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Published online by Cambridge University Press: 06 December 2021
Unequal voting rights arrangements under dual class share structures are increasingly favoured by entrepreneurs and founders of technology companies, in order to retain a degree of control over the company that is disproportionate to their equity shareholdings. The rise of such share structures around the world has put competitive pressure on the UK Government and the country's financial regulator to relax the one share, one vote principle in the premium listing regime of the London Stock Exchange, to ensure the UK equities market remains world-leading and fit for the future development of the economy. There is, however, a long tradition of institutional investors’ distaste for dual class share structures. In fact, the near extinction of dual class listings in the UK capital markets can be largely attributed to the opposition of large British institutions. Therefore, this paper will critically discuss the conflict between the demands to attract listings from high-tech and innovative companies and concerns of a race to the bottom in the UK context. It rebuts criticisms based on investor protection and argues that if dual class companies were permitted to list in the Premium Segment, the higher level of regulatory protection provided in the premium listing regime would help enhance minority shareholder protection and shareholder engagement. The additional safeguarding measures, as we have seen from other global financial centres, would also help to restrain the potential abuse of controllers’ weighted voting power. Together with the market mechanism, permitting dual class listings in the Premium Segment should be welcomed.
1 D Thomas et al ‘UK seeks change in listing rules to lure tech start-ups’ Financial Times (5 November 2019) available at https://www.ft.com/content/d4d2da5a-fee8-11e9-be59-e49b2a136b8d; FT editorial ‘Why dual class shares deserve consideration’ Financial Times (12 November 2019) available at https://www.ft.com/content/6f576e60-0231-11ea-be59-e49b2a136b8d.
2 Yan, M ‘The myth of dual class shares: lessons from Asia's financial centres’ (2021) 21 Journal of Corporate Law Studies, DOI: 10.1080/14735970.2020.1870843Google Scholar.
3 M Leung and R Tung Dual-Class Shares: the Good, the Bad, and the Ugly — A Review of the Debate Surrounding Dual-Class Shares and Their Emergence in Asia Pacific (CFA Institute, 2018) pp 39–41.
5 For example, the newly revised Listing Rules of the Singapore Stock Exchange define dual class shares as a share structure that gives certain shareholders voting rights disproportionate to their shareholding. In other words, shares in one class carry one vote, while shares in another class carry multiple votes.
6 In short, the weighted voting rights under dual class share structures enable founders to retain a degree of control over the company that is disproportionate to their equity shareholdings. See Yan, above n 2.
7 S Gopinath and R David ‘THG shares soar after $2.4 billion IPO to ride online boom’ Bloomberg (16 September 2020) available at https://www.bloomberg.com/news/articles/2020-09-16/thg-holdings-rides-online-shopping-boom-with-2-4-billion-ipo.
8 ‘The Company will have two classes of shares at admission, Class A Shares and Class B Shares. The Class B Shares will not be admitted to listing or to trading on any stock exchange. On a poll, holders of the Class A Shares shall have one vote for every Class A Share held, and for so long as the Founder or a Permitted Transferee holds Class B Shares, the Founder or such Permitted Transferee shall have twenty votes for every Class B Share held’: Deliveroo Holdings plc's Prospectus (22 March 2021) para B.1.3 at 3, available at https://corporate.deliveroo.co.uk/protected_file/175/.
10 Only premium listed equity shares are eligible for inclusion in the FTSE UK Index Series: Section 4 ‘Security Inclusion Criteria’ of FTSE UK Index Series Rules (December 2020) available at https://research.ftserussell.com/products/downloads/FTSE_UK_Index_Series.pdf.
11 Thomas et al, above n 1.
12 J Hill UK Listings Review (Final Report) (3 March 2021).
13 ICGN ‘Letter response to Call for Evidence – UK Listings Review’ (December 2020) available at https://www.icgn.org/policy/letters.
14 FCA Review of the Effectiveness of Primary Markets: The UK Primary Markets Landscape, Discussion Paper (DP17/2) (February 2017) para 1.21.
16 L Hannah The Rise of the Corporate Economy (London: Methuen, 1976) p 54.
17 L Hannah ‘Visible and invisible hands in Great Britain’ in A Chandler and H Daems (eds) Managerial Hierarchies: Comparative Perspectives on the Rise of the Modern Industrial Enterprise (Cambridge: Harvard University Press, 1980) p 53.
18 J Franks and C Mayer ‘Evolution of ownership and control around the world: the changing face of capitalism’ in B Hermalin and M Weisbach (eds) The Handbook of the Economics of Corporate Governance (Amsterdam: North Holland, 2017) p 685.
19 While families rapidly relinquished ownership, they retained control through their positions on the boards of directors: J Franks et al ‘Spending less time with the family: the decline of family ownership in the United Kingdom’ in R Morck (ed) A History of Corporate Governance Around the World: Family Business Groups to Professional Managers (Chicago: University of Chicago Press, 2005) p 583.
20 Ibid. Moreover, as Professor Cheffins pointed out, takeovers also fostered considerable dilution of blockholding among companies carrying out acquisitions in the second half of twentieth century: B Cheffins Corporate Ownership and Control: British Business Transformed (Oxford: Oxford University Press, 2008) p 317.
21 In 1953, Charles Clore launched the UK's first successful hostile takeover bid: Franks et al, above n 19, p 584.
22 It is agreed that few takeover defences are more successful than dual class shares: Seligman, J ‘Equal protection in shareholder voting rights: the one common share, one vote controversy’ (1986) 54 George Washington Law Review 687Google Scholar at 687. In the US, the rise of dual class shares also paralleled a takeover wave. See G Jarrell and A Poulsen ‘Dual-class recapitalization as antitakeover mechanisms’ (1988) 20 Journal Financial Economics 129.
23 Franks and Mayer, above n 18, pp 685–735. In addition, voting restrictions and strategic block holdings, namely seeking protection under the wing of a friendly parent, are also used.
24 F Braggion and M Giannetti ‘Changing corporate governance norms: evidence from the dual class shares in the UK’ (2019) 37 Journal of Financial Intermediation 15 at 17.
25 The cost of capital and corporate governance would be affected by investor demand. It is pointed out that ‘institutional investors, who worked hand in glove with the stock exchange, were able to impose sanctions against firms that engaged in such practices, denying them access to outside finance, if, for example, they sought to use dual-class issues in new equity flotations’: Franks et al, above n 19, p 610.
27 B Cheffins and S Bank ‘Corporate ownership and control in the UK: the tax dimension’ (2007) 70 Modern Law Review 778 at 780–782. See also Hannah, above n 16.
28 The tax system encouraged the expansion of insurance firms and pension funds: P Davies ‘Institutional investors in the United Kingdom’ in T Baums et al (eds) Institutional Investors and Corporate Governance (Berlin: De Gruyter, 1993) p 257.
29 Cheffins, above n 20, p 307. In addition, Cheffins outlined the main incentives of unwinding control from both sell side and buy side: ibid, p 10.
30 For example, the percentage of shares owned by institutional investors rose from 21% in 1957 to 60% in 1991: Cheffins and Bank, above n 27, at 781. In fact, the institutional ownership had grown to 60% by 1980 in the UK and has remained roughly constant since then: B Black and J Coffee ‘Hail Britannia?: institutional investor behavior under limited regulation’ (1994) 92 Michigan Law Review 1997 at 2007.
31 See eg R La Porta et al ‘Corporate ownership around the world’ (1999) 54 Journal of Finance 471 at 497.
32 Black and Coffee, above n 30, at 2002.
33 Ibid, at 2009. It is further pointed out that the five largest institutional shareholders control 30% or more of the shares of smaller firms.
35 It is also pointed out that the government in effect delegated important areas of rule setting (such as takeovers and listing rules) to quasi-governmental organisations, which were particularly open to collective institutional influence: P Davies ‘Shareholders in the United Kingdom’ in R Thomas and J Hill (eds) Research Handbook on Shareholder Power (Cheltenham: Edward Elgar, 2015) p 355.
37 Black and Coffee, above n 30, at 2002. It is also argued that the expectation of oversight is embedded in British culture; this may also result in British institutional investors being more interested in corporate governance than their American counterparts.
38 Davies, above n 35.
39 Franks et al, above n 19, p 585.
40 Braggion and Giannetti, above n 24, at 18–20. Additionally, concerns about agency problems in companies with dual class shares would be more likely to be heightened by media coverage, and media pessimism has a particularly strong effect on these firms. And this would also directly or indirectly affect investor demands: ibid. See also above n 25 and accompanying text.
41 D Jenkins Report of the Company Law Committee (Her Majesty's Stationery Office, London, 1962) paras 135 and 136: ‘The supporters of voteless shares take the view that in the event of discrimination by the voting section of shareholders against the holders of the voteless shares the Court would, under section 210 [of Companies Act 1948] or otherwise, intervene at the instance of the latter, and we think this view is well founded. We have found this question a difficult one, but after careful consideration of the arguments either way we have come to the conclusion that the case for abolition by law of voteless shares has not been made out. Notwithstanding the objections to which they may give rise in certain cases we think that their abolition would be too drastic a step. In any case it would be likely to encourage alternative methods of vesting control in the holders of particular shares or classes of shares. So far as we can see this could only be prevented by imposing a statutory requirement that equity shares should carry voting rights proportional to their rights to participate in the distribution of profits and assets, and that no other shares should have any ordinary voting rights. In our view any such requirement would be unduly restrictive.’ In short, the Jenkins Committee argued that it may be desirable that control be retained by insiders, and the acceptance of dual class shares was accordingly reinstated.
42 Davies, above n 35. This is also why it is argued that the absence of dual class shares in the UK is by choice rather than by law: J Franks et al ‘Ownership: evolution and regulation’ (2009) 22 Review of Financial Studies 4009 at 4030.
43 One of prominent examples is the 2011 boardroom bust-up at Eurasian Natural Resources Corporation PLC, indicating that controlling shareholders could cause governance problems, which were largely unprepared by the pre-2014 UK corporate governance system. For more detailed discussion, see Cheffins, B ‘The undermining of UK corporate governance(?)’ (2013) 33 Oxford Journal of Legal Studies 503CrossRefGoogle Scholar at 510–516.
44 Huang, F ‘Dual class shares around the top global financial centres’ (2017) Journal of Business Law 137Google Scholar at 144–145.
45 Listing Rules (Listing Regime Enhancements) Instrument 2014 (FCA 2014/33) 7.2.1A.
46 M Yan ‘A control-accountability analysis of dual-class share (DCS) structures’ (2020) 45 Delaware Journal of Corporate Law 1 at 12–14.
47 See E Yiu ‘Securities Commission backs introduction of dual-class shares on Hong Kong stock exchange’ South China Morning Post (20 December 2017), available at https://www.scmp.com/business/companies/article/2124972/securities-commission-backs-introduction-dual-class-shares-hong.
48 EY Global IPO Trends: Q4 2020 (January 2021) available at https://www.ey.com/en_gl/growth/ipo-trends-2020-q4.
50 In total, 25 out of 112 newly listed companies in 2019 and 32 out of 165 newly listed companies in 2020 adopted dual class shares. See eg J Ritter Initial Public Offerings: Technology Stock IPOs (December 2020) available at https://site.warrington.ufl.edu/ritter/files/IPOs-Tech.pdf.
51 This means that issuers cannot access the FTSE index, and means lower liquidity and higher costs of capital.
52 J Hill ‘Letter to in the Chancellor’ in the UK Listing Review (Final Report) (3 March 2021) at 9.
53 European Commission Primary and Secondary Equity Markets in the EU (Final Report) (November 2020) p 118.
54 In the UK, a director can be removed by an ordinary resolution at a shareholder meeting before the expiration of his period of office, notwithstanding anything in any agreement between the company and him: Companies Act 2006, s 168.
57 UK tech IPOs on the LSE have far lagged behind the US: ibid, at 318. When dual class recapitalisations are not possible, some firms would rather choose to remain or go private in order to maintain control if firms have good growth prospects. For example see K Lehn et al ‘Consolidating corporate control: dual-class recapitalizations versus leveraged buyouts’ (1990) 27 Journal of Financial Economics 557.
58 FCA Review of the Effectiveness of Primary Markets: The UK Primary Markets Landscape, Discussion Paper (DP17/2) (February 2017) para 4.12.
59 It is pointed out that UK technology companies are disproportionately the subject of merger and acquisition (M&A) activity compared with their international peers: ibid.
60 These ‘scale-up’ companies are commonly defined as having an average growth in employees or turnover of more than 20% per annum over three years, with a minimum of 20 employees at the start: ibid, para 4.9.
62 Reddy, above n 56, at 321. In contrast, the availability of private funds, such as venture capital and private equity funds can become alternative funding option. For founders who wish to seek to retain control, when private financing becomes more widely available, it would serve as a substitute for going public.
63 Primary and Secondary Equity Markets in the EU (Final Report), above n 53, p 13. The report also highlights that there are 5,000 family-run companies above €50m in size that remain unlisted among the 14 EU Member States analysed, which could be a significant source of new listings.
64 HM Government Building our Industrial Strategy (Green Paper) (January 2017) p 67.
65 Yan, above n 2.
66 The majority voting rights will help these entrepreneurs or founders to retain the ability to determine the leadership of the firm. If they are part of the management team, the disproportionately greater voting rights would protect them from being dismissed from leading the management of the firm by other shareholders.
67 It is argued that dual class firms face lower short-term market pressure because they have fewer shares held by transient investors or short-term investors. Accordingly, there is a lower probability of being taken over: B Jordan et al ‘Growth opportunities, short term market pressure, and dual-class share structure’ (2016) 41 Journal of Corporate Finance 304 at 327.
68 Google Inc Registration Statement (Form S-1) No 333 (April 2004) available at https://www.sec.gov/Archives/edgar/data/1288776/000119312504073639/ds1.htm.
69 J Eley and S Provan ‘Hut Group targets £4.5bn valuation in London listing’ Financial Times (27 August 2020) available at https://www.ft.com/content/481b0b9f-504b-482b-9c77-a63b20757d40.
70 Building our Industrial Strategy, above n 64, p 67.
71 THG, above n 4.
72 Eley and Provan, above n 69.
73 Deliveroo ‘Deliveroo selects London as future listing’ (4 March 2021), available at https://uk.deliveroo.news/news/deliveroo-london-tech.html.
74 J Fisch and S Solomon ‘The problem of sunsets’ (2019) 99 Boston University Law Review 1057 at 1064.
75 Or, say, to insulate entrepreneurial management from shareholder pressure in general, which is discussed in more detail below.
76 FCA Response to CP13/15 – Enhancing the effectiveness of the Listing Regime (PS14/8 2014) p 6.
77 The weighted voting rights provided to the controlling shareholders make them virtually insulated from minority shareholders' pressure and the disciplinary forces of the market for corporate control. Shareholders without weighted voting rights would subsequently lose their influence over certain types of material transactions.
78 After all, the higher level of governance standards mandated in the premium sector would provide more regulatory protection to inferior voting investors, which is discussed in Section 3(b) below.
79 This is also why Hong Kong, Singapore and mainland China recently changed their listing rules to accommodate these types of companies to list with dual class shares: M Yan ‘Differentiated voting rights arrangement under dual-class share structures in China: expectation, reality and future’ (2020) 28 Asia Pacific Law Review 337.
80 This becomes increasingly important as there is an unprecedented shift from active funds to passive funds. For example, the ‘Big Three’ passive funds, ie BlackRock, Vanguard and State Street combined, currently constitute the largest shareholder in 87.6% of S&P 500 companies: Yan, above n 2. This is not to mention that an index excluding dual class companies that outperform the market would also not be in the best interest of index providers who are also for-profit companies.
81 Besides, shareholder proposals or informal dialogues which are seen by institutional investors as an effective means of enhancing accountability would also be less effective, especially when directors cannot feel any real threats.
82 H Hu and B Black ‘Empty voting and hidden (morphable) ownership: taxonomy, implications, and reforms’ (2006) 61 Business Lawyer 1011 at 1014.
83 R Gilson ‘Controlling shareholders and corporate governance: complicating the comparative taxonomy’ (2006) 119 Harvard Law Review 1641 at 1651. Meanwhile, the cost of doing so would also correspondingly be decreased.
84 A shareholder in a dual class company with a typical 10:1 ratio needs to hold only 28.6% of shares to obtain 80% of the votes, compared to 80% of shares under one vote per share. Further, he or she only needs as little as a 9.1% of shareholdings to retain majority control: L Bebchuk and K Kastiel ‘The perils of small-minority controllers’ (2019) 107 Georgetown Law Journal 1453 at 1478.
85 Reddy, above n 56, at 336.
86 Such opposition is well documented in the government Green Paper published in 2017: Building our Industrial Strategy, above n 64, p 67.
87 Such benefits can be either pecuniary, for instance via tunnelling corporate assets or ‘non-pecuniary’, such as desirable social status to political influence. See eg Gilson, above n 83, at 1663–1664.
88 The less equity the controlling shareholder has, the greater the incentive to extract private benefits: ibid, at 1651.
89 Cheffins, above n 43, at 510.
90 LR 6.4.1R of the UK Listing Rules.
91 According to the UK Listing Rules, the controlling shareholder means any person who exercises or controls on their own or together with any person with whom they are acting in concert, 30% or more of the votes able to be cast on all or substantially all matters at general meetings of the company. See FCA Handbook.
92 LR 6.5.4R of the UK Listing Rules. Even after getting listed, the above-mentioned agreement is required to put in place at all times to ensure the controlling shareholder's compliance. See 9.2.2ADR of the UK Listing Rules.
93 LR 9.8.4R(14) of the UK Listing Rules.
94 LR 9.2.24R of the UK Listing Rules.
95 LR 11.1.1CR of the UK Listing Rules.
96 LR 5.2.2G of the UK Listing Rules.
97 Related party is defined to include a company's substantial shareholders who have 10% or more of the votes. See LR 11.1.4R and 11.1.4AR of the UK Listing Rules.
98 LR 11.1.7R of the UK Listing Rules.
100 Cheffins, above n 43, at 525.
101 LR 5.2.5R of the UK Listing Rules.
102 Ibid. Not surprisingly, a premium-listed company should also put significant transactions to a shareholder vote according to LR 10.1 of the UK Listing Rules.
103 There are in fact two approvals: first, a simple majority of shareholder approval is required, and then a simple majority of non-controlling shareholders’ approval is also required. LR 9.2.2ER of the UK Listing Rules.
104 LR 6.1.1R, 9.1.1R, 10.1.1R, 11.1.1R of the UK Listing Rules.
105 THG, above n 4, at 31.
107 Provision 9 of the UK Corporate Governance Code 2018 states that: ‘The roles of chair and chief executive should not be exercised by the same individual. A chief executive should not become chair of the same company’. However, the Code is only applicable to companies with a premium listing.
108 The chapter of related party transactions only applies to a company that has a premium listing: LR 11.1.1R of the UK Listing Rules.
109 For example, Rule 730B ‘Dual Class Share Structure’ of the Listing Rules of the Singapore Stock Exchange (Mainboard) specifies that: ‘For an issuer with a dual class share structure, the following matters must be voted through the enhanced voting process: (1) changes to the issuer's Articles of Association or other constituent documents; (2) variation of rights attached to any class of shares; (3) appointment and removal of independent directors; (4) appointment and removal of auditors; (5) reverse takeover of the issuer; (6) winding up of the issuer; and (7) delisting of the issuer.’ Similarly, Rule 8A.24 of the HKEx Main Board Listing Rules also states that: ‘Any weighted voting rights attached to any class of shares in a listed issuer must be disregarded and must not entitle the beneficiary to more than one vote per share on any resolution to approve the following matters: (1) changes to the listed issuer's constitutional documents, however framed; (2) variation of rights attached to any class of shares; (3) the appointment or removal of an independent non-executive director; (4) the appointment or removal of auditors; and (5) the voluntary winding-up of the listed issuer.’
110 For example see Moore, M ‘Designing dual class sunsets: the case for a transfer-centered approach’ (2020) 12 William & Mary Business Law Review 93Google Scholar; L Bebchuk and K Kastiel ‘The untenable case for perpetual dual-class stock’ (2017) 103 Virginia Law Review 585; J Fisch and S Solomon ‘The problem of sunsets’ (2019) 99 Boston University Law Review 1057; Sharfman, B ‘The undesirability of mandatory time-based sunsets in dual class share structures: a reply to Bebchuck and Kastiel’ (2019) 93 Southern California Law Review Postscript 1Google Scholar.
111 For more detailed discussion, see Yan, above n 2.
112 See eg Z Goshen and A Hamdani ‘Corporate control and idiosyncratic vision’ (2016) 125 Yale Law Journal 560 at 577.
113 For example, Rule 210(10)(f) of the Listing Rules of the Singapore Stock Exchange (Mainboard) specifies: ‘An issuer with a dual class share structure must have automatic conversion provisions which provide that a multiple voting share will be converted into an ordinary voting share on a one-for-one basis in the event that: (i) the multiple voting share is sold or transferred to any person… or (ii) a responsible director ceases service as a director (whether through death, incapacity, retirement, resignation or otherwise)….’ Similarly, Rule 8A.17 of the HKEx Main Board Listing Rules also specifies: ‘The beneficiary's weighted voting rights in a listed issuer must cease if, at any time after listing, the beneficiary is: (1) deceased; (2) no longer a member of the issuer's board of directors; (3) deemed by the Exchange to be incapacitated for the purpose of performing his or her duties as a director; or (4) deemed by the Exchange to no longer meet the requirements of a director set out in these rules.’
114 Rule 210(10)(d) of the Listing Rules of the Singapore Stock Exchange (Mainboard).
115 Rule 8A.10 of the HKEx Main Board Listing Rules states: ‘A class of shares conferring weighted voting rights in a listed issuer must not entitle the beneficiary to more than ten times the voting power of ordinary shares, on any resolution tabled at the issuer's general meetings.’
116 When the ratio increases, it means a controller can drastically decrease their equity holding without losing control, which would then enlarge the divergence between their control and ownership which in turn increase the controller's incentive to extract private benefits. See eg Yan, above n 46, at 32–33.
117 Rule 8A.30 of the HKEx Main Board Listing Rules.
118 Rule 210(10)(i) of the SGX Mainboard Rules.
119 Perhaps, more radically, special rights for minority shareholders to be represented by non-executive directors can also be considered to ensure the accountability.
120 Typical risks may include investors’ lack of control and exclusion from major indexes. For detailed disclosure requirements, see eg the Singapore Listing Rules where dual class companies are required to additionally provide: (a) a statement on the cover page of the document that the issuer is a company with a dual class share structure; (b) details of the dual class share structure and its associated risks; (c) the rationale for adopting the dual class share structure; (d) matters that are subject to the enhanced voting process and the implications to holders of ordinary voting shares; (e) key provisions of the Articles of Association or other constituent documents relating to the dual class share structure; and (f) the following details for each holder of multiple voting shares (name of shareholder, number and total voting rights of multiple voting shares, number and total voting rights of ordinary voting shares): Rule 610 of the SGX Mainboard Rules.
121 However, it should be borne in mind that safeguarding measures are indeed a double-edged sword. Although they could help mitigate the potential abuse of enhanced control as corporate governance risks, these safeguarding measures would compromise the value of dual class shares. More discussion on this contention can be found in Section 4(b) below.
122 P Myners Institutional Investment in the UK: A Review (March 2001) p 89.
123 For example, see the guidance to Principle 1 of the UK Stewardship Code 2012.
124 Companies Act 2006, s 172 (UK).
125 For example, s 173 of the Companies Act 2006 requires directors to exercise independent judgement and where a controlling shareholder also serves as a director, s 175 – the duty to avoid conflict between personal interests and the interest of the company – would deter any self-serving behaviour.
126 Companies Act 2006, ss 260–264 (UK).
127 It is argued that if undertakings contained in a relationship agreement are breached by the controlling shareholder, a s 994 petition could be a viable option. For more discussion see Cheffins, above n 43, at 529.
128 A Friedman The Promise of Market Reform: Reigniting America's Economic Engine (18 May 2017) available at https://corpgov.law.harvard.edu/2017/05/18/the-promise-of-market-reform-reigniting-americas-economic-engine/.
130 The Kalifa Review of UK FinTech (Final Report) (26 February 2021).
132 While the default position is one share, one vote, companies are generally allowed to design their own voting rules under the articles of association. See Companies Act 2006, s 284 (UK) on general rules of votes.
133 However, as discussed below, this does not necessarily mean (institutional) investors would like them.
134 Hill, above n 12, at 11.
137 Hill, above n 12, at 11–12.
138 The five-year duration condition seems arbitrary, and it is understandable that institutional investors’ campaigns on the time-based sunset provision may have an impact on this policy recommendation. See eg Moore, above n 110; Yan, above n 2; Fisch and Solomon, above n 74.
139 Franks et al, above n 42, at 4030. See also Section 1 above. But removing the regulatory hurdles could at least help to test the market and keep the door open for potential investors.
140 For example, Paddy Ireland points out that shares are ‘readily marketable commodities, liquid assets, titles to revenue easily converted by their holders into money’: Ireland, P ‘Corporate governance, stakeholding, and the company: toward a less degenerate capitalism’ (1996) 23 Journal of Law and Society 287CrossRefGoogle Scholar at 303.
141 Stephen Bainbridge argues that the ownership of shares represents ‘a proportionate claim on the corporation's net assets in the event of liquidation, the right to a pro rata share of such dividends as may be declared by the board of directors from time to time, and limited electoral rights’: S Bainbridge Corporate Governance after the Financial Crisis (Oxford: Oxford University Press, 2012) p 235.
142 In particular, when appropriate safeguarding measures can be applied as discussed above, the economic rights contained in the shares shall not be the principal reason for institutional shareholders to reject the dual class share structures.
143 It is also noted that the UK pension schemes now re-weight in favour of bonds and out of equity: Davies, above n 35.
144 Office of National Statistics ‘Share ownership time series dataset’ (January 2020), available at https://www.ons.gov.uk/economy/investmentspensionsandtrusts/datasets/shareownership.
145 Cheffins, above n 20, pp 377–381.
146 Davies, above n 35. Institutional investors’ continuing bias in favour of passivity is also confirmed by the 2001 Myners Report.
147 Black and Coffee, above n 30, at 2047–2048.
149 Indeed, these passive funds lack both firm-specific information and incentives to devote appropriate resources to informed voting. See eg Lund, D ‘Nonvoting shares and efficient corporate governance’ (2019) 71 Stanford Law Review 687Google Scholar at 712.
150 Between 2008 and 2015 investors bought passively managed funds of approximately US$1 trillion, while at the same time selling holdings of actively managed equity funds worth roughly US$800 billion; and as of year-end 2015, passive index funds managed total assets invested in equities of more than US$4 trillion. See J Fichtner et al ‘Hidden power of the big three? Passive index funds, re-concentration of corporate ownership, and new financial risk’ (2017) 19 Business & Politics 298 at 299.
151 Passive funds have already represented more than half of US equity markets and biggest shareholders in many big US companies. For example, the ‘Big Three’ passive funds, ie BlackRock, Vanguard and State Street combined, currently constitute the largest shareholder in 87.6% of S&P 500 companies: Yan, above n 2.
152 The Investment Association Investment Management in the UK 2019–2020 (September 2020) https://www.theia.org/sites/default/files/2020-09/20200924-imsfullreport.pdf.
153 As discussed in Section 3, if the ultimate objective is to maintain or enhance minority shareholder protection, dual class companies should be allowed to list in the Premium Segment in order to hold superior voting shareholders (ie the controlling party) more accountable and provide inferior voting shareholders with more protection. Similarly, institutional shareholders can also have more chances to engage in a dual class company with a premium listing.
154 Enriques and Romano classified present-day institutional investors into ‘portfolio value maximizing’ (PVM) shareholders, who have a preference for maximising the value of their portfolio as a whole, and ‘firm value maximizing’ (FVM) shareholders who have interest in the performance of specific companies to make as much money as possible. By issuing dual class shares, the founders signal to the market that the company will be run as an FVM company instead of PVM company. In other words, dual class companies would primarily focus on firm value irrespective of the consequences that this might have for other firms in the economy. Enriques and Romano, therefore, concluded that the first best strategy for PVM institutional investors is advocating for the elimination of dual class shares to ensure that all firms behave as portfolio value maximisers; but if they cannot achieve this outcome, the second-best option is to purchase stakes in firms controlled by FVM shareholders to enjoy additional profits brought by the dual class company though its growth may disrupt the activity of many of their portfolio firms. Just as the two authors observed in the controversial IPO by Snap: ‘despite their fierce opposition to dual class shares in general, and to Snap's IPO structure in particular, institutional investors purchased Snap's shares en masse’. For more discussion see L Enriques and A Romano ‘Rewiring corporate law for an interconnected world’ 64 Arizona Law Review (forthcoming). Suffice it to say, shareholder protection is not always the primary reason for institutional investors to reject dual class share structures.
155 B Sharfman ‘A private ordering defense of a company's right to use dual class share structures in IPOs’ (2018) 63 Villanova Law Review 1 at 2.
156 D Fischel ‘Organized exchanges and the regulation of dual class common stock’ (1987) 54 University of Chicago Law Review 119 at 147.
157 R Gilson ‘Evaluating dual class common stock: the relevance of substitutes’ (1987) 73 Virginia Law Review 807 at 808–809.
158 Ibid; see also Committee on Capital Markets Regulation The Rise of Dual Class Shares: Regulation and Implications (April 2020) available at https://www.capmktsreg.org/wp-content/uploads/2020/04/The-Rise-of-Dual-Class-Shares-04.08.20-1.pdf.
159 Fischel, above n 156.
160 K Rydqvist ‘Dual class shares: a review’ (1992) 8 Oxford Review of Economic Policy 45 at 55.
161 G Parker et al ‘Sunak to arm City of London for fightback with listings shake-up’ Financial Times (1 March 2021) available at https://www.ft.com/content/a9e9de26-7f44-41e1-9dd6-3721a52c7d9c.
162 FCA ‘FCA welcomes Lord Hill's Listing Review report’ (3 March 2021) available at https://www.fca.org.uk/news/statements/fca-welcomes-lord-hills-listing-review-report.
164 HM Government UK Listings Review: Response (21 April 2021) available at https://www.gov.uk/government/publications/uk-listings-review/uk-listings-review-government-response.
165 It is reported that Deliveroo's decision to list in London over New York actually follows the publication of Lord Hill's UK Listings Review and the Chancellor's endorsement of it: Deliveroo, above n 73; see also T Bradshaw ‘Deliveroo targets $10bn valuation in London IPO’ Financial Times (4 March 2021) available at https://www.ft.com/content/f8108b89-419f-40e8-97c9-ce2c15b905e9. Therefore, there may be some immediate impact of relaxing the ban on dual class listing on the LSE. Nevertheless, with the increased supply of private capital, private financing may also compete with public equity markets for those founders who wish to seek to retain control. When there are more money chasing deals (which also indicates higher firm valuations), the bargaining position of founders in high-growth companies would be increased in negotiating for greater control rights and/or postponing the decision to go public. See eg D Aggarwal et al ‘The rise of dual-class stock IPOs’ Duke Law School Public Law & Legal Theory Series No 2020-78, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3690670. While the role of private capital markets becomes increasingly influential, a full analysis of its impact on dual class listing falls beyond the scope of this paper. Suffice it to say, public markets remain important and relevant. First, founders’ desire to stay private often conflicts with private equity investors’ preference to go public. In particular, venture capital funds have a fixed life cycle and taking their portfolio firms public ensures a timely liquidation of their investment and carries considerable reputational benefits. See P Gompers ‘Grandstanding in the venture capital industry’ (1996) 42 Journal of Financial Economics 133 at 147. Thus, a startup may choose to stay private longer before going public, but when it exceeds a certain size going public is still favoured, and IPOs remain the most efficient and profitable exit option in most cases. Meanwhile, public equity markets can provide a more continuous source of financing. See eg Fontenay, E ‘The deregulation of private capital and the decline of the public company’ (2017) 68 Hastings Law Journal 445Google Scholar at 463; M Ewens and J Farre-Mensa ‘The deregulation of the private equity markets and the decline in IPOs’ (2020) 33 Review of Financial Studies 5463. In addition to IPOs, listed companies can raise additional equity capital through a secondary public offering or a follow-on issue. The status of being a listed company also increases their opportunities to access other sources of capital, eg through corporate bond market. The increasing availability of capital would in turn lower costs of capital among others.
166 The extremely low take-up of dual class shares in the new IPOs in Hong Kong, Singapore and Shanghai at least partly reflects the reduced attraction of such share structures when mandatory safeguards are stringent. In short, both the intended and unintended impact of these safeguarding measures might over-restrain the controllers’ ability to control, and hence overly compromise the intrinsic value of dual class shares: Yan, above n 79, at 354.
167 Or they simply stay private for longer, considering the increased supply of private capitals. See above n 165.
168 Y Lee and Y Lee ‘Grab CEO Tan to get majority voting control in record SPAC deal’ Bloomberg (15 April 2021) available at https://www.bloomberg.com/news/articles/2021-04-15/grab-ceo-tan-to-get-majority-voting-control-in-record-spac-deal; M Ruehl and S Palma ‘Grab co-founder set to dramatically increase voting rights with Nasdaq listing’ Financial Times (19 April 2021) available at https://www.ft.com/content/4e23cd61-1a8d-4dc5-aba1-8565fce31882.
170 See above n 114 and accompanying text.
171 9.1% * 10 > (100% — 9.1%) *1.
172 See also R Adams and D Ferreira ‘One share-one vote: the empirical evidence’ (2008) 12 Review of Finance 51 at 58.
173 Such as to avoid uninformed outside stockholders’ interference: H DeAngelo and L DeAngelo ‘Managerial ownership of voting rights: a study of public corporations with dual classes of common stock’ (1985) 14 Journal of Financial Economics 33 at 35. The change of UK institutions as well as prevalent passivity would also strengthen this type of argument. Empirical evidence also showed that dual class companies outperformed the market and dual class structures can materially increase the value of high-growth companies in terms of market valuation. See D Melas ‘Putting the spotlight on Spotify: why have stocks with unequal voting rights outperformed’ MSCI (3 April 2018) available at https://www.msci.com/www/blog-posts/putting-the-spotlight-on/0898078592. State Street Global Advisors also issued a report finding that S&P 500 companies with dual class share structures outperformed their counterparts by over 26% over a 10-year period between 2007 and 2017: R Kumar et al ‘State Street Global Advisors, Shareholder Rights in the Age of Snap, Market Commentary’ (April 2017) available at https://docplayer.net/56433180-Shareholder-rights-in-the-age-of-snap.html. See also Jordan et al, above n 67, at 318–320; S Bauguess et al ‘Large shareholder diversification, corporate risk taking, and the benefits of changing to differential voting rights’ (2012) 36 Journal of Banking & Finance 1244 at 1245.
174 Additional disclosure requirements can also be mandated in order to facilitate investors to make more informed decisions.
175 Hill, above n 12, p 11.
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