| Since March 1,2019,the Shanghai Stock Exchange(hereinafter referred to as “SSE”)officially allowed companies with special voting rights to get listed therein.Technically,Dual-Class Stock(hereinafter referred to as “DCS”)is a double-edged sword,it protects the controlling power of the founders of such company thereby encouraging entrepreneurship and injecting vitality into economic development,notwithstanding its inherent negative factors.The landing and introducing of any system should be based on the overall legal environment of local capital market.In order to prevent the transplant mismatch of institution and large-scale violation of the rights and interests of ordinary shareholders from taking place,what can regulatory authorities of Mainland China do to overcome the loopholes and optimize the regulation thereby minimizing the potential negative effects of implementing DCS?In theory,traditional corporate governance regards “same share-same vote” and “one share-one vote” as the basic principles of the allocation of shareholding rights.With respect to the relationship between the two principles,the latter shall be included in the ideas of the former.As an innovation and breakthrough to company’s traditional governance model,DCS has certain positive economic significance and is therefore recognized in some developed jurisdictions.However,it has its own inherent negative factors,such as increase of agency cost and reduction on the impact of external supervision of the corporate control market.Although DCS is the most direct breakthrough to the principle of “one share-one vote”,it can survive legally under the principle of “same share-same vote”,which lays the theoretical premise of elimination of legality risk by legislation amendment in the future.To assess the impact of DCS on corporate governance and the protection of minority shareholders under current conditions of Mainland’s market environment,I adopted the research method of comparative law to review the implementation of DCS within the market of United States of America(hereinafter referred to as “USA”)and Hong Kong(hereinafter referred to as “HK”),after which I have a deep discussion and analysis on the institutional environment and its characteristics when deciding whether accepting DCS or not.Firstly,the overall application of DCS on a global basis is worth being inspected: most developed countries and regions allow companies with DCS to list,but in terms of the number of listed companies,DCS remains as a “minor model”.Then I selected USA and HK as my focuses to continue the discussion of the institutional environment and supporting regulatory rules respectively: in the USA market,the battle between the idea of investor protection and competition among various stock exchanges ended up with the wining of the latter and brought about the acceptance of DCS.Based on the analysis of several jurisprudence cases in Delaware,I found that the judges in that state could make the best use of judicial discretion in every specific case thereby establishing and continuously improving the system of fiduciary duty and review standards in such judicial process,which enables that the legitimate rights and interests of minority shareholders are entitled to relief in the judicial proceedings as the last resort.As far as HK is concerned,the listing rules of the Hong Kong Exchange(hereinafter referred to as “HKEX”)set up a strict system to prevent the weighted voting rights from being abused at the interest of other minority investors,but there are still certain loopholes in that system.After analyzing and summarizing the overall legal environment of the two markets,I came to the conclusion that the acceptance of DCS is the outcome of efficient competition between exchanges.The strict regulatory system of the exchange shall be the first defense to resist the negative impact of DCS.With the guarantee of fiduciary duty and strict review standards under the Common Law systems,plus judicial review as the last resort for fair protection,the whole system can maximize the avoidance of infringement to the interests of other small and medium shareholders by controlling shareholders in any transaction.The analysis and conclusion in this chapter can be used as a theoretical basis for the assessment of the current market environment in Mainland China.Back to Mainland China,I have first sorted out the status quo of DCS within this territory theoretically and practically.Although DCS is not allowed under the regulation of domestic Company Law,in practice,from March 2019 on,SSE has been open to companies with DSC to be listed on particular board.Similarly,SSE has also set up a ruling system to regulate such special equity structure models.Based on the conclusion and summary arrived in Chapter 2,I conducted a preliminary evaluation on China’s market base and supporting systems,and found that several major issues are worth being noted,namely,two stock exchanges in Mainland China are insufficiently independent which results in the lack of sufficient and effective competition in the market and incompleteness of the supervision function.Secondly,there are some apparent loopholes in the fiduciary duty systems in respect of directors and controlling shareholders,the relevant detailed review standards have not been established so far.Thirdly,China’s securities civil litigation mechanism is undeveloped and is incapable of providing timely and adequate judicial relief in the case of violation to interests of small and medium investors.After comparing the regulatory rules between the two exchanges in Hong Kong and Shanghai,I preliminary draw the conclusion that the supervision system of SSE has problems such as the doubtful independence of the internal supervision organization within the company,insufficient requirement on information disclosure requirements and lack of requirement of “sunset clause”.Therefore,the gaps on the overall legal environment between current Mainland China and developed markets have put the rights and interests of small and medium investors at risk in the context of DCS.At present,we cannot deny the fact that Mainland China has accepted DCS in listed companies.The supervisor and regulator of the capital market should focus on solving the following two major issues.Firstly,eliminating the legality risk caused by the introducing of DCS through the amendment of legislations: it is worth being considered that the “one share-one vote” principle be reformed into the “same sharesame vote” rule which is reserved.Secondly,improving and optimizing the market and legal supporting system to achieve the goal of maximizing the positive function of DCS while suppressing its potential negative effects: firstly,filling in the loopholes of current fiduciary duty;Secondly,in respect of judicial relief,attention should be paid to gradually improving the role of the securities civil litigation mechanism and appropriately reducing the pre-requisites for civil compensation litigation due to securities fraud;in addition,judges should be encouraged in securities civil litigations to master flexible use of discretion and judicial technic;Last but not least,the independence of the stock exchange should be increased to incentivize effective competition therefore maximizing their front-line regulatory functions in the securities market. |
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