CFA Institute reiterates warning on dual class share structures

[pianist]

http://www.singaporelawwatch.sg/slw/head...Othya.dpbs

For gain of market share, sgx seems desperate

[soros]

The link to cfa warning does not work.

[pianist]

I tested n it works well.

[pianist]

I tested n it works well.

CFA Institute reiterates warning on dual-class share structures
Source
Business Times
Date
24 Apr 2018
Author
Angela Tan
It says arrangement will weaken system of checks and balances between shareholders and management
JUST days before Hong Kong stock exchange opens its doors to listing applicants with dual-class share (DCS) structures, CFA Institute maintained its stance against weighted voting rights (WVR), warning that the structure will weaken the system of checks and balances between shareholders and management.
The principle of "one-share, one-vote" is considered a bedrock of good corporate governance standards, it says. In contrast, DCS gives one group of shareholders control and voting power disproportionate to their shareholding.
"CFA Institute remains steadfast in our belief that there should not be unequal voting rights as they could allow management or minority shareowners to override the wishes or best interests of majority shareholders for personal benefit and compromise accountability, leading to potential entrenchment issues," said Mary Leung, head of advocacy, Asia Pacific, CFA Institute, the global association of investment management professionals.
Like HKEx, Singapore Exchange (SGX), too, has decided to accept DCS listings. Public consultation is still open and once it closes, the exchange will make the necessary amendments to its rules, and effect them when they are approved by the Monetary Authority of Singapore. This is expected to occur in the second half of 2018.
As regional stock markets scramble to accept the controversial structure in a bid to woo more initial public offer (IPO) businesses, CFA Institute says six in 10 investment professionals in the Asia Pacific lack experience investing in such firms, flagging the need to educate investors and the public on the implications.
If adopted, there is a need for investor protection safeguards against self-dealing and other misuses of corporate resources by corporate insiders for personal gain.
Measures include the separation of the roles of chairperson and chief executive; the appointment of an independent chairperson; appointment of a majority of independent non-executive directors to the board; time-based sunset provision that automatically converts super voting rights to regular voting rights in three to five years as well as event-based sunset provisions that automatically convert super voting rights to regular voting rights in the event such shares are transferred or sold.
It also suggests that the maximum voting differential be lowered to the ratio of 2:1, or at most 3:1, to effectively hold company management accountable. Key matters such as a takeover offer or a related-party transaction should be decided on a "one-share, one-vote" basis.
"Any further relaxation of the rules and safeguards for a select group of companies will place strains on the market," Ms Leung stressed.
In a survey survey conducted from March 8 to 16, 2018, by CFA institute, respondents across the region are split on the introduction of DCS listings, with respondents in Singapore more inclined to support, while those in Hong Kong are more inclined to oppose.
Respondents recognised that the introduction of DCS listings would bring additional business opportunities, with boosting attractiveness of the exchange as a landing spot for IPO issuers, attracting companies from technology and other innovative sectors, and providing access to funding for pre-profit companies as the most likely benefits.
The top three risks were insufficient or absence of minority investor protection; skewed proportionality between ownership and control; and race to the bottom in terms of corporate governance standards.
Ms Leung said: "Although enhancing competitiveness and profits may be compelling reasons for the proposals, compromising hard-earned credibility in corporate governance and weakening investor protection is not a sustainable growth strategy.
"The introduction of the WVR-structured companies will encourage short termism, and deter long-term capital and high-quality issuers from these markets.''
Source: Business Times © Singapore Press Holdings Ltd. Permission required for reproduction.

[karlmarx]

It can't be helped.

HK Exchange is doing DCS even though it has a strong pipe line of Chinese and international companies.

If SGX -- which is only able to attract reit listings -- does not do it, then it may well become obsolete in the succeeding years...

My opinion is that the willing of exchanges to allow DCS is a result of the abundance of credit. So much so that there are fewer reasons for companies to raise money through selling shares than debt. If the credit markets normalise, this DCS issue may fade away, as there will then be more companies competing to sell shares -- due to the high(er) cost of raising money through debt -- which makes companies with DCS less attractive.

[Duskerdawn]

It can't be helped.

HK Exchange is doing DCS even though it has a strong pipe line of Chinese and international companies.

If SGX -- which is only able to attract reit listings -- does not do it, then it may well become obsolete in the succeeding years...

My opinion is that the willing of exchanges to allow DCS is a result of the abundance of credit. So much so that there are fewer reasons for companies to raise money through selling shares than debt. If the credit markets normalise, this DCS issue may fade away, as there will then be more companies competing to sell shares -- due to the high(er) cost of raising money through debt -- which makes companies with DCS less attractive.

Agree on your opinion, on the abundance of credit. As the Fed interest rate hikes upward, and the tightening of money supply, the DCS issue will fade away as the shrinking pool of credit will go towards the higher quality issues.

It is the same reason why so much money is flooding the ICO market. There is way too much money in the market that and investors are jumping at anything that even promises a slight bit of "growth". I am pretty sure that the majority of ICO investors do not even read the white papers or even understand the implications of these ICOs not being regulated.

Back to the main topic, SGX should just allow DCS issues. I believe investors should do their own due diligence and understand the differences between the listings. They should apply an appropriate discount to the value of the security under the DCS or just avoid them altogether. SGX is just harming themselves by not having DCS allowed, since the competitiveness of exchanges are in types of structures and services offered plus the pool of investors trading in the particular exchange. 

In addition, compared to ICOs which are rampant, dual-class listings are a much lesser evil. 

"CFA Institute remains steadfast in our belief that there should not be unequal voting rights as they could allow management or minority shareowners to override the wishes or best interests of majority shareholders for personal benefit and compromise accountability, leading to potential entrenchment issues," - There are still options for majority shareholders for recourse if management or minority shareowners do override their wishes. Additionally, they should consider the risk of that happening in their calculations of the value of security in the DCS.

However, I would like to clarify that I do not like DCS and find it hard to buy into securities under DCS. But I do not see a truly compelling reason to prevent the listing of securities under DCS in SGX.