The Good And The Bad With The Singapore Market’s New Dual Class Share Structure

Singapore’s bourse operator, Singapore Exchange Limited (SGX: S68), announced last week that its Listing Advisory Committee (LAC) has voted in favour for the company to allow dual-class share structures.

What does this mean for investors, shareholders, and other stakeholders in the market? Let’s take a look at the announcement from both sides of the fences. But first, let’s briefly run through what a dual-class share structure actually mean.

The ins-and-outs of the structure

Right now in our local market, all the companies have a “one share, one vote” structure. A dual-class structure  would allow some class of shares to have more voting rights than another class of shares within the same company even though both classes of shares have the same economic rights.

The LAC has approved a maximum voting differential of 10-to-1. This means that companies can list two classes of shares in the market, with one having at most 10 times more voting rights than the other.

Right now, the US is an example of a market that embraces a dual-class share structure, with many major technology companies such as Alphabet Inc (the parent company of Google) and Alibaba Group Inc having such a structure.

The ‘Good’ side of the fence

This new development would greatly improve Singapore Exchange’s status as a listing platform of choice in the region. For companies that need a dual-class share structure, they might choose Singapore as their place of listing compared to other exchanges around the region.

Most notably, Singapore Exchange lost the listing of the British football club Manchester United Plc in 2011 as the company required a dual-class share structure. Manchester United is now listed in the New York Stock Exchange in the US.

As Singapore will now be the only major exchange in the region to allow a dual-class share structure, it might attract many regional companies to choose Singapore’s market to list their shares, thereby adding more international companies to the exchange.

Then, with possibly more listings in Singapore, investors here would be able to have a larger selection of investments to choose from.

The ‘bad’ side of the fence

If a company has a dual-class share structure, this brings in the possibility of abuse of power by certain shareholders even when they do not have much economic stake in a company.

Let’s consider a company with a dual-class share structure where one class of shares (let’s call this the B-class) has 10 voting rights per share and the other class (let’s call this the C-class) has one voting right per share. Now let’s assume that (1) the company has 10 B-class shares and 90 C-class shares, and (2) Investor-B owns all the B-Class shares while Investor-C owns all the C-Class shares.

In the scenario above, Investor-C has a stake of over 90% in the company’s economic benefits while Investor-B has just 10%. But, Investor-B will have majority control over the company. (There are a total of 190 voting rights for the company and the B-Class shares have 100 of these voting rights.)

When faced with a company with a dual-class share structure, it’s very important that investors have trust in the ability and integrity of the person or organisation who controls the voting rights.

Foolish Summary

The approval of the dual-class share structure in Singapore has shown our Garden City to be a progressive financial hub and might help bring in more listings here in the future.

But, there are also risks to consider that come with such a structure and investors need to be aware of them.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Singapore Exchange. Motley Fool Singapore writer Chong Ser Jing contributed to part of this article. He owns shares in Alphabet. Motley Fool Singapore writer Stanley does not own shares in any companies mentioned.