After years of debate, both the Singapore Exchange and the Stock Exchange of Hong Kong have amended their rules to allow the listing of companies with dual-class share (DCS) structures. Their decision to do so was not made lightly and was dogged by controversy.
Much of the argument in favour of allowing DCS listings focuses on the success of DCS companies like Google and Facebook, and of course, the decision by Alibaba to list in New York rather than in Hong Kong. A company with a DCS structure typically has two classes of shares, each carrying different voting rights. The shares with more voting rights (“super voting shares”) are usually held by the company’s founders and senior executives, allowing them a high level of control in the company with a relative low level of equity ownership. Ordinary shares, usually carrying one vote per share, are listed and sold to public investors.
New Superpowers for Some Company Founders
The recent pivot to DCS listings in Asia was made for the benefit of technology and so-called “new economy” companies (although companies in other industries may be able to take advantage of the change in some markets). Founders of these companies are said to favour such structures — a DCS structure protects them from the vagaries of market fluctuations while they implement their long-term vision, which, given new and proprietary technologies and business models, may not provide immediate, short-term benefits. By using a DCS structure, visionary entrepreneurs can focus on the long term and resist pressure to deliver short-term performance for shareholders looking for immediate financial gains.
As a byproduct, however, super voting shares give their holders almost superpower-like control over companies even though they only own a small percentage of the underlying equity. The undemocratic nature of the DCS structure is naturally making some investors and analysts nervous.
Deciding Where to List
Many exchanges see permitting DCS firms to list as a necessary step to stay relevant in a time of relentless competition in the global, cross-border IPO business. As capital becomes increasingly global, issuers are no longer limiting themselves to their domestic exchanges, but are shopping around for the best listing venue.
What does a good listing venue look like? From an issuer’s perspective, the exchange’s liquidity, financial infrastructure (e.g., speed of network), credibility and prestige, ease of future fundraising, and regulatory framework, and the availability of highly experienced, relevant professionals and the size and valuation of the issuer’s peer group on the exchange, are some of the considerations.
Another critical aspect for potential issuers is the investor and analyst community covering the issuer’s sector on that exchange. Issuers want to ensure they will get the attention they need and that their business model is thoroughly understood by investors so they can obtain the best valuation.
Of course, fees associated with the listing are also a key factor — companies desire certainty over how much it will cost them to launch their IPOs and to maintain their listings. Equally importantly, companies will look at the rules of the relevant exchange. How strongly is the market regulated? Are the rules clear? Are the rules robust and well enforced, and at the same time, business friendly?
Changing the rule book to allow DCS IPOs may appear a quick and easy way to win market share. However, it is but one of many considerations from an issuer’s perspective. In itself allowing DCS listings does not provide a sustainable competitive advantage — after all, other exchanges can easily replicate it. If all exchanges have the same rules, what makes one exchange stand out over another? What is the unique selling proposition (USP)? Are we not back to fundamentals such as liquidity, valuation, investors, analysts, the regulatory framework, and the ecosystem? If the fundamentals do not work, allowing DCS listings will not help in the competitiveness stakes. If they do, then DCS is a red herring beyond the initial IPO. – cfablog
