The Protection For Investors In Dual Class Share Structure

Different from the common one share-one vote structure,companies with dual class share structure can issue two classes of shares carrying disproportionate voting rights.Since its invention in the late 19 th century,there has been continuous debate over this particular ownership structure.Neither scholars nor regulators have reached consensus.Last year,Hong Kong Exchange's loss of Alibaba's IPO to New York Stock Exchange has again put dual class share structure under spotlight.Much of the debate focused on HKSE's listing rules.Some scholars are in favor of the current regulation since it protects the interest of shareholders,while others criticized Hong Kong regulators for their lack of flexibility and feared that HKSE would no longer be an ideal IPO destination for some companies with this alternative share structure.However,the fact is that dual class share structure has never been widely accepted in global capital markets.Though this type of shares can be seen traded actively in US,Canadian and Sweden markets,other important capital markets in world have set prohibitions or restrictions over the trading of such shares.Dual class share structure has its advantages and disadvantages.It is imprudent to draw a simple conclusion whether to adopt it or not.Speaking from the external environment,it is linked to the overall legal system and operating regulations of a country.Regarding the internal environment of a company,the choice of single or dual class share structure not only affects company's financing activity,but also its corporate governance structure.Williamson stated that the capital structure was the basis of corporate governance,while corporate governance reflected capital structure.This dissertation examines the source and characteristics of dual class share structure by reviewing its development and performing empirical analysis on its application.The author investigates both sides of the debate over dual class share structure.From the perspective of shareholder interests,this paper explains the reasonability of this structure by applying the approach of law economics.On the other hand,the author offers suggestions to avoid its possible defects from the perspective of corporate governance and external regulations,in order to improve the development of this particular share structure,especially for its implementation in China.Therefore,this dissertation is arranged in the following framework.Chapter one reviews the fundamentals of dual class share structure,including definition,the cause of its invention,characteristics and major Chinese companies listed in the United States with this structure.Statistics show that Hong Kong Exchange's attractiveness towards China-based businesses are in decline,especially for those in TMT sector due to regulation reasons.More and more China-based companies choose NYSE or Nasdaq as their IPO destinations,i.e.Alibaba.In order to fully understand its structure,it is necessary to review the development of dual class share in history.The author selected both mature and emerging capital markets,namely United States,Singapore and Hong Kong,to analyze the evolvement of dual class structure.The comparison of permission,restriction and board member appointment mechanism in these markets will be presented in tables.In the last part of Chapter One,the author performs case studies on Google,Facebook,Alibaba and other media companies which had implemented dual class share structure,and compares the differences of the control structure among them.This chapter mainly serves to provide basis for further research in following chapters.The second chapter uses the debate over dual class share structure as clue to explain its reasonability and feasibility.The six main arguments derive from the following six perspectives: shareholder primacy theory,voting rules,attitude of institutional investors,the effect on stock price and the supervision over management.The advantages and disadvantages of dual-class stock structure are further explained by comparing it to one share-one vote structure,which has its limitations because of the heterogeneity of shareholders in modern enterprises.The dual-class share structure can give full play to the advantages of human resources and facilitate the match ofdecision-making power and knowledge in this era of knowledge economy.Therefore,the author concluded that its emergence was tailored to the needs of the development of enterprises in modern society.We should regard the dual class share structure with a comprehensive view and seek to design or improve mechanism to make up for its defects,rather than restrain its application in an arbitrary way.The third chapter explores the means to protect investors with dual class shares.Dual class share structure increases the possibility of management override of internal control,improper action and infringement of shareholder interests,which would be disastrous for the company if there is little balancing mechanism.Thus it is crucial for the smooth implementation of dual class share structure to design mechanisms to replace those used in one share-one vote structure which would no longer be effective.Firstly,the author introduces the characteristics,problems and goals of corporate governance in dual structure companies.Secondly,the author points out the underlying issues concerning shareholder rights protection resulting from proxy issues,voting power and takeover defense.For the proxy issues,the author makes induction on the particularity of dual class structure and proposes five mitigation methods by applying the framework of management control theory of Berle and Means.For the voting mechanism,the author investigates the presence of coercion in voting as well as voting power's effects on management and made three suggestions on how to compensate for the inequality in voting rights.As for the takeover defense,the author analyzes the presence of transactions with premium and the abuse of defense power,then proposed constructive solutions.The fourth chapter aims to explore the external regulations related to dual class capital structure.By introducing Alibaba's IPO as case study,the article investigates three aspects of the different institutional background between Hong Kong and the United States,which are mandatory disclosure,stock exchange regulations as well as supervision and litigation.Firstly,the author analyzes the necessity to apply higher disclosure standards to companies with dual class stock structure and makes recommendations on the focus,trigger and scope of disclosure.Secondly,the author puts forward his tentative idea on how to improve the role and regulation system of stock exchange.As for supervision and litigation,which will be the last measure of self protection for shareholders,the author maintains that this scheme should be simplified enough for shareholders to exercise to effectively protect their own interests.The fifth chapter summarizes the research findings of the previous four chapters.Firstly,the author analyzes the feasibility of dual class share structure in China based on current regulations and demand,then explores the specific realms in China suitable to implement this share structure.Finally,the author proposes recommendations on how to construct and improve the dual class share structure regulation system in China.