Research on dual-class share structure system

Abstract

For the development of the company, the founders and management often resort to issuing shares for financing, which inevitably leads to equity dilution and may endanger the founders' control over the company. To maintain control during financing, founders are increasingly adopting a dual-class share structure. Before listing, founders categorize shares into two types: one reserved for founders or majority shareholders, which are non-tradable but carry multiple voting rights per share; and another publicly issued, which can freely trade on the stock market but carries only one share one vote. Even after multiple rounds of financing under a dual-class structure, founders can still retain control of the company. The dual-class share structure has become a popular corporate governance model for tech companies in the evolving capital markets. The Shanghai Sci-Tech innovation board has also begun to allow tech companies with dual-class structures to list, showing recognition of this structure. However, given China's current market environment and legislative background, the application of dual-class structures must be strictly regulated. This research first defines the basic concepts and historical development of dual-class share structures, then analyzes the potential legal risks and advantages based on Principal-agent theory, control rights theory, and shareholder heterogeneity theory. The thesis draws on the developmental history and legislative practices from the United States, Canada, Singapore, and Hong Kong to provide insights for implementing dual-class structures in China. This thesis also includes an empirical analysis of China concept stock listed in the U.S., assessing the impact of dual-class structures on corporate performance. Finally, the article proposes specific recommendations for establishing and refining dual-class share structures in China, including qualifying conditions for listing, enhancing supervision systems, improving the independent director system, strengthening information disclosure requirements, and establishing more comprehensive shareholder protection mechanisms to ensure that minority shareholders can obtain effective relief when their rights are infringed.