Reconciling the Principle of Equal Treatment of Shareholders with Dual Class Share Structures in Singapore

In recent years, global capital markets have witnessed a proliferation of dual-class share structures, with international financial centres streamlining their listing rules to attract initial public offerings (IPOs) of innovative companies. Although conclusive evidence on its impact on corporate and market performance is yet unattainable, this institutional change seems ‘not for turning’, as instanced by the newly effective changes to the UK Listing Rules which, inter alia, ratify dual-class share structures within the premium segment of the London market.

In essence, dual-class share structures differentiate equity shareholders of a listed company, where founding shareholders retain control over a listed company with weighted voting rights disproportionate to their equity interest in the company. The primary purpose is to shield these founders from unsolicited takeovers, which might disrupt an innovative company’s growth cycle. Dual-class share structures hence intrinsically correlate with takeover regulation. Rise of the former warrants holistic revisit of the latter. Our paper details the amendments to Singapore’s Code on Take-overs and Mergers (SG Take-over Code) following the ratification of dual-class share structures within the Mainboard of the Singapore Exchange (SGX).

1. Amendments to the SG Takeover Code

In June 2018, the primary listing of companies with dual-class share structures on the SGX was approved. Swiftly in January 2019, amendments to the SG Take-over Code were adopted to ensure that takeovers of SGX listed companies with dual-class share structures would be conducted in compliance with the principle of equal treatment of all shareholders. The key amendments, featuring several new Notes implementing the principle of equality, are two-fold:

expanding the application of mandatory offers and its dispensation in target companies with dual-class share structures
clarifying the fair pricing norms for multiple classes of equity share capital of target companies with dual-class share structures.

• Amendments to the Mandatory Offer Rule

The mandatory offer rule and its dispensation manifest ‘most discernibly’ the principle of equal treatment of shareholders as enshrined in the SG Take-over Code. To accommodate the SGX’s new listing framework for dual-class share structures, a new Note 18 was incorporated into Rule 14.1 of the Code.

For a company with a dual-class share structure per the new SGX listing rules, there might occur a conversion of weighted voting rights shares (multiple-votes shares or MV shares) to ordinary voting rights shares (one-vote share or OV shares, as non-voting shares are still not permitted), or a reduction in the number of voting rights per MV share resulting in a lowering of the total number of voting rights of the company. The new Note 18 clarifies that such a triggering circumstance may find a shareholder foisted with the mandatory offer obligation to extend a general offer for all outstanding shares.

Nevertheless, such an obligation to make a general offer for all outstanding shares might be dispensed with if the concerned shareholder:

• is independent of the conversion or reduction;
• has not acquired any additional voting rights in the company from the date it becomes aware that the conversion or reduction is imminent; and
• has not exercised its voting rights in excess of the relevant mandatory offer threshold under Rule 14.1 from the date of the conversion or reduction.

The power to dispense with the general offer obligation, however, solely rests with the regulator, the Securities Industry Council, who should be consulted in all cases related to the dispensation.

• Amendments to the Fair Pricing Norms

A mandatory offer will not achieve the objective of treating shareholders equally without equitable considerations for equivalent shares. The revised Take-over Code introduces a new Note 8 into Rule 14.3 to determine the minimum offer price, which is set at the highest price that the offeror or concert parties have paid for voting rights in the company in the 6 months prior to the earlier of:

• the date of announcement of the conversion or reduction; or
• the date of the conversion or reduction.

If the offeror and concert parties did not acquire shares in the company within the above period, the offer price is set at the simple average of the daily volume weighted average traded prices of the company on either the latest 20 trading days or whatever number of trading days there were within 30 calendar days prior to the earlier of the above dates. The Securities Industry Council reserves the right to disregard any inexplicably high or low traded prices during the said 30 calendar days when computing the offer price.

The revised Take-over Code also addresses the ratio of offer values involving both MV shares and OV shares. The new Note 1 under Rule 18 prescribes it to be equal to the ratio of the simple average of daily volume weighted average traded prices of the shares within 6 months preceding the commencement of the offer period. Where traded price is unavailable for any class and different classes differ only in their voting rights, the offer will be comparable if the ratio of the offer values is equal to one. In all cases, the ratio of the offer values must be justified to the Securities Industry Council in advance, whose concern is that all shareholders be given the change to access the premium given for private rights of control.

2. Implications of the Amendments

The revised SG Take-over Code provides greater certainty to the takeover of companies with dual-class share structures in Singapore. It manifests the policy preference towards strong and equal shareholder protection in the shadow of the global proliferation of dual-class share structures.

Amendments to the SG Take-over Code also project transnational implications for other jurisdictions seeking to reconcile the equal treatment of shareholders under takeover regulations with the differentiated treatment of shareholders within dual-class share structures. For example, the Hong Kong Exchanges and Clearing Limited, while revising its Main Board Listing Rules for weighted voting rights listings, clarified that the Takeover Panel Executive (Executive) would not require a concerned shareholder to make a mandatory offer if it was independent of the event which led to the conversion of MV shares to OV shares. Nevertheless, the Executive is to be consulted in all relevant cases, which is similar to the Securities Industry Council position. The Hong Kong Codes on Takeovers and Mergers and Share Buy-backs, however, have not yet been amended.

In the wake of the UK listing rules reforms, the UK Takeover Panel has recently published a public consultation paper seeking comments on miscellaneous amendments to the UK Takeover Code. Notably, the proposed amendments have addressed neither the mandatory bid offer nor the fair pricing norms in respect of the nascent primary listing of companies with dual-class share structures within the premium segment of the London market. Given that the equal treatment of all shareholders is enshrined as one of the paramount principles of the UK Takeover Code, it may be worthwhile for the UK Takeover Panel to examine pertinent regulatory developments in Singapore and Hong Kong, which have traditionally faithfully inherited the UK Takeover Code.

Chuanman You is a Research Fellow at the Faculty of Law of the National University of Singapore. Prior to NUS, Chuanman had worked at Singapore Management University and Tel Aviv University.

Hans Tjio is the CJ Koh Professor at the Faculty of Law of the National University of Singapore.