Preliminary Research On The IPO Of Dual-class Share Structures Corporations

The financing of company and maintaining the control of the company has always been a challenge in the development of companies. For the development of the company, the founders needs to raise funds from the outside, which inevitably brings about equity dilution. After several rounds of financing, equity dilution leads to losing the control of the company. While a part of managers of the companies are not willing to give up the control of the companies when financing, they break the rule of the single-class share structure, issued two classes of stock: one is ordinary shares issued to the public, which has one vote per share; the other is special shares issued only within the founders and managers of the company, which has several votes per share share though forbidden to be sold. The founders and managements can take the control of the company by dual-class share structure, so they will pay more attention to long-term development of the company. At the same time, dual-class share structure is able to withstand hostile takeover, so that management can be more concentrated on the management of the company. based on the advantages of dual-class share structure and their own reality, more and more companies, especially technology and innovative companies begin using dual-class share structure when going public. As the representative of them, Alibaba’s "Lakeside partner" is kind of innovation which takes the external legal regulation and its own processing into consideration when going public.Although compared to the single-class structure, dual-class stock structure has many advantages, its disadvantages are also still obvious. Dual-class share structure has the managers take absolute control of the company, which not only breaks the balance of the ratio between the benefits shareholders will have and risks taken by shareholders, meanwhile bring in the reduction of the supervision both from the inside of the company and market for corporate control. Therefore, only if dual-class share structure is supervised by the right supporting regulations, it will have a significant effect on corporate governance, which is well demonstrated by the conditions of the development of the foreign dual-class share structure. The rule of “one share one vote ”is treated as a basic principle of company law both in Europe and the United States, but dual-class share structure is allowed as a form of exception. For example, the United States, where dual-class share structure was born. Dual-class share structure originated in the United States in 1898, then was banned by the stock exchanges. After the dozens of years’ prohibition, the New York stock exchange had to abolish the ban against dual-class share structure because of the competitive pressures from other stock exchanges. Though Securities and Exchange Commission legislated the rule restricting dual-class share structure, soon the rule was abolished by the court. Eventually, rules of the dual-class stock exchange structure came to be mature, through a hundred years of twisted development.At present, Chinese company law still maintains one share one vote as a mandatory rule, prohibiting the release of the share standing for more than one vote per share. However, as capital markets develops, there will be more and more market participants whose needs are various, which means Chinese capital market has to make some changes to meet their requests. The single and rigid mandatory requirements have been difficult to meet all market participants’ needs, but also to some extent limit the development of Chinese capital market. It is a good proof that more and more Chinese companies went public overseas with dual-class share structure. Of course, though faced with the increasing demands for dual-class share structure, Chinese capital market shall not free their limitations against the dual-class share structure at any time. Lots of Foreign companies with the dual-class share structure tend to be highly efficient and orderly operated, which relies on their stock markets that is mature and strict entire legal system. Hence the current priority for Chinese capital market is to pave the way for the release of dual-class share structure. Firstly, we need to find some legislative room within the existing legal framework for the future legislation of dual-class stock structure; secondly, it needs to improve the external supervision and standardize the disclosed information, enhance the transparency of the market. At the same time, it also need to perfect the regulatory system, giving the body more securities transactions meaning more space for autonomy; finally, it needs to improve the protective rules of minority shareholders, such as the introduction of the securities class action system, improving independent director system.