Study On Restricting Special Shareholders' Equity Rights Under Dual Class Share Structure

Alibaba's application for listing in HKEX was rejected in 2013 for the reason that its Alibaba Partnership was viewed as dual class share structure which was not accepted by HKEX.Then it came to the US security market successfully.This case brought dual class share structure to the public and caused hot discussion.For the mismatching of its cash flow rights and control rights,dual class share structure was once objected by some countries or regions.However,in recent years,this equity structure has been more and more admitted by the world's major countries or regions.For example,Hong Kong and Singapore have changed their attitude of rejection recently.China's mainland had always adhered to the principle of one share and one power.However,on January 30,2019,the China Securities Regulatory Commission issued the "Implementation Opinions on Establishing a Science and Technology Board and Pilot Registration System on the Shanghai Stock Exchange",which established the dual ownership structure of China for the first time.Although the "Implementation Opinions" and related supporting rules(hereinafter referred to as "New Rules")have systematically allowed companies which took the dual class share structure to list on the science and technology board in China,New Rules still need much improvement on protecting ordinary shareholders rights and so on.The core of dual class share structure is to give managers special shareholder rights.Unlike ordinary shareholders,managers(especially founders)have a strong willingness to gain control of listed companies.In theory,corporate control is not very clearly defined,but in the practice of securities market,voting right is the symbol of corporate control.China's "Company Law" "Administrative Measures for the Acquisition of Listed Companies" also regard voting right as the core of company control.There are usually two modes in which managers obtain control of listed companies: controlling shareholder meetings through special voting right,which is the most common dual-equity practice;controlling board meetings through special shareholder right such as right of appointing directors,which is usually agreed by the company's articles of association,Alibaba Partnership is a good example.There is also the hybrid model that involving both modes.Under the current centralized mode of shareholder conference in China,the first mode should be the most important one and the election of directors is the statutory power of the shareholder conference.In addition,as the creation of any atypical special shareholders' rights should be clearly reflected in the company's articles of association,and the amendments to the company's articles of association are special resolutions of the shareholders' meeting,the second mode of taking controlling of listed company is still based on the first mode.In view of this,the special shareholder rights in the dual shareholding structure can be summarized as special voting rights.Similarly,New Rules also express the dual shareholding structure as different voting rights arrangement.On one hand,the essence of special shareholder rights is to maintain managers' control over the company,which enables the key resources possessed by managers,such as human capital and intellectual capital,be played stably.It is also the legitimacy of special shareholders' rights.On the other hand,the principle of substantial equality of shareholders requires limitation on the special shareholder rights.The traditional principle of shareholder equality has a new connotation under the trend of heterogeneity of shareholders.It no longer emphasizes the equality of shares in the assumption of shareholder homogenization,but respects the different needs of shareholders.In theory,special voting rights,as a kind of agreement between special shareholders and ordinary shareholders on the transfer of voting rights,express the common pursuit of the long-term development of the company and conform to the principle of substantial equality of shareholders.However,if there is no restriction on the rights of special shareholders in practice,it is likely to increase the moral hazard of managers such as seeking personal interests and conveying the interests of the company through their stable control over the company directly and weaken internal and external supervision from shareholders,independent directors,supervisors,mergers and acquisitions market,which could as a result increase the agency costs between special shareholders and ordinary shareholders.Therefore,it is necessary to limit the special shareholder rights in the dual shareholding structure to prevent the controlling shareholder from abusing their special rights which could violates the principle of substantial equality of shareholders.The subject and the content are two main parts to restrict special shareholder right.Firstly,a special shareholder must be a director.Comparing the provisions of the Shanghai Stock Exchange and the HKEX on the qualifications of special shareholders,it could be noted that the HKEX requires special shareholders to be individuals(ie directors),while the Shanghai Stock Exchange allows entity which could be controlled by such personnel to enjoy the special equity.The expansion of the subject scope is likely to cause an overlap between the dual equity structure and the pyramid control structure.The pyramid structure has the same character of disproportionate cash flow rights and voting rights with dual class share structure.As the overlapping use of the two structures will undoubtedly lead to the aforesaid negative effects,and at present there is no restriction on the entrusted entity,it is recommended that,in the initial period of introducing the dual shareholding structure to China,special shareholders should be limited to individuals.In addition,the status of a director shall be maintained after the listing.If there are situations such as the director's separation or death,the special voting right shall be extinguished.This requirement is aimed to restrict the rights of special shareholders by the directors' fiduciary duty that is already mature in the current laws and regulations.In addition,it is necessary to put forward higher and more specific requirements for the character integrity and performance of special shareholders.The restriction on the subject also reflects in the ratio.In order to prevent the special shareholders' moral hazard caused by excessive deviation of cash flow rights and control rights,the minimum share amount that special shareholders must hold should be clarified,which could make an relation between the special shareholders' own interests and the company interests.In addition,maximum shares should also be set up to ensure that the proportion of ordinary voting rights is not less than a certain amount,so that ordinary shareholders can exercise the corresponding shareholders' rights according to their ordinary voting rights.Furthermore,according to the principle of consistency of rights and obligations,the information disclosure obligations and the relevant responsibilities of special shareholders should be aggravated.In the case of right content,setting the maximum voting multiple is a common practice.In addition,not all of the decisions of listed companies require ordinary shareholders to transfer voting rights.The super-voting rights should be applied only to some necessary decision-making matters,otherwise it will bring huge deviations between voting rights and cash flow rights.That is to say,the company's other major resolutions should implement the principle of one share and one power.The fundamental purpose of special voting rights is to lock the management's control over the company.Therefore,it is necessary to apply special voting rights for the change of control of listed companies,which in a broad sense includes merger.As for the mandatory application of the one share-one vote rule,changes in the company's existence,changes in the articles of association,changes in the interests of any class of shareholders,and the appointment and removal of independent directors are the key points.In addition,more attention should be paid to the matching of related systems.For example,New Rules stipulate that the election of independent directors should apply the principle of one share and one right.However it set up special reporting system of the board of supervisors rather than reflecting the special role of independent directors in the internal supervision of different voting structure companies.If some special corporate governance institutions with independent directors are established or a special reporting system for independent directors is set up,the independent directors may make the sense,or it will lose its institutional significance.On the other hand,since New Rules stipulate that the board of supervisors should exercise the special reporting responsibilities,the appointment and dismissal resolutions of the supervisors should be included in the one share-one vote matters.The rules of the HKEX in this respect are worth learning.It not only stipulates that the special voting rights will be invalid in the case of appointment and dismissal of independent directors,but also strengthens the duties of independent directors in the Nominating Committee and the Corporate Governance Committee through the supporting rules.In the case of the termination of special rights,the event sunset clause is better than the regular sunset clause.The special voting rights should be naturally converted into ordinary shares when they are transferred or the company's control substantially moved to other people.