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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

Learn about the dual-class share structure debate from CFA Institute. The DCS controversy affects the investment market with voting rights dilemmas.

Dual-Class Shares: The Good, the Bad, and the Ugly

View the report (PDF)

Dual-class shares (DCS), also known as shares with weighted voting rights, provide some owners with superior voting rights giving them voting control over a company that is disproportionate to their equity shareholding. Commonly they are found in founder-led companies allowing founders to maintain control while giving investors an opportunity to participate in the company’s growth.

DCS have a much longer history in Western countries; they are much less prevalent in the Asia-Pacific region (APAC), although this is rapidly changing. In a bid to increase IPOs, both the Hong Kong Exchange and Singapore Exchange have amended their listing rules in 2018 to allow DCS IPOs. We anticipate that other stock exchanges in the APAC will follow suit.

This study examines three questions:

  • What are the safeguards that investors can most rely on?
  • What are the lessons learned that are most applicable for investors, standard setters, and regulators in APAC?
  • Who should investors look to for investor protection?

To answer these questions, we have (1) assessed developments in other markets (notably the United States), (2) conducted a range of literature review on the subject, and (3) interviewed a number of practitioners from different parts of the industry. We also conducted a survey in March 2018 to gauge the views of our members on the introduction of DCS and the necessary safeguards in APAC (CFA APAC Survey).

In this report, we review the debate for and against DCS as well as look at the performance of DCS companies with the passage of time and examine the implications for policymakers. The report notes the historic development of DCS in the United States, reviews regional APAC developments, and assesses common safeguards.

The report outlines case studies on Magna International, Facebook, and CBS Corporation/Viacom that illustrate how DCS companies have hurt investors. It also includes the complex views of industry stakeholders. Our recommendations to improve investor protection in the face of the increasing prevalence of DCS companies include mandatory time-based sunset clauses (before reverting to a one-share, one-vote system), event-based sunset clauses, implementing enhanced corporate governance measures, and limiting the maximum voting differential.

In APAC, legal action against rogue companies or management is not an avenue available to most investors. Our recommendations for enhancing investor awareness are:

  • Exchanges and regulators should coordinate their efforts and invest in investor education and awareness.
  • In jurisdictions where class and derivative actions are unavailable and/or uncommon, governments and regulators should establish a mechanism to enable small investors to seek recourse.
  • Regulators must intervene in a timely manner when investors are taken advantage of or harmed.

The survey covered in the report revealed that respondents were divided when asked if DCS structures should be introduced to the market, with 53% opposing the introduction and 47% in favor. Regardless of their position on DCS, almost all (97%) respondents considered it necessary to enact additional safeguards in the event DCS structures are permitted.