The Singapore Exchange recently announced plans to become the first Asian bourse to allow dual-class share listings. Lawyers tell Ranajit Dam that this will help Singapore become a regional technology hub by helping the city-state attract sought-after listings from “unicorns”
By Ranajit Dam for Asia Legal Business
Last month, Singapore Exchange (SGX) unveiled plans to become the first Asian bourse to allow dual-class share listings (DCS). DCS allows company founders to maintain control by giving them superior voting rights through a split share system that gives some shares more weight.
Allowed on the New York Stock Exchange and Nasdaq, the system was controversial when Google used them in its listing back in 2004, but it had become less so by the time Facebook had its IPO in 2012. According to a Reuters report, the introduction of DCS could make SGX the go-to place for potential IPOs of Southeast Asian startups such as ride-hailing services Grab and GO-JEK, and online retailers Indonesia’s Tokopedia and India's Flipkart.
Lawyers in the city-state agree. “There will likely be more interest in exploring listings in Singapore from growth companies in the region, as this opens up an additional avenue of funding for tech companies while allowing them to retain control and drive the direction of their companies, which are still in the start-up stage,” says Chen Yih Pong, a principal at Baker McKenzie.Wong & Leow.
“This is particularly important as young companies will need to rely on the founders’ vision and expertise to grow and mature,” he adds. “In terms of maintaining a listing, these companies will have to take note of any additional compliance they may be subject to and balance the needs of the company for funding. They may also need to maintain a higher level of corporate governance that the SGX may implement if the dual-share system is eventually adopted here.”
Azmul Haque, managing director at Collyer Law, agrees. “In general, having the dual-class share structure for listed public companies in Singapore is likely to support job creation and stimulate the economy, as it allows entrepreneur-driven high-growth companies to have access to the public markets. This, in turn, will enable them to grow, create more jobs, and provide investors a chance to participate in that growth in a transparent environment,” he says.
WORTH THE RISK
The dual-class share system could be the shot in the arm that Singapore needs at this point, as it reels from the effects of a sluggish economy and a number of delistings. However, Haque notes that there is a certain amount of risk that investors should be aware of.
“There may be a trade-off for investors because they need to believe in and bet on management and their approach to value creation,” he says. “That’s a calculated risk that investors will need to take. It will certainly attract IPO aspirants from high-growth technology companies in Asia, which otherwise would have sought out more established exchanges that are known to value technology companies better.”
Haque adds that the conundrum around the idea of a dual-class share structure is that the principal advantage – i.e., it protects entrepreneurial management from the demands of ordinary shareholders – is also, strangely enough, the main disadvantage.
“Most common law-based systems of governance for companies, including Singapore, have traditionally been predicated around the notion of voting control based on one share equals one vote. So the inherent safeguard is that if you don’t like what directors and officers were doing, you have a fair chance at voting them out,” he says. “Given that a dual-class structure is an exception to this form, it may raise certain corporate governance issues, particularly about the obligations of the controlling shareholder to other minority shareholders.”
But if the bet does pay off, the payout could be spectacular. “The best example of a listed company that thrived with a dual-class structure is probably Google, which disclosed in its IPO document that the dual-class structure ‘will make it easier for its management team to follow the long term, to be innovative’,” says Haque. “To look at this another way, it gives directors more leeway to work with top management to take ‘big bets’ without being hamstrung by dissenting outside owners or overarching regulators.”