Argument On The Application Of The Dual Class Stock Structure To Listed Companies

The dual class stock structure refers to an equity structure including two types of shares with different voting right in the same company.Article 103 of the Company Law of China stipulates that each share held by a shareholder when he attends a meeting of shareholders shall have one vote.This article has legislatively blocked the legality of the application of the dual class stock structure in China,and led to the problem that a large amount of outstanding listed corporations chose overseas capital markets for IPO.However,the provisions of Article 131 of the Company Law seem to leave the possibility for the application of the dual class stock structure in our capital market.Up till now,scholars still have different opinions about the dual class stock structure: Supporters believe that it takes into account the dual needs of financing and control,and it can prevent hostile takeovers and contribute to the long-term development of the company;opponents believe that it violates the “one share,one vote” principle,resulting in the separation of cash flow rights from control rights,which may easily lead to moral hazard for controlling shareholders and generate unnecessary agency costs.Yet,judging from the advantages of the dual class stock structure and China's actual needs,China still has the necessity to introduce this system.However,to successfully introduce it,it is necessary to break through the obstacles currently faced,learn from extraterritorial experience,improve related investor protection measures,and design a dual class stock structure that is suitable for local conditions.The full text is divided into the following four parts:In the first part,the concept and characteristics of the dual class stock structure were introduced,and distinguishes between the multiple voting shares and some confusing concepts,such as special shares,preference shares,and gold shares,were pointed out,to give a clear definition of the dual class stock structure.In addition,the advantages and disadvantages of the dual class stock structure were compared so as to foster strengths and circumvent weakness in the design of the system.The advantages mainly include five aspects: the company's financing and prevention of dilution of equity,valuation premium,business philosophy and the company's internal culture,efficiency of business decision-making,and China's capital market structure.While the disadvantages are elaborated from three perspectives: the possibility of abuse of control by controlling shareholders,the conflict of rights among shareholders,and the difficulty of rights protection for ordinary shareholders.In the second part,the history of the dual class stock structure and the related listing rules in the Americas,Europe,and Asia were sorted out.It can be seen that although the rules for the dual class stock structure of listed companies are slightly different,almost all of them allows the setting up of multiple voting shares or limited voting shares or even non-voting shares outside ordinary shares,however,"one share,one vote" must be the pre-set rule.After uncluttering the 2017 IPO Report published by the WilmerHale Law Firm,the general arrangements for the design of equity structure of listed companies adopting this system are summarized,so as to provide reference for the construction of China's dual class stock structure.In the third part,combining with the current situation in China,starting from the theory of shareholder heterogeneity and the phenomenon of many start-up businesses going public in the United States,it is concluded that the single class stock structure under the assumption of shareholder homogeneity does not satisfy the diversified interest preferences of shareholders.Shareholder heterogeneity is already an indisputable fact.At the same time,if China's capital market insists on not implementing a dual class stock structure,it will lose a large amount of high-quality listed corporations,which is not conducive to the development of start-up businesses in China.In addition,the lack of maturity in the domestic investment environment and inadequate sound investor protection system are the two major obstacles to China's introduction of dual class stock structure.Therefore,in the initial stage of introduction,the dual class stock structure should be gradually implemented in pilot projects,and the shortcomings of the investor protection system,information disclosure system,and co-litigation system must be overcome in order to successfully introduce the dual class stock structure.On the basis of the above studies,in the fourth part several suggestions are put forward for the application of dual class stock structure to listed companies in China.First of all,amend Article 103 of the Company Law of China with reference to the legislative approach of preference shares,and allow the articles of incorporation to adopt a dual class stock structure.Second,only listed companies are allowed to build a dual class stock structure through initial public offerings or new issue of low-voting shares,in case the existing shareholders' voting rights are restricted or weakened.It is better to confine the target company to a certain industry field in the initial stage of implementing the dual class stock structure and implement it in pilot projects.In addition,raise the requirements for the target company's accounting to increase public investors' investment confidence.Furthermore,through the restrictions on shareholders of multiple voting shares,voting right multiple,transition conditions,and proposals for setting sunset clauses,specification of the issuance and circulation of multiple voting shares,prevent the abuse of control by controlling shareholders.Finally,through the establishment of a classification voting system to determine important issues,strengthening the requirements of information disclosure to such shareholders,the establishment of a special corporate governance committee,improve the co-litigation system and other measures,strengthen protection of non-wvr shareholder.