As a fertile ground for startups, Singapore wants to make sure that it is retaining its homegrown companies to list on the Singapore Stock Exchange (SGX) while attracting more IPOs from countries like China by offering the option of a dual class share system.
The SGX is inviting comments on the proposed dual class share system, where different share classes have different voting rights and dividend payments, through a consultation until April 17. The exchange and the Monetary Authority of Singapore (MAS) are discussing the governance structure, though they still hope the system will be in place by the third quarter of this year with the amendment to the Companies Act. Singaporean capital markets lawyers told Asialaw they believe the dual class share system will help make the jurisdiction more competitive in attracting IPOs but warn that safeguards must be put in to ensure shareholder rights are protected.
Motivations to go dual class
Enhancing the SGX as an ideal platform for listing and making it easier for entrepreneurs to raise funds without losing focus on growing their businesses are some of the reasons why Singapore is looking to offer dual class shares. “The Singapore Securities Exchange wants to attract companies looking for the best in class international stock exchange to list in,” says Stefanie Yuen-Thio, joint managing director, TSMP Law Corporation. “The US has allowed dual class shares for many years. I believe that Singapore is ready for this, with the appropriate safeguards in place.”
“Many startups have been bought by private equity funds and are enticed to list elsewhere,” she adds. “Singapore wants to make sure that we do not lose our homegrown companies to other exchanges.”
“With the unstable geopolitical climate between China and the US, American influence is not as strong as it used to be,” says Yuen-Thio. “Chinese companies may be looking to invest their money in stable and safe environments, like Singapore.”
“One of the driving factors is probably the perception of a relatively poorer performance of SGX’s IPO market for the past couple of years compared to the Hong Kong IPO market,” says Sin Boon Ann, deputy managing director, corporate & finance at Drew & Napier. “The average number of equity listings per year was 19 for the past two years as compared to 34 in the period of 2008 to 2014.”
“The dual class share structure would enable entrepreneurs to swiftly expand the business by leveraging on new third-party capital while remaining as controlling shareholders,” says Sin.
“Good candidates for dual class shares are those in the tech, fintech and biomedical sectors, where traditional valuation models do not work,” says Yuen-Thio. “For example, a company like Facebook needed to cut a hefty equity cheque to acquire Whatsapp. Dual class shares should also only be allowed for large cap companies, where a wider shareholding spread and more sophisticated international investors will be able to hold the management accountable.”
Putting in safeguards
A number of provisions can be put in place to protect the rights of shareholders and ensure corporate governance standards are met to avoid problems such as owners being entrenched in the management of the company and majority shareholders getting excessive private benefits. “One key safeguard for shareholders is to have sunset provisions for the special rights, so that dual class rights are not entrenched indefinitely,” says Yuen-Thio. “The generation that comes after the founder may not have a similar strategic vision, or the needs of the company may change after listing. The company should, via a vote of its independent shareholders held periodically, consider if it wants to extend the special rights. The important thing is to put the independent shareholders in the driver’s seat.”
|Sin Boon Ann|
“A coat-tail provision is being proposed which requires the holders of multiple vote shares and one vote shares to be treated equally in the event that there is a change in control of the company,” says Sin.
“Whether a company is allowed to have dual class shares will be judged on a case by case basis,” says Yuen-Thio. “With technology changing all the time, and increasing innovative disruption, it is not feasible to have too many hard-and-fast rules around dual class rights. A regulation that makes sense today may be outdated tomorrow. It would be better for regulators to retain some flexibility to approve dual class shares; the important thing is for corporate governance rights to be upheld.”
The SGX has also suggested imposing additional admission criteria on companies with dual class share structures. “For example, the company would need to have a minimum market capitalisation of S$500 million ($357 million), a level of participation by sophisticated investors, which may refer to institutional investors, to be at least 90% of the public float requirement, and a compelling reason based on holistic assessment of various factors such as industry and operating track record,” says Sin.
Singapore’s dual class share system will evolve as it adapts to the market and public feedback. It is important to keep in mind the differences when comparing Singapore to jurisdictions such as the US. “Singapore will, learning from the experience of other jurisdictions, pick the best in class features when and if we roll out dual class shares, but we are likely to be conservative in implementation,” says Yuen-Thio. “The US is much more permissive in allowing envelope-pushing company structures.”
“Unlike Singapore, the US has a more robust activist shareholder culture and the American legal system has a contingency fee-based class action system which provides minority shareholders a viable means for taking actions against abusive controlling shareholders,” says Sin. “While shareholders in Singapore are able to seek redress when being oppressed under section 216 of the Companies Act, the process is usually costly and lengthy.”
“Perhaps the SGX could consider setting up a special tribunal where aggrieved investors of a listed SGX company with a dual class share system can have a quick and affordable resource against owner managers when proposed safeguards are breached,” adds Sin.
To ensure shareholder rights are balanced with the need to ensure the SGX remains the ideal choice for IPOs globally, Singapore needs to make sure that the appropriate safeguards are in place and that they are adapted as the dual class share system evolves over time.