 Journal of Corporate Finance 304, 318–20.

63 It is found that economic benefits typically arise when closely held firms adopt dual class shares. See Scott Bauguess, Myron Slovin and Marie Sushka, ‘Large Shareholder Diversification, Corporate Risk Taking, and the Benefits of Changing to Differential Voting Rights’ (2012) 36 Journal of Banking & Finance 1244, 1245.

64 Martijn Cremers, Beni Lauterbach and Anete Pajuste, ‘The Life-Cycle of Dual Class Firm Valuation’ (2018) European Corporate Governance Institute (ECGI) – Finance Working Paper No. 550/2018 at 20.

65 If the controlling shareholders are involved in managing the firm as directors and executives, the insulation would protect them from being removed from running the firm. Furthermore, the management would not have any fear of losing their employment as long as the controlling shareholders’ interests are satisfied.

66 As with other takeover defences, dual class share structures would lead to conflicts of interest: e.g. the job security of the target company’s incumbent management versus the substantial premium for the target company’s shareholders’ shares. See Jeffrey Gordon, ‘Ties that Bond: Dual Class Common Stock and the Problem of Shareholder Choice’ (1988) 76 California Law Review 1, 18.

67 Such benefits can be either pecuniary, for instance via tunnelling corporate assets or ‘non-pecuniary’, such as desirable social status to political influence. See e.g. Ronald Gilson, ‘Controlling Shareholders and Corporate Governance: Complicating the Comparative Taxonomy’ (2006) 119 Harvard Law Review 1641, 1663–664.

68 In addition, there is another criticism against dual class shares from the perspective of shareholder democracy. See e.g. Joel Seligman, ‘Equal Protection in Shareholder Voting Rights: The One Common Share, One Vote Controversy’ (1986) 54 George Washington Law Review 687, 688; Robert Jackson, Perpetual Dual-Class Stock: The Case Against Corporate Royalty (February 2018) <https://www.sec.gov/news/speech/perpetual-dual-class-stock-case-against-corporate-royalty#_ftn4>. However, the core concern of ‘shareholder democracy’ in the context of one vote per share is the vertical relation linking shareholders and management, aiming at ‘correct[ing] a balance of power that had tilted dangerously toward [management]’ through ensuring that shareholders are ‘sufficiently informed’ and ‘able to vote their shares’. See Colleen A Dunlavy, ‘Social Conceptions of the Corporation: Insights from the History of Shareholder Voting Rights’ (2006) 63 Washington & Lee Law Review 1347, 1365. So, logically, democracy under one share – one vote is irrelevant to the horizontal relations among shareholders. And this article decides to leave this criticism at that.

69 Grant Hayden, ‘The False Promise of One Person, One Vote’ (2003) 102 Michigan Law Review 213, 251–61.

70 For example, shareholders, as claimed by the UK Company Law Review Steering Group (‘CLRSG’), have the greatest exposure to residual risk as a consequence of mismanagement. CLRSG, Modern Company Law for a Competitive Economy: The Strategic Framework (DTI 1999) at 34.

71 See Frank H Easterbrook and Daniel R Fischel, ‘Voting in Corporate Law’ (1983) 26 Journal of Law & Economics 395, 409. As the general corporate voting rule apportions power among shareholders based on their shareholdings in the company, shareholders would then have the appropriate incentive to cast their votes and monitor managerial performance accordingly.

72 In other words, the proportionate voting rule can better align corporate insiders’ incentives with those of the outside shareholders.

73 See e.g. Louis Putterman, ‘Ownership and the Nature of the Firm’ (1993) 17 Journal of Comparative Economics 243, 249.

74 Bernard Black and Reinier Kraakman, ‘A Self-Enforcing Model of Corporate Law’ (1996) 109 Harvard Law Review 1911, 1945.

75 Grant Hayden and Matthew Bodie, ‘One Share, One Vote and the False Promise of Shareholder Homogeneity’ (2008) 30 Cardozo Law Review 445, 476.

76 Frank H Easterbrook and Daniel R Fischel, ‘Voting in Corporate Law’ (1983) 26 Journal of Law & Economics 395, 405.

77 Easterbrook and Fischel argued that ‘If a firm makes inconsistent choices, it is likely to self-destruct’. ibid 405.

78 See Henry Hansmann, The Ownership of Enterprise (Harvard University Press 2000) at 11. Meanwhile, Easterbrook and Fischel claimed that in a given company at a given time most shareholders are a reasonably homogeneous group with an analogous objective. Frank H Easterbrook and Daniel R Fischel, The Economic Structure of Corporate Law (Harvard University Press 1991) at 70. John Armour, Henry Hansmann, Reinier Kraakman and Mariana Pargendler also commented that those equity capital investors have, or at least are able to be induced to have, relatively homogeneous interests. John Armour et al., ‘What Is Corporate Law’ in Reinier Kraakman et al. (eds), The Anatomy of Corporate Law: A Comparative and Functional Approach (3rd edn, Oxford University Press 2017) at 13.

79 According to Fisher’s separation theorem, in order to increase the present value of the company to the greatest extent possible, the management should disregard shareholders’ different objectives due to their lack of expertise and make investment decisions separate from shareholders’ preferences. Irving Fisher, The Theory of Interest (MacMillan 1930); see also Ronald J Gilson, ‘Separation and the Function of Corporation Law’ (2005) 2 Berkeley Business Law Journal 141–52. However, it becomes clear that companies may and shall have objectives other than maximising shareholder wealth. See e.g. Lawrence E Mitchell, ‘A Theoretical and Practical Framework for Enforcing Corporate Constituency Statutes’ (1992) 70 Texas Law Review 579, 610–30; Min Yan, Beyond Shareholder Wealth Maximisation (Routledge 2018) at 80–1. Even assuming shareholder interests only comprise economic/financial profits, they may still have heterogeneous investment time horizons or risk preferences. In particular, first, shareholders with different expected holding periods would unavoidably have divergent preferences over the corporate decision-makings. Secondly, diversified shareholders care much less about firm-specific risk compared to undiversified shareholders, but shareholders who invest in a given company without also diversifying would be very sensitive to such risks. Indeed, undiversified shareholders would normally give up higher returns for reduced risks. Thirdly, heterogeneous expectations between inside shareholders and outside shareholders, hedged shareholders and unhedged shareholders also demonstrate that shareholders may have very different interests. For example, see Min Yan, ‘Corporate Social Responsibility vs. Shareholder Value Maximization: Through the lens of hard and soft law’ (2019) 40 Northwestern Journal of International Law & Business 47, 55–6; see also Iman Anabtawi, ‘Some Skepticism About Increasing Shareholder Power’ (2006) 53 UCLA Law Review 561, 583–93.

80 See Grant Hayden and Matthew Bodie, ‘One Share, One Vote and the False Promise of Shareholder Homogeneity’ (2008) 30 Cardozo Law Review 445, 500–4.

81 Take socially responsible investment (SRI) funds for example, even SRI funds are arguably providing lower average returns than non-SRI funds, its market size in the US, was over US$12.0 trillion by the end of 2017, equivalent to a quarter of all investment under professional management in the US. US SIF Foundation’s 2018 Report on US Sustainable, Responsible and Impact Investing Trends (2018), <https://www.ussif.org/trends>.

82 That is to say, increasing one’s ownership stake may not necessarily incentivise him/her to maximise the residual profits of the company.

83 See e.g. Bobby V Reddy, ‘The Fat Controller: Slimming Down the Excess of Controlling Shareholders in UK Listed Companies’ (2018) 38 Oxford Journal of Legal Studies 733, 736–37.

84 Similarly, the controller may also choose to sacrifice some firm value in order to maintain the private benefits of control. See Paul A Gompers, Joy Ishii and Andrew Metrick, ‘Extreme Governance: An Analysis of Dual-Class Firms in the United States’ (2010) 23 Review of Financial Studies 1051, 1085. However, it should also be noted that ‘[t]he power of the controlling shareholders to expropriate outside investors is moderated by their financial incentives not to do so’. Rafael La Porta et al., ‘Investor Protection and Corporate Valuation’ (2002) 57 Journal of Finance 1147, 1148.

85 Ronald Gilson, ‘Controlling Shareholders and Corporate Governance: Complicating the Comparative Taxonomy’ (2006) 119 Harvard Law Review 1641, 1651. Meanwhile, the cost of doing so would also correspondingly be decreased.

86 Lucian A Bebchuk and Kobi Kastiel, ‘The Perils of Small-Minority Controllers’ (2019) 107 Georgetown Law Journal 1453, 1467.

87 A shareholder in a dual class company with a typical 10:1 ratio needs to hold only 28.6% of shares to obtain 80% of the votes, compared to 80% of shares under one vote per share. Further, he or she only needs as low as a 9.1% of shareholdings to retain majority control. ibid 1478.

88 Ronald Gilson, ‘Controlling Shareholders and Corporate Governance: Complicating the Comparative Taxonomy’ (2006) 119 Harvard Law Review 1641, 1651.

89 The likelihood of non-controlling shareholders expropriation by a controlling shareholder with a minority ownership stake but weighted voting rights would be significantly higher. Mike Burkart and Samuel Lee, ‘One Share – One Vote: The Theory’ (2008) 12 Review of Finance 1, 34.

90 By the same token, the controller may also have structural incentives to avoid value-enhancing actions, because she would capture only a fraction of the efficiency gains that the transaction would produce while fully bearing the loss of the private benefits of control. See e.g. Lucian A Bebchuk and Kobi Kastiel, ‘The Untenable Case for Perpetual Dual-Class Stock’ (2017) 103 Virginia Law Review 585, 616.

91 Widely held companies are characterized by diverse ownership of shares without a single controlling shareholder while controlled companies have controlling shareholder(s) with majority equity stake in the company. See Lucian A Bebchuk and Kobi Kastiel, ‘The Perils of Small-Minority Controllers’ (2019) 107 Georgetown Law Journal 1453, 1465.

92 When a company underperforms, its share price will drop, making it vulnerable to predatory takeover offers. The management of the underperforming company would normally be replaced following a successful hostile takeover.

93 See e.g. Dorothy S Lund, ‘Nonvoting Shares and Efficient Corporate Governance’ (2019) 71 Stanford Law Review 687, 715.

94 Margaret Blair, Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century (The Brookings Institution 1995) at 128; Brian Cheffins, Company Law: Theory, Structure and Operation (Oxford University Press 1997) at 8.

95 Zohar Goshen and Assaf Hamdani, ‘Corporate Control and Idiosyncratic Vision’ (2016) 125 Yale Law Journal 560, 597.

96 That is exactly why Bebchuk and Kastie argued that ‘without both market discipline and strong financial incentives, a controller with a minority equity stake may favor choices that increase the private benefits of control even if those choices substantially diverge from those of other public shareholders, and no threat of removal exists to prevent her from pursuing those interests’. Lucian A Bebchuk and Kobi Kastiel, ‘The Untenable Case for Perpetual Dual-Class Stock’ (2017) 103 Virginia Law Review 585, 603.

97 Lucian A Bebchuk and Kobi Kastiel, ‘The Perils of Small-Minority Controllers’ (2019) 107 Georgetown Law Journal 1453, 1467.

98 Paul A Gompers, Joy Ishii and Andrew Metrick, ‘Extreme Governance: An Analysis of Dual-Class Firms in the United States’ (2010) 23 Review of Financial Studies 1051, 1084.

99 See Stijn Claessens, Simeon Djankov, Joseph P H Fan and Larry H P Lang, ‘Disentangling the Incentive and Entrenchment Effects of Large Shareholdings’ (2002) 57 Journal of Finance 2741, 2764–765.

100 The authors conclude that the marginal value of cash decreases by $0.08 per one-standard-deviation increase in the ratio of insider control rights to cash flow rights. Ronald W Masulis, Cong Wang and Fei Xie, ‘Agency Problems at Dual-Class Companies’ (2009) 64 Journal of Finance 1697, 1703–705.

101 Renee Adams and Daniel Ferreira, ‘One Share-One Vote: The Empirical Evidence’ (2008) 12 Review of Finance 51, 85.

102 Jeffrey Coles, Michael Lemmon and J Felix Meschke, ‘Structural Models and Endogeneity in Corporate Finance: The Link between Managerial Ownership and Corporate Performance’ (2012) 103 Journal of Financial Economics 149, 162–64.

103 For example, share prices of dual class companies such as Alibaba, Google and Facebook have all had significant gains since their IPOs.

104 Rafael La Porta, Florencio Lopez-De-Silanes, Andrei Shleifer and Robert Vishny, ‘Investor Protection and Corporate Valuation’ (2002) 57 Journal of Finance 1147, 1168. On the other side, the long-termism and immunity from market pressure underlying the positive impact of dual-class shares are also consistent with arguments supporting weighted voting rights.

105 Marc T Moore, ‘Designing Dual Class Sunsets: The Case for a Transfer-Centered Approach’ (2020) 12 William & Mary Business Law Review (forthcoming).

106 They are also among the top 5 global financial centres just behind New York and London. See Mark Yeandle and Mike Wardle, Global Financial Centres Index 26 (September 2019) at 4 <https://www.longfinance.net/media/documents/GFCI_26_Report_v1.0.pdf>.

107 Section 588(4) of Hong Kong Companies Ordinance (Cap. 622).

108 Rule 8.11 of Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited provided that ‘the share capital of a new applicant must not include shares of which the proposed voting power does not bear a reasonable relationship to the equity interest of such shares when fully paid (‘B Shares’). The Exchange will not be prepared to list any new B Shares issued by a listed issuer nor to allow any new B Shares to be issued by a listed issuer … [except in exceptional circumstances]’.

109 For example, the Chairman of the Hong Kong Securities and Futures Commission said: ‘[allowing companies with dual class structures to list in Hong Kong] is a competition issue. It is not just the US–the UK and Singapore also want to attract technology and new economy companies to list. Hong Kong needs to play catch up’. See Enoch Yiu, ‘Securities Commission Backs Introduction of Dual-Class Shares on Hong Kong Stock Exchange’ South China Morning Post (20 December 2017) <https://www.scmp.com/business/companies/article/2124972/securities-commission-backs-introduction-dual-class-shares-hong>.

110 HKEx, Consultation Conclusions: To Concept Paper on Weighted Voting Rights (June 2015) at 22–3.

111 For example, see Securities and Futures Commission, SFC Statement on the SEHK’s Draft Proposal on Weighted Voting Rights (25 June 2015). HKEx, The Exchange’s Response to the SFC’s Statement in Relation to the Draft Proposal on Weighted Voting Rights (25 June 2016).

112 Enoch Yiu, ‘Securities Commission Backs Introduction of Dual-Class Shares on Hong Kong Stock Exchange’ South China Morning Post (20 December 2017) <https://www.scmp.com/business/companies/article/2124972/securities-commission-backs-introduction-dual-class-shares-hong>.

113 HKEx, Consultation Conclusions: A Listing Regime for Companies from Emerging and Innovative Sectors (April 2018) at 9.

114 HKEx, Main Board Listing Rules Amendment (Update No. 119) (April 2018) at 5.

115 According to the new Chapter 8A of the HKEx Main Board Listing Rules, IPO applicants must ‘demonstrate the necessary characteristics of innovation and growth and demonstrate the contribution of their proposed beneficiaries of weighted voting rights to be eligible and suitable for listing with [dual class shares] as set out in guidance published on the Exchange website and amended from time-to-time’.

116 Ministry of Finance (Singapore), Report of the Steering Committee for Review of the Companies Act (June 2011) at 16.

117 Section 33 of Companies (Amendment) Act 2014 (No. 36 of 2014).

118 SGX, Possible Listing Framework for Dual Class Share Structures (16 February 2017) <https://www.cfasociety.org/singapore/Documents/DCS+Consultation+Paper+(SGX+20170216)(Final).pdf>.

119 SGX, ‘SGX Launches Rules for Listing of Dual Class Shares Companies’ (26 June 2018) <https://api2.sgx.com/sites/default/files/news-releases/migration/sgx_launches_rules_for_listing_of_dual_class_shares_companies.pdf>.

120 Article 106 of Chinese Company Law 1993.

121 For example, the latest Chinese Company Law 2013 requires that shareholders present at a general meeting shall be entitled to one vote for each share held. See Article 103 of Chinese Company Law 2013.

122 Min Yan, ‘Differentiated Voting Rights Arrangement under Dual-Class Share Structures in China: Expectation, Reality and Future’ (2020) 28 Asia Pacific Law Review <https://doi.org/10.1080/10192557.2020.1855794>.

123 No. 32 [2018] of the State Council.

124 CSRC, Implementation Opinions on Setting up the Science and Technology Innovation Board and Launching the Pilot Program of the Registration System on the Shanghai Stock Exchange, Announcement No. 2 [2019] of CSRC. This was then subsumed by the Rules Governing the Listing of Stocks on the Science and Technology Innovation Board of Shanghai Stock Exchange (hereafter SSE Sci-Tech Innovation Board Listing Rules) in March 2019, allowing eligible listing applicants to go public with dual class shares. Article 2.1.4 of the SSE Sci-Tech Innovation Board Listing Rules stipulates: ‘For the purpose of these Rules, the differentiated voting rights arrangement means a mechanism whereby an issuer makes an offering of shares with special voting rights in accordance with article 131 of the Chinese Company Law, in addition to ordinary stocks as generally provided for thereunder. Except that each special voting stock has more voting rights than each ordinary stock, the shareholders of special voting stocks shall have the same rights as those of ordinary stocks’.

125 Rule 8A.17 of HKEx Main Board Listing Rules.

126 See Rule 210(10)(f) of SGX Mainboard Rules.

127 Article 4.5.3 of SSE Sci-Tech Innovation Board Listing Rules requires only directors who made and can continue to make a material contribution to development or business growth can hold the multiple voting shares under dual class shares.

128 However, empirical evidence also shows that independent directors may not prevent companies’ excessive risk taking and there were serious deficits in understanding the business. Wolf-Georg Ringe, ‘Independent Directors: After the Crisis’ (2013) 14 European Business Organization Law Review 401–24. Research also indicates positive correlations between the likelihood of corporate failure and the proportion of independent directors on corporate board. Hwa-Hsien Hsu and Chloe Yu-Hsuan Wu, ‘Board Composition, Grey Directors and Corporate Failure in the UK’ (2014) 46 British Accounting Review 215–27. Having said that, this article still takes a conservative stance, namely independent directors potentially have a role to play in safeguarding shareholders with inferior voting rights in dual class companies.

129 Independent directors are required to constitute a majority of each of the board’s sub-committees performing the functions of an audit committee, a nominating committee and a remuneration committee, and serve as chairmen in these sub-committees. See Rule 210(10)(i) of SGX Mainboard Rules.

130 See Rule 8A.30 of HKEx Main Board Listing Rules.

131 See Article 4.5.12 of SSE Sci-Tech Innovation Board Listing Rules.

132 See Rule 8A.24 of HKEx Main Board Listing Rules.

133 See Article 4.5.10 of SSE Sci-Tech Innovation Board Listing Rules.

134 See e.g. Rules 8A.32, 8A.37–41 of HKEx Main Board Listing Rules; Rules 610 and 1207 of SGX Mainboard Rules.

135 Take HKEx, for example. Rule 8A.37 states: ‘An issuer with a WVR (weighted voting rights) structure must include the warning ‘A company controlled through weighted voting rights’ on the front page of all listing documents, periodic financial reports, circulars, notifications and announcements required by these rules and describe the WVR structure, the issuer’s rationale for having it and the associated risks for shareholders prominently in its listing documents and periodic financial reports. This warning statement must inform prospective investors of the potential risks of investing in an issuer with a WVR structure and that they should make the decision to invest only after due and careful consideration’. In Singapore, any circular sent by an issuer to its shareholders must include a statement on the cover page that the issuer is a company with a dual class share structure. See e.g. Rules 753 and 1206 of SGX Mainboard Rules.

136 The minimum market capitalisation threshold is 10 billion HK dollars (circa US$1.3 billion) in Hong Kong, 300 million Singapore dollars (circa US$214 million) in Singapore and 10 billion RMB (circa US$1.4 billion) in Shanghai.

137 For example, pursuant to the Guidance Letter HKEX-GL93-18, an applicant is expected to possess more than one of the following characteristics: (a) its success is demonstrated to be attributable to the application, to the company’s core business, of (1) new technologies; (2) innovations; and/or (3) a new business model, which also serves to differentiate the company from existing players; (b) research and development is a significant contributor of its expected value and constitutes a major activity and expense; (c) its success is demonstrated to be attributable to its unique features or intellectual property; and/or (d) it has an outsized market capitalisation / intangible asset value relative to its tangible asset value. HKEx, Guidance Letter (GL93-18) (April 2018) at 2 <https://en-rules.hkex.com.hk/sites/default/files/net_file_store/new_rulebooks/g/l/gl9318.pdf>.

138 See HKEx, HKEx 2019 Annual Market Statistics (December 2019) <https://www.hkex.com.hk/-/media/HKEX-Market/Market-Data/Statistics/Consolidated-Reports/Annual-Market-Statistics/2019-Market-Statistics.pdf>. There are another 42 companies newly listed in the first quarter of 2020, and none of them adopted dual class shares. HKEx Market Data (31 May 2020) <https://www.hkex.com.hk/Market-Data/Securities-Prices/Equities?sc_lang=en>.

139 SSE Market Data Overview (31 May 2020) <http://star.sse.com.cn/en/marketdata/overview/>.

140 Except the secondary listing of the AMTD International Inc. with a dual class share structure in 2020.

141 It would not be difficult to find that most of these safeguarding measures adopted by Hong Kong, Singapore and Shanghai cannot be found in either of the main US stock exchanges (i.e. the NYSE and the NASDAQ). In the US, there are no particular entry requirements such as minimum market capitalisation or industry restrictions; there are no restrictions on multiple voting shares or event-based sunset provisions; and there are no maximal voting differentials or minimal equity threshold held by multiple-voting shareholders. See e.g. Robin Hui Huang, Wei Zhang and Kelvin Siu Cheung Lee, ‘The (Re)Introduction of Dual-Class Share Structures in Hong Kong: A Historical and Comparative Analysis’ (2020) 20 Journal of Corporate Law Studies 121, 142–43.

142 See e.g. Jay R Ritter, Initial Public Offerings: Technology Stock IPOs (June 2020) <https://site.warrington.ufl.edu/ritter/files/IPOs2019Tech-Stock.pdf>; Council of Institutional Investors, ‘Dual Class Companies List’ (March 2020) <https://www.cii.org/files/FINAL%20format%20Dual%20Class%20List%203-16-20(1).pdf>.

143 In this regard, dual class shares can be understood as a design to make shareholders with superior voting rights (or say controllers) less vulnerable to market disciplinary forces including hostile takeover, while the safeguarding measures are intended to reverse such a trend by placing restrictions on controllers’ insulation from market discipline.

144 See Mike Burkart and Samuel Lee, ‘One Share-One Vote: The Theory’ (2008)12 Review of Finance 1, 29 and 40–1.

145 Mary Leung and Rocky Tung, Dual-Class Shares: The Good, the Bad, and the Ugly—A Review of the Debate Surrounding Dual-Class Shares and Their Emergence in Asia Pacific (CFA Institute, 2018) at 56.

146 Lucian A Bebchuk and Kobi Kastiel, ‘The Untenable Case for Perpetual Dual-Class Stock’ (2017) 103 Virginia Law Review 585, 587–88.

147 ibid 605–7.

148 This is perhaps why some dual class companies voluntarily choose to adopt time-based sunset provisions even in jurisdictions without mandatory time-based sunsets. See Council of Institutional Investors, ‘Companies with Time-Based Sunsets on Dual-Class Stock’ (15 August 2019) <https://www.cii.org/files/8-15-19%20Time-based%20Sunsets.docx.pdf>.

149 For instance, some scholars found dual class companies’ valuation premium would disappear on average four/five years subsequent to the IPO, and then turn into discount after six to nine years. See Martijn Cremers, Beni Lauterbach and Anete Pajuste, ‘The Life-Cycle of Dual Class Firm Valuation’ (2018) ECGI – Finance Working Paper No. 550/2018 at 20–1. There is also research suggesting that young dual class companies (namely, firms younger than 12 years from IPO) have a valuation premium while mature dual class companies (namely, firms older than or equivalent to 12 years from IPO) have a discount compared to single class counterparts. Hyunseob Kim and Roni Michaely, ‘Sticking around Too Long? Dynamics of the Benefits of Dual-Class Voting’ (2019) ECGI – Finance Working Paper No. 590/2019 at 2–3.

150 For more details, see <http://ir.jd.com>.

151 HKEx, Concept Paper on Weighted Voting Rights (August 2014) at 46–8.

152 The event can potentially be performance-related as well. That is to use a pre-specified financial performance outcome as an event to trigger the event-based sunsets and convert multiple voting shares to single voting shares.

153 The only exception is the ownership-based sunsets in the SSE, which would be discussed in the following paragraph.

154 See Section 3.2 above.

155 Although there is no ownership-based sunset in the HKEx and SGX, the maximal voting differentials as discussed in the next subsection may also effectively control the minimum shareholdings through limiting the high to low voting ratio.

156 Put differently, the enlarged divergence would decrease the likelihood of the controllers to avoid decisions reducing corporate value but increasing private benefits. See the discussion in Section 2.3 above.

157 Stijn Claessens, Simeon Djankov, Joseph P H Fan and Larry H P Lang, ‘Disentangling the Incentive and Entrenchment Effects of Large Shareholdings’ (2002) 57 Journal of Finance 2741, 2764–765; Ronald W Masulis, Cong Wang and Fei Xie, ‘Agency Problems at Dual-Class Companies’ (2009) 64 Journal of Finance 1697, 1703–705.

158 See e.g. Lucian A Bebchuk and Kobi Kastiel, ‘The Perils of Small-Minority Controllers’ (2019) 107 Georgetown Law Journal 1453, 1505.

159 For most resolutions including removal of directors, only a simple majority (i.e. more than 50%) of the total voting rights is required.

160 33.4% * 2 > (100% – 33.4%) * 1.

161 25.1% * 3 > (100% – 25.1%) * 1; 20.1% * 4 > (100% – 20.1%) * 1.

162 9.1% * 10 > (100% – 9.1%) *1.

163 See Council of Institutional Investors, ‘Dual Class Companies List’ (March 2020) <https://www.cii.org/files/FINAL%20format%20Dual%20Class%20List%203-16-20(1).pdf>.

164 See Mary Leung and Rocky Tung, Dual-Class Shares: The Good, the Bad, and the Ugly—A Review of the Debate Surrounding Dual-Class Shares and Their Emergence in Asia Pacific (CFA Institute, 2018) at 56.

165 Non-voting shares namely, share class with zero voting rights, are an extreme case here as it represents an infinite ratio of high/voting rights. That means a controller can reduce his/her equity shareholding to literately one share as holders of the other class have zero voting rights regardless of their shareholdings.

166 See e.g. Rule 8A.09 and Rule 8A.23 of HKEx Main Board Listing Rules; Article 4.5.7 of SSE Sci-Tech Innovation Board Listing Rules.

167 Rules 8A.09 and 8A.23 of HKEx Main Board Listing Rules; Article 4.5.3 of SSE Sci-Tech Innovation Board Listing Rules; Rules 210(10)(g) and (h) of SGX Mainboard Rules.

168 Rule 8A.30 of HKEx Main Board Listing Rules.

169 Rule 210(10)(i) of SGX Mainboard Rules.

170 Lucian A Bebchuk and Kobi Kastiel, ‘The Perils of Small-Minority Controllers’ (2019) 107 Georgetown Law Journal 1453, 1500.

171 Another good example is using unique stock code to raise the awareness of dual class shares and help investors differentiate dual class companies from single class companies as we can see in the HKEx and SGX.

172 See Rules 8A.32, 8A.37–41 of HKEx Main Board Listing Rules; Rules 610 and 1207 of SGX Mainboard Rules; Article 4.5.10 of SSE Sci-Tech Innovation Board Listing Rules.

173 Furthermore, there is no consensus as to whether time-based sunset provisions have positive value impact on firms in general. See Xiaochuan Weng and Jingjing Hu, ‘Every Sunset is an Opportunity to Reset: An Analysis of Dual Class Share Regulations and Sunset Rules’ (manuscript in preparation).

174 The Council of Institutional Investors (‘CII’) is an organisation of more than 140 public, union, and corporate pension funds and representing managers of US$25 trillion assets. Between October 2018 and September 2019, the CII had submitted letters to the NASDAQ, NYSE and Delaware Bar to petition the exchanges or legislation to prevent companies retaining dual class structures beyond seven years after the IPO, unless each class, voting separately, supports extending that structure by a majority of outstanding shares. For more details, see <https://www.cii.org/dualclass_stock>.

175 For example, the Toronto Stock Exchange (‘TSX’) implements a coattail provision as a takeover protective provision to ensure the holders of inferior voting rights are able to participate in a takeover bid on equal terms as those with superior voting rights. See Section 624(l) of TSX Company Manual.

176 Whilst a coattail provision can effectively protect the interests of inferior voting shareholders, such a provision would largely undermine the initial purpose, the underlying benefits, of dual class structures.

177 There is also evidence to suggest that R&D investment may be adversely affected when debt capital becomes the main source of finance of a firm. In other words, high-tech and innovative firms would find more difficult to seek bank loans because of the higher risks and greater informational asymmetries associated with the R&D projects. Maria Maher and Thomas Andersson, Corporate Governance: Effects on Firm Performance and Economic Growth (OECD 1999) at 36.

178 It is argued that the divergence has a significant positive impact on innovation as it offsets the costs of insider control on firm value. Lindsay Baran, Arno Forst and M Tony Via, ‘Dual Class Share Structure and Innovation’ (December 2019) <https://doi.org/10.2139/ssrn.3183517>.

179 By the same token, it also poses similar challenges for future empirical studies aiming to quantitatively assess the merits and drawbacks of these safeguarding measures in a systematic manner.

180 They will probably vote with their feet and choose a less stringent regime like the US’s to go public with such share structures.

181 See John Armour, Henry Hansmann and Reinier Kraakman, ‘Agency Problems and Legal Strategies’ in Reinier Kraakman et al., The Anatomy of Corporate Law: A Comparative and Functional Approach (3rd edn, Oxford University Press 2017) at 37–8.

182 ibid. See also Robin Hui Huang, Wei Zhang and Kelvin Siu Cheung Lee, ‘The (Re)Introduction of Dual-Class Share Structures in Hong Kong: A Historical and Comparative Analysis’ (2020) 20 Journal of Corporate Law Studies 121, 131. For a more detailed discussion of the distinction between ex ante rules and ex post standards, see Louis Kaplow, ‘Rules Versus Standards: An Economic Analysis’ (1992) 42 Duke Law Journal 557–629.

183 Robin Hui Huang, Wei Zhang and Kelvin Siu Cheung Lee, ‘The (Re)Introduction of Dual-Class Share Structures in Hong Kong: A Historical and Comparative Analysis’ (2020) 20 Journal of Corporate Law Studies 121, 137 and 141. The authors pointed out that Hong Kong and Singapore do not have a class action and contingency fee system, as we can observe in the US legal framework. Neither does Mainland China.

184 In other words, stricter ex post mechanisms will be easier to justify after the occurrence of any suggested managerial unaccountability or opportunism. On a different note, it is also found that ex post sanctions are more efficient than ex ante sanctions in law enforcement. See e.g. Nuno Garoupa and Marie Obidzinski, ‘The Scope of Punishment: An Economic Theory’ (2011) 31 European Journal of Law and Economics 237, 240–45.

185 Furthermore, other existing regulations such as related party transaction rules can also be explored further to mitigate the risk of abuse of weighted voting control.

186 Order 15, Rule 12 of The Rules of the High Court (Cap 4A) (Hong Kong).

187 Order 15, Rule 12 of Rules of Court (Cap 322) (Singapore).

188 Similar to the representative proceedings in Hong Kong and Singapore, Article 95 of the revised Chinese Securities Law 2020 now allows aggrieved investors to initiate representative civil litigation against the company for fraudulent disclosure.

189 The entrenchment of control would provide corporate insiders too much influence as minority controller and shield them from both internal governance and external market check. For more detailed discussion, see Section 2.3 above.

190 While corporate insiders fully enjoy the private benefits of control, they will not bear the full costs caused by their value-destroying decisions due to the separation of control rights from cash flow rights. Nevertheless, even in the context of proportionate voting such agency costs, or say moral hazard, is also inevitable as long as a principal-agent relationship exists.

191 In the United Kingdom (UK), dual class listing is only permitted on the Alternative Investment Market of the London Stock Exchange (LSE) and the Standard Segment of the LSE’s Main Market, which are less attractive to investors than the Premium Segment of the LSE’s Main Market. For example, the Premium Listing Principles 5 of Listing Rule 7.2.1A provides: ‘A listed company must ensure that it treats all holders of the same class of its premium listed securities and its listed equity shares that are in the same position equally in respect of the rights attaching to those premium listed securities and listed equity shares’. A government consultation on the introduction of dual class shares for the Premium Listing Segment is currently taking place. Lord Hill’s Review on Listings (i.e. the UK Listings Review) has specifically included the area of dual class shares, with an objective to propose reforms to the UK listing regime that will lure the most successful and innovative companies to list in the UK. For more details see <https://www.gov.uk/government/publications/uk-listings-review>.

Additional information

Notes on contributors

Min Yan

Min Yan is an Assistant Professor in Business Law and Director of BSc. Business with Law Programme at Queen Mary University of London, UK; he is also a Jinshan Distinguished Visiting Professor of Law at Jiangsu University, China.