Guide to shares: Dual-class shares

What are dual class shares?

You might have come across companies with Dual Class Share (DCS) structures. Companies opt for DCS structures when they want their owner-managers to retain control of the business. Such companies give certain shareholders outsized voting rights relative to their economic interests in the company.

DCS structures appeal to high-growth companies such as those in the technology and innovation sectors. It allows them to tap into capital markets for funding to ramp up their business rapidly while maintaining voting control for their owner-managers to execute long-term strategies for the company.

In Singapore, DCS companies may be listed on the Singapore Exchange (SGX).

How it works

With DCS structures, voting rights are disproportionate to shareholding.

Most companies operate on a one-share, one-vote basis. However, a DCS company has two classes of voting shares – shares in one class carry one vote, while shares in another class carry multiple votes.

In the case of a DCS company listed on SGX, the voting rights attached to multiple-vote shares will be capped at 10 votes per share.

Such structures allow shareholders with multiple voting rights to have more say over the running of the company and its business strategy.

If you choose to invest in such a company, you would have to accept that your voting rights are diluted. However, you may be willing to accept having a smaller voice in the company if you believe in the growth prospects and the importance of the leadership of the company.

What to consider before investing

Look into the nature of the business, the company’s track record and its growth prospects.

• Is the company operating in a high growth area?

• Do you share the leader’s vision for the company and do you have confidence that he will be able to execute this vision?

Pay attention to what the multiple-vote shareholder(s) bring to the table. They will have control over long-term strategies of the company.

• What kind of expertise or knowledge are they contributing to the company?

• What is their track record like in building growth for the company?

• Does the board have the appropriate mix of skills, experience and independence to instill good corporate governance and act as an effective check against the multiple-vote shareholder(s).

You should only invest in a DCS company if, apart from wanting to take a stake in its prospects, you understand how your rights will be affected and are willing to take on the risks involved.

What are the risks?

DCS structures pose risks that investors should be aware of. Given that control is vested in the hands of the owner-manager, DCS companies could be more susceptible to:

• Management Entrenchment – It will be difficult to remove the owner-manager from the management team since he has voting control. Although management entrenchment can also occur in a single share-class company with a large shareholder, his equity stake would be proportionate to the voting rights he holds, and his interests are thus more likely to be aligned with those of the minority shareholders.

• Expropriation Risks – With concentrated control, there is a risk of the owner-manager extracting private benefits from the company, to the detriment of other shareholders. This risk may be more pronounced if the company does not have strong corporate governance practices or an effective board to oversee the company’s affairs.

It is therefore important for the board of a DCS company, particularly the independent directors, to act as a check against the owner-manager.

Restrictions on trading, transfer and issuance of multiple-vote shares

DCS structures have the following restrictions:

IPO moratorium

Multiple-vote shares will not be traded. Multiple-vote shareholders cannot transfer or dispose of their shareholding in the issuer (in respect of both their multiple-vote and one-vote shares) during the 12-month period from the time of the Initial Public Offering (IPO).

Auto-conversion of MV shares to one-vote shares

Multiple-vote shares will automatically convert into one-vote shares if the multiple-vote shareholder does one of the following:

• Ceases to be a director of the company (including through death or incapacitation)

• Sells or transfers his multiple-vote shares

This is unless independent shareholders (including other independent multiple-vote shareholders) approve to allow otherwise, on a one-share one-vote basis.

This means that if independent shareholders agree, a multiple-vote shareholder will be able to retain his multiple-vote rights after stepping down as a director; and in the case of a sale or transfer, the new shareholder will own multiple-vote shares.

Permitted holder group

A group of persons or a Permitted Holder Group (PHG) is also allowed to hold multiple-vote shares.

Transfers of multiple-vote shares within the PHG are not subject to the auto-conversion requirement. The scope of the PHG must be specified at IPO and the PHG must be represented by a responsible director who has fiduciary duties.

Multiple-vote shares will convert to one-vote shares if they are sold or transferred to someone outside the PHG, or if a responsible director ceases service as a director and no new responsible director is appointed.

Restriction on issuing more multiple-vote shares post-listing

The proportion of multiple-vote shares against one-vote shares cannot increase post-listing. This means that the voting rights of one-vote shareholders, as a class, will not be diluted vis-à-vis multiple-vote shareholders post-listing.

Only corporate actions that do not increase the proportion of multiple-vote shares are allowed (e.g. rights issues that are undertaken on a pro-rata basis).

Rights of one-vote shareholders

In any general meeting, one-vote shareholders (who are not also holding multiple-vote shares) must be able to cast at least 10% of the total voting rights of the issuer.

Also, one-vote shareholders holding at least 10% of the voting rights have the right to requisition for a general meeting.

Key matters to be decided on a one-share-one-vote basis

All shareholders, regardless of whether they hold multiple-vote or one-vote shares, will have only one vote per share when they are voting on the following key matters at a general meeting:

• Any change to the company’s Articles of Association or other constituent documents;

• Variation of rights attached to any class of shares;

• Appointment or removal of independent directors and auditors;

• The company’s winding up and de-listing; and

• A reverse takeover of the company.

Independence of board committees

Where a company has a DCS structure, the majority of the Audit Committee, Nominating Committee, and Remuneration Committee (including their respective chairmen) must be independent.

These measures strengthen the board’s independence to guard against expropriation risks. The appointment of independent directors is conducted on a one-share-one-vote basis, regardless of the class of shares held.

Disclosures for trading

You can refer to the IPO prospectus of a DCS company to find out more about the company’s justifications for adopting a DCS structure and the associated risks.

You will be able to identify securities of DCS issuers as they will be clearly indicated so on trading screens.

You will also be able to identify companies that have DCS structures from the cover page of their announcements, circulars and annual reports.