Regulation of dual class share structures in listed companies : a comparison of Hong Kong and the United States

Abstract

The efficiency of dual class share structures has been the subject of great controversy for a long time. In April 2018, Hong Kong decided to lift its ban on listings with dual class structures. This thesis will discuss how to regulate dual class listings, propose improvements to the HK regulatory regime and make some general policy suggestions to other jurisdictions that permit or plan to permit dual class listings. This thesis argues that dual class listings have both merits and demerits, and that an effective regulatory regime of dual class listings should control certain demerits of theirs while not impairing their merits; the HK regulatory regime needs improvements in both respects of this standard. To explore how dual class listings should be regulated, this thesis is developed around two interrelated questions. First, what are the merits and demerits of dual class listings? Second, if dual class listings are to be allowed for their merits, what rules should be made to control their demerits? For the first question, this thesis proposes a three-layer analytical framework under which dual class structures are compared respectively to dispersed ownership structures (under one share-one vote), concentrated ownership structures (under one share-one vote) and other control-enhancing mechanisms. This thesis finds that dual class structures facilitate long-term business strategies, firm-specific investments, equity financing and risk-taking, and they are simple, transparent and stable; but they insulate corporate controllers from proxy contests and hostile takeovers, exacerbate tunnelling and shirking problems, and enable corporate controllers to achieve an extreme voting-cash flow rights divergence and to disenfranchise existing shareholders through certain recapitalization mechanisms. On the basis of the findings about dual class structures’ governance effects, this thesis proceeds to discuss how to control the demerits of dual class listings. This thesis compares the HK regulatory regime of dual class listings mainly with the US regime; laws of several other jurisdictions are also considered. In addition, this thesis discusses the effects of mandatory sunset provisions for dual class listings and argues that their benefits generally do not outweigh their costs. This thesis argues that a regulatory regime of dual class listings should effectively control extreme voting-cash flow rights divergence, disenfranchising dual class recapitalizations and controlling shareholders’ tunnelling behaviour while not diminishing the merits of dual class listings. The US regulatory regime plus an effective regulation of voting-cash flow rights divergence can be considered as an example regime that satisfies this standard. However, assessed under this standard, the HK regime has substantial weaknesses in both sides of curbing dual class listings’ demerits and supporting their merits; relevant amendments will be proposed. Other jurisdictions that permit or plan to permit dual class listings should also follow the aforementioned standard at least as a starting point, since it responds to the basic qualities of dual class structures. Adjustments may be made thereto when they are supported by sufficient reasons such as special market conditions in a particular jurisdiction.