| Differential voting arrangement refers to stock structure of which the voting right and the cash flow right are not arranged correspondently.In most situations,a public-held company with differential voting arrangement issues two classes of common stocks,class A and class B.One share of class A has one vote while one share of class B has multiple votes.In the past years,domestic tech giants such as Baidu,JD.com and Alibaba went public oversea,attracting a great amount of attention on the topic of dual-class structure,differentiated allocation of equiy,classified share etc.and also indicating an urgent demand on more flexible stock structures other than“one share one vote”in private market.In April 2018,HKEX?Hong Kong Exchanges and Clearing Limited?adopted the newest edtion of listing rules,declaring its acceptance of WVP Structure.The move was praised by Li Xiaojia,CEO&Excutive Director of HKEX,as“an uneasy revolution”.In March 2019,SSE?Shanghai Stock Exchage?also announced its adoption of“Differential Voting Arrangement”in Science and Technology Innovation Board,which,to some extent,has made an end of arguments on whether or not the transplant of Dual-Class Structure would be feasible,and has also pushed the academic study to the next stage.Except for systematic reforms on relative realms such as registration system,information disclosure and security class actions,the listing rules of Science and Technology Innovation Board adopted a procative regulatory mode for differential voting arrangements,through which a set of strict regulatory rules are imposed on such arrangements for the purpose of restricting the potential negative effect of the regime.It is the multiple voting design and the entrenchment of the controlling power that brings about the potential risks for a publicly-held company with differential voting arrangment,the constraining regime therefore becomes one of key issuses about differential voting arrangement.The topic can be analysed at least from the following aspects:the fundamental theories of differential voting arrangement,the potential risks incured by execution of such arrangement,common patterns aimed at maintaining and strenghtening the controlling power,the effect of the current constraining rules and finally,by looking into foreign pracitice to find out whether there is room for improvement of the current rules.Besides the“Preface”and“Conclusion”,this dissertation comprises four chapters:Chapter One introduces the basic theories,the conception and reasons of differential voting arrangement,as well as the potential risks incured by such novel equity arrangements.The arrangement of stock rights is an important issue of corporate governance.Modern corporate governance theory is mainly based on“Principal-agent”mode.The Transaction Cost Theory,which is represented by Coase,holds that one of the primary goals for corporation is to constrain the internal cost of the governance.Along with the theory,Easterbrook and Fishel argue that only with the condition that the voting right exclusively belongs to shareholders and one share represents one vote,can the overall cost of corporate governace be the least and the utility be the greatest.Hence,the one-share-one-vote principle becomes an implied rule in modern corporate governance,which is even considered as an compulsive rule in Chinese Corporation Law.However,the theoretical mode faces practical dilemma.Reasons for differentiated allocation of equiy include at least the following points:First,one share one vote structure is not able to meet the demand in reality.Especially,since the 21stcentury,tech innovative start-ups such as Alibaba have thrived,and the one share one vote rule can't solve the difficulty faces entrepreneurs of remaining the controlling power while expanding the financing.Second,differential voting arrangent has its own merits:According to shareholder heterogeneity theory,differentiated allocation of equity satisfies pluralistic interests of shareholders,which is correspondent with the fact of shareholder heterogeneity.According to the collective action puzzle theory,differentiated allocation of equity helps efficiently to concentrate the controlling power,easing the“thumb a lift”phenomena.Third,in developed capital markets,differentiated allocation of equity is the creation of social and economic development.Take the United States as an example,such idiosyncratic stock arrangements have been executed over a century.Except for its merits,differential voting arrangement also brings about risks.The core risk of such arrangement is the abuse of controlling power by the shareholder with differential voting shares.From the perspective of internal corporate governance,the risk would be the entrenchment by insiders;From the perspective of capital market regulation,the risk is the threat to public investors.Chapter Two discusses the reasons and mechanisms that incure the controlling risks under differential voting arrangement,and also illustrates the common controlling patterns for publicly-held corporations with such an idiosyncratic stock structure.Mechanisms behind the risks includ two approaches:Multiple votes enable the insiders to entrench the controlling power,being immune to other shareholders'opinions.Second,the proportion of the voting power doesn't match the weight of its equity interest.When the controller makes a right decision,his financial payback is limited compared to his voting weight,which indicates a shortage of incentive.On the contrary,when the controller makes a wrong decision,the loss would be distributed among all shareholders and his personal suffering is tiny.By this way,differential voting arrangement somehow encourages the controller to abuse his power,bringing about moral hazards in corporate governance.What's more,no matter what kind of differential voting arrangements adopted by issuers in the phase of IPO,the controlling interest would possibly be diluted with time passing by.To avoid such risk,controllers are likely to take actions to mantain and even strengthen his controlling power.In this chapter,I analyse the controlling maintenance projects of Ford Motor,Alibaba,JD.COM,Snapchat,Google,etc,illustrate some common patterns for control intensification and their potential risks,providing some thoughts on constraint of the controlling power.Along with the prior theoretical disscussion,we are able to better understand and comment on the current constraining rules of the differential voting arrangement in Science and Technology Innovation Board.Chapter Three focuses on the constraint provisions in the Listing Rules of Science and Technology Innovation Board.I will take UCloud Inc.as an example to illustrate the efficiency of relavant provisions and the potential risks.The first part of this chapter is a brief summary of the current provisions under a comparison perspective between Hong Kong and mainland China.Through such compaison,we can easily find out a great similarity between the two.The second part,I will analyse the primary constraint provisions in the Listing Rules of Science and Technology Innovation Board.The methods that I use in this part comprises two:First,to analyse the voting weight as well as its changes of the differential voting shares.This is based on the first mechanism that I've mentiond priorly that the multiple voting rights creat an entrenchment of the controlling power for a singular shareholder.Second,to analyse the wedge between the controlling weight and equity interest.This corresponds to the second mechanism that the wedge between the controlling weight and equity interest would twist the incentive of the controller,who may therefore have an inclination of self-benefit and stir moral hazard.The larger the wedge is,a higher risky of abuse of the controlling power there would be.In the context,the wedge would be represented by a wedge datum?w?and the formular is:w=the proportion of voting right of the differential voting share/the proportion of equity right of the differential voting share.The former one basically amounts to the Interest conflict among controlling shareholders and the minority shareholders,which is common in any ownership struchture as long as there is one overwhelmingly large stock.The latter one,however,could be the novel risk under differetial voting structures.The third part is an empirical analysis on Ucloud.Ucloud is the first domestic corporation go on board with differential voting arrangement,which also provides us a vivid example to have a look on the practical effect as well as the possible problems of the current constraint rules.Through Ucloud's case,we can find that regulators are putting emphasis on the first type of risks,namely,constraining the multiples of the voting number and the proportion of the controlling voting power.However,the wedge number and the changes of the wedge have been ignored.Chapter Four makes an effort to perfect the current constraining rules,normalizing the execution of the controlling power under differential voting arrangement.As what we have disscussed in chapter tree,the Listing Rules of Science and Technology Innovative Board have set up comprehensive constraining rules for differential voting arrangement.If there is any to be improved,I would like to suggest three aspects:First,the exit regime of differential voting structure.Current rules adopted a transfer-based sunset clause,throught which the differential voting structure would be automatically transferred into one share one vote strucutre when the triggering events such as resignation,death,incapability,lossing control and transferring differential voting shares happen.However,the transfer-based sunset is not enough to prevent possible risks incured by the novel structure.Second,the ignorance of the wedge data between the controlling power and the equity interest of the differential voting shares.Third,the corporate governance under differential voting structure.The current Listing Rules lay a burden of an annual report on the Board of Supervisors,which is not enough apparently.To solve these problems,I turn to forigen experience:One is from the United States.The U.S.mode is largely depending on its mature regimes of the developed market,such as information disclosure and class action.Apart of this,the U.S.also has experience on regulatory rules specifically for constraining dual-class structure:one is the Rule 19C-4.Rule19-4 was SEC's first attempt to regulate dual-class structure nationwide in history but was abolished at last.The other is the sunset clause.Sunset clauses come from practice of dual-class listed companies in the United States,of which the time-based sunset is the most popular.I also turn to Hong Kong and Singapore's parctice.Just like the mainland China,the two district also opt to a prior regulatory approach and show a great amout of similarity on the specific constraning rules.However,after a simple comparison,I find that both Hong Kong and Sinapore have set a more restrict standard of corporate governance for dual-class listed companies.This is what our Listing Rules lacks,and we can learn something from that.Regarding to specific advice,I would like to suggest the following three points:First,to facilitate the information disclosure,especially the wedge number and the ongoing changes of that wedge.Second,to learn from the practical experience of the United States and set up a time-phased sunset clause.To be specific,a feasible approach is to set a time-phased sunset regime with flexible terms.In principle,when the promised time-phase terminates,all the differential voting shares would be transferred automatically into common shares,backing to one share one vote structure.At the same time,before the preinstalled time arrives,listing rules accord public companies the right to re-assess the necessity of differential voting structure.If the decision is adopted by the majority of uncontrolling shareholders in shareholders meeting,the extension of such a novel ownership structure would be legitable.Besides,the whole process must be subject to disclosure standards.Third,to strengthen the corporate governance under the differential voting structure.Chinese corporation law adopts a single-class with three boards corporate governance mode,under which the board of supervisors and the independent directors are responsible for inside suprvision.As such,on one hand,it's necessary to facilitate the independence of supervisors,therefore I suggest adding the election of supervisors to the special voting affairs which can be decided only by mandatory one-share-one-vote rule.On the other hand,we should also strengthen the independence of independent directors,facilitating independence and diverse of the board.Hong Kong and Singapore's experience is referable.Besides,to impose a heavier fiduciary duty on the controller is helpful. |
PDF Full Text Request