Last Updated on August 4, 2023 by Tree of Wealth

Within organizations that employ a dual class share (DCS) system, specific shareholders possess enhanced voting rights compared to their actual ownership percentage in the firm. Explore the functionality of DCS and familiarize yourself with the governing principles for companies utilizing this system on the Singapore Exchange (SGX).

What exactly does “dual class shares” mean?

You may have encountered the term dual class share (DCS) when looking at various business structures. This arrangement is commonly chosen by companies wishing to ensure that their leading managerial figures maintain a firm grasp over the operations. Through DCS, designated shareholders receive voting rights that surpass their financial investment in the company, giving them a distinct advantage.

Particularly attractive to burgeoning businesses in fields like technology and innovation, DCS offers a viable means to access the capital markets for the essential funds to swiftly grow their operations. Simultaneously, it preserves the voting supremacy for the key managerial staff, enabling them to carry out long-term planning and strategic management for the business.

In the context of Singapore, companies that operate with DCS principles may find themselves eligible to be publicly traded on the Singapore Exchange (SGX).

How Does It Function?

In organizations that utilize dual class share (DCS) structures, there’s an imbalance in voting rights compared to the shareholding. While the majority of companies adhere to the principle of “one-share, one-vote,” a DCS system takes a different approach.

Under this unique structure, there are two distinct classes of voting shares. Shares in one class entitle the holder to a single vote, whereas shares in the other class can carry multiple votes. For those DCS companies traded on the Singapore Exchange (SGX), this multiple-vote privilege is limited, with a maximum of 10 votes per share.

This design empowers shareholders possessing multiple-vote shares, granting them significant influence over the company’s direction and strategic planning.

When considering an investment in a company operating under a DCS framework, it’s important to recognize that your voting rights will be somewhat diluted. Despite this, you may still find the investment appealing if you are confident in the company’s growth potential and place value on the leadership’s role. It’s a matter of weighing the reduced say in company affairs against the potential for robust growth and strong management.

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What Should You Consider Before Investing?

Investing in a company with dual class share (DCS) structures necessitates a thorough examination of various aspects of the business. Here’s what you need to weigh:

Understand the Business Landscape

• The Industry: Is the company positioned in a sector primed for high growth?
• Leadership Vision: Are you aligned with the leader’s objectives for the company, and do you trust their ability to fulfill this vision?

Evaluate the Multiple-Vote Shareholder(s) The individuals or entities with multiple voting rights will wield considerable influence over the company’s long-term strategies. Investigate:

• Their Expertise: What specialized knowledge or skills do they offer?
• Track Record: Have they demonstrated a history of fostering growth within the company?
• Board Composition: Does the board possess the necessary blend of abilities, experience, and autonomy to encourage sound corporate governance and serve as a counterbalance to the multiple-vote shareholders?

Investing in a DCS company should only be undertaken if you not only desire a stake in its potential but also grasp how your rights will be modified and are prepared to accept the associated risks.

What Are the Potential Risks?

DCS structures introduce certain risks that investors must be cognizant of:

• Management Entrenchment: With voting control, removing the owner-manager becomes a complex task. While this can occur in companies with single share classes, in such cases, the equity stake would correlate with voting rights, fostering alignment with minority shareholders’ interests.
• Expropriation Risks: Concentrated control might lead to the owner-manager benefiting personally at the expense of other shareholders. If the company lacks robust governance practices or an effective board, this risk intensifies.

The presence of vigilant independent directors on the board of a DCS company is crucial. They must serve as a restraint against the owner-manager to mitigate these risks.

Before investing in a DCS company, careful evaluation of the business model, growth potential, leadership vision, and understanding of the unique structure and risks is essential. It’s about balancing the appealing prospects with the intricate dynamics of rights and potential pitfalls. Your investment should be both an expression of confidence in the company’s future and a calculated decision, understanding the unique attributes and challenges of a DCS system.

Restrictions on Trading, Transfer, and Issuance of Multiple-Vote Shares

Dual class share (DCS) structures come with specific constraints that govern the handling of multiple-vote (MV) shares. Here are the key restrictions to be aware of:

1. IPO Moratorium During the 12-month period following the initial public offering (IPO), multiple-vote shares cannot be traded, transferred, or disposed of. This freeze applies to both MV shares and one-vote (OV) shares held by the multiple-vote shareholder.
2. Auto-Conversion of MV Shares to OV Shares An automatic conversion of MV shares into OV shares occurs if a multiple-vote shareholder:

• Stops being a director of the company (including through death or incapacitation).
• Sells or transfers their MV shares.

However, this can be overridden if independent shareholders (including other independent MV shareholders) give approval on a one-share one-vote basis. In such cases, an MV shareholder could retain MV rights after resigning as a director, or a new shareholder could inherit the MV shares following a sale or transfer.

3. Permitted Holder Group (PHG) A group of individuals or an entity known as a permitted holder group (PHG) can also hold MV shares. Transfers of MV shares within this group are exempt from the auto-conversion requirement. The boundaries of the PHG must be defined at the time of IPO, and the group must be represented by a responsible director who carries fiduciary duties.

MV shares will revert to OV shares if they are sold or transferred outside the PHG, or if the responsible director ends their service without appointing a successor.

The restrictions on MV shares within a DCS structure are designed to maintain stability and control. They offer provisions for automatic conversion, exceptions within a defined group, and require approval for special circumstances. Understanding these restrictions is vital for investors and shareholders navigating the complexities of DCS systems, as they directly influence the dynamics of control and the potential for changes in voting power within the company.

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Additional Restrictions, Rights, and Procedures in Dual Class Share (DCS) Structures

Let’s delve into more specifics surrounding the handling of multiple-vote (MV) and one-vote (OV) shares, especially the restrictions, rights, and key procedures within DCS structures:

1. Restriction on Issuing More MV Shares Post-Listing

• The ratio of MV shares to OV shares must not increase after listing, thereby ensuring that the voting rights of OV shareholders won’t be diluted compared to MV shareholders.
• Corporate actions that do not increase the MV share proportion are permissible (such as rights issues on a pro-rata basis).

2. Rights of One-Vote Shareholders

• OV shareholders (not holding MV shares) must have the ability to exercise at least 10% of the total voting rights.
• Shareholders with at least 10% of the voting rights can request a general meeting.

3. Key Decisions on a One-Share-One-Vote Basis

• Whether holding MV or OV shares, all shareholders cast one vote per share for key decisions, including alterations to the company’s governing documents, varying share rights, appointing or removing independent directors and auditors, company winding-up, de-listing, and reverse takeovers.

4. Independence of Board Committees

• In a DCS-structured company, the majority of members (including chairpersons) on the Audit, Nominating, and Remuneration Committees must be independent.
• This bolsters board independence and safeguards against expropriation risks.
• Appointment of independent directors is on a one-share-one-vote basis, regardless of share class.

5. Disclosures for Trading

• The IPO prospectus of a DCS company will contain information about why the DCS structure was adopted and the risks involved.
• DCS issuers will be explicitly marked on trading screens.
• The cover pages of announcements, circulars, and annual reports will also identify DCS-structured companies.

These regulations and practices further detail the workings of DCS systems, offering transparency, consistency, and protection for both classes of shareholders. The balance between MV and OV shares, the rights afforded to OV shareholders, the consensus needed for crucial decisions, and the clear demarcation of DCS companies all contribute to a well-regulated framework. For those engaging with DCS companies, understanding these nuances is vital to informed decision-making and awareness of the unique governance and investment landscape.