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E-MailAurelio Gurrea-Martínez is an Assistant Professor of Law at Singapore Management University. This post is based on his recent paper. Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock (discussed on the Forum here), The Perils of Small-Minority Controllers (discussed on the Forum here), and The Lifecycle Theory of Dual-Class Structures (discussed on the Forum here), all by Lucian Bebchuk and Kobi Kastiel.
Dual-class shares have become one of the most controversial issues in corporate governance and capital markets around the world. On the one hand, a tough regulatory competition to attract IPOs has led many stock exchanges, including the Singapore Exchange (SGX) and the Stock Exchange of Hong Kong (HKEX), to revise their regulatory framework to allow companies going public with dual-class shares provided that several requirements are met. On the other hand, Nasdaq and the New York Stock Exchange (NYSE) in the United States have been asked by the Council of Institutional Investors to impose time-based sunset clauses to firms going public with dual-class share structures. In the meantime, other leading financial centres, including London (premium listing) and Frankfurt, still prohibit companies from going public with dual-class shares, even though it remains to be seen whether they will keep this approach—especially in the case of the United Kingdom after Brexit—in the light of the competitive regulatory environment existing in today´s capital markets.
In a new paper, I argue that the desirability of each regulatory model to deal with dual-class shares will depend on a variety of local factors, including the level of sophistication of the market existing in a country, the degree of protection provided to minority investors, the level of private benefits of controlled enjoyed by controlling shareholders, and the sophistication of regulators and courts in a given jurisdiction. Therefore, the key question to be addressed from a policy perspective is not whether companies should be allowed to go public with dual-class shares, as many authors and regulators seem to be discussing, but whether dual-class class shares should be allowed and, if so, under which conditions, taking into account the particular features of a country. Therefore, regulators should be careful when analysing foreign studies and solutions. Otherwise, they may end up adopting a regulatory solution that might not be appropriate for their local capital markets.
The article is divided as follows. Section 2 discusses the features and rationale of dual-class share structures and the misconceptions surrounding the ‘one share, one vote’ principle traditionally existing in corporate law. Section 3 explains the rise of the debate on dual-class shares in recent years. Section 4 discusses the arguments in favour and against dual-class share structures, providing new insights in the debate. Section 5 reviews the empirical literature on dual-class shares and criticizes the adoption of mandatory-based dual-class shares structures proposed by several authors and stakeholders such as the Council of Institutional Investors.
Section 6 analyses the different regulatory approaches to deal with dual-class shares. Section 7 explains why several factors existing in a particular country may affect the desirability of, and therefore the regulatory model to deal with, dual-class shares. Section 8 advocates for a country-specific solution to the phenomenon of dual-class shares. Namely, it will be argued that, in countries with sophisticated markets and regulators, strong legal protection to minority investors, and low private benefits of control, regulators should allow companies going public with dual-class shares with no restrictions or minor regulatory intervention (e.g., event-based sunset clauses). By contrast, in countries without sophisticated markets and regulators, high private benefits of control, and weak legal protection to minority investors, dual-class shares should be prohibited or subject to higher restrictions (e.g., time-based sunset clauses and stringent corporate governance rules). Intermediate solutions should be adopted in countries with mixed features. For this reason, the key question to be addressed from a policy perspective is not whether companies should be allowed to go public with dual-class shares, as many authors and regulators seem to be discussing, but whether dual-class class shares should be allowed and, if so, under which conditions, taking into account the particular features of a country. Therefore, regulators should be careful when analysing foreign studies and regulatory solutions since it may lead them to adopt an undesirable approach to deal with dual-class shares.
The complete paper is available here.
