The Jurisprudence Analysis Of Dual Class Structure

When using equity financing, the founders of company will face an embarrassing situation. On the one hand they have to raise money from outside investors by giving up the vote right, on the other hand they don’t want to lose control of the company. One way to solve this problem is to use dual class structure, which can raise money and keep control at the same time. But the deviation of “one vote one share” principle will significantly reduce the company’s management level. So the dual class structure itself has many obvious flaws to be criticised.Based on the historical evolution and present situation of America、Singapore、Chinese Hongkong and other countries or regions, combined with costs and benefits system, the paper’s aim is to show the irrationality of introducing dual class structure to China. Meanwhile through the meticulous research, the author put forward an alternative structure to meet the development of innovative enterprises.This paper has four chapters:Chapter one: The present situation of dual class structure. First the author respectively defines the connotation and extension of the dual class structure. Then, to specify the worldwide attitudes, the author combs the current situation of dual class structure all around the world by form. The form includes whether this country allow dual class、the main area of dual class develop and the different law in different countries of dual class structure. Throughout the world, the attitudes to different country is not uniform. USA, Canada, South Korea, Switzerland, Denmark and other countries use dual class extensively. While Britain, France, Australia, Singapore, South Africa and other countries allowing dual class structure, but in practice, the dual class does not has a large scale. And in Germany, China, Hong Kong(China) and other places, the dual class is prohibited.Chapter two: The historical evolution of dual class structure. Taking a view at the historical evolution of America、Singapore and Hongkong(China),the author found that the most important reason for dual class development is the fierce competition between different financial centers. In other words, it is forced to develop instead of the many benefits dual class itself has. Further more, during the develop process, the controversy has never been stopped. Especially in Hongkong, the dual class has experienced from permit to forbidden. From all of these evidence, it is concluded that the develop of dual class has a huge resistance and the earning is too low to cover the cost. According to the analysis of these countries and Hongkong’s history, the writer found that the United States and Singapore to open dual class structure is largely affected by the stock exchange competition. The SFC carefully discussed dual class is also due to international competition among stock exchanges. If they adhere to its own trading rules, the SFC will lose the opportunity to many companies in its listing. They consider dual class rather than because it has a strong advantage. Although dual class structure has the advantage of anti-takeover, but its anti-takeover strategy in the 1980 s in Hong Kong also caused the stock market turmoil. Its negative effects can not be underestimated. The HKEx is also consider the benefit-cost of dual class and at last made the decision to refuse use it. History shows that use dual class is likely to cause harm than usefulness.Chapter three: Legal obstacle of the dual class structure. After further analyzing one share one vote theory、path dependence of corporate governance theory、the shareholder center corporate governance theory and so on, the author makes it clear that: first of all, one vote one share is the cornerstone of corporate governance. It’s also the best way to protect the company’s interests. Dual class structure breaks the one vote one share theory. The separation of voting rights and residual claims are bound to produce high agency costs. Secondly, according to the theory of path dependence, every country has its own corporate governance characteristics. The Chinese company’s ownership is concentration, adhere to the one vote one share theory. Let us set the dual-class drawbacks aside, just because of its original corporate governance the dual class will be difficult to China. Chinese current corporate governance path is the most efficient way and the original governance model will affect the subsequent treatment. Thirdly, as the company’s residual claimants, shareholders should have the right incentives to make the most favorable decision(such as proper exercise of discretion) through the right to vote. Therefore, the existence of dual class structure, set up a non-voting shares, destroyed shareholder primacy theory. Currently, most Chinese companies use the shareholder center corporate governance and do not have much motivation transfer to dual class shares. So dual class structure exists legal barriers. Based on its obstacles, dual class has so many disadvantages such as high agent cost、lack of regulation、mislead the market price.Those ills make dual class do not meet the basic requirements of economic law. Because its cost is much higher than the benefits, introduce dual class directly may bring huge side effects.Chapter four: Practical obstacles of the dual class structure. Besides the legal obstacles, there is no condition for dual class to develop in China since the present situation of one share dominates exclusively and lack of coordination system. Compared the self-protection ability of domestic investors、the level of investor protection and related incentives with United States, the writer found that the level of Chinese domestic investors can not be significantly improved in a short time, the stock market is too difficult to judge for them. For investor protection, according to LLSV conclusion: the point view of corporate governance is "to protect outside investors." That means the indifference to finance market is not a good way to promote corporate governance reform. The importance of financial market reform should strengthen the protection of outside investors, the protection from the courts, regulators or market participants themselves. Therefore, some scholars stressed the dual class should be decided by the market is ridiculous since this practice is at the expense of the outside investors. What’s more, Chinese protection of minority shareholders is weak, hastily introduced dual class stock is not a good path to financial market reform. Moreover through comparing different systems between China and United States, the author made a conclusion that dual class is not suitable for China. But a small number of innovative companies in China currently need the equity financing and resisting hostile takeover. The last section of this paper made some ideas for the alternative mechanisms which have low cost compared with dual class to help this kind of company develop well. 【 】;...