A special taskforce is looking at reforms to the UK’s listings regime, including the launch of dual-class shares. One academic now argues that there are governance measures available that could offset the risks many see in boosting the voting rights of some share owners over others.

The argument rests on observing the kind of measures in other jurisdictions that have given dual-class shares the go-ahead. Min Yan, associate professor of business law at Queen Mary University in London, says in a post on the Oxford Law blog: “While there are contradictory standpoints regarding the implication for separating controlling shareholders’ control from their cashflow rights, it is fair to say that solutions do exist to mitigate the increased governance risk.”

Shanghai, Hong Kong and Singapore have, in recent years, introduced dual-class share structures, sparking a global debate. The changes were introduced ostensibly to attract founders of big tech looking to float their companies. Founders argue they need more control over companies to maintain their original vision, hence extra voting rights through special shares. Far eastern markets were worried they were losing local marquee companies to the US where weighted voting rights are permitted, though they remain contentious.

Yan argues the markets have balanced added voting rights with extra governance measures such as enhanced disclosure regimes; sunset clauses that place restrictions on voting rights; maximum voting different; limits on voting powers on “certain corporate decisions”; and minimum equity thresholds for enhanced voting rights. In other words, founders receive dual-class shares and weighted voting rights in return for a list of “restrictions”.

“As a result, in these financial centres, the ongoing academic and policy debate over the viability of dual-class shares has shifted from whether to allow companies to list dual-class share structures to how to restrain the associated governance risks,” says Yan.

Dual-class shares under scrutiny

That will no doubt be under consideration by Jonathan Hill, the House of Lords member charged last November with leading a taskforce to look at the UK’s listings regime.

Dual-class share structures are not the only issue under examination by the former European Union commissioner, but it will be the topic that grabs most attention. In considering whether to recommend a green light, he says he will need to balance the UK’s reputation for running a tight regulatory regime with measures to “support growth and innovation”. When he launched the taskforce, chancellor Rishi Sunak said it would be aiming for reforms that “attract the most innovative and successful firms”.

Founders are not only interested in control, so the argument goes, they want control for a reason: investors are too focused on short-term results when building big tech concerns are a long-term game. These concerns may be exaggerated, but many observers believe tech founders take them seriously.

Another argument is that the UK is an outlier with competitors like the Far East and the US attracting the big companies because they have already cleared the way for dual-class shares.

Yet another claim is that the stronger boards (in relation to shareholders) produced by dual-class share structures provide better returns.

Oversight and governance standards

That all being said, there is opposition. The International Corporate Governance Network (ICGN) has opposed dual-class shares vociferously. The ICGN says studies reveal that companies with dual-class shares have a “high market to book ratio”—a measure widely seen as a proxy for overpriced shares; while other studies indicate companies with dual-class shares experience a higher cost of capital and lure fewer foreign institutional investors.

Research in the US, the ICGN says, suggests companies with differential shares have lower governance standards, while another found “firm value” is negatively associated with “insiders’ voting rights”.

The ICGN is not without support on this issue. Tim Bush of PIRC, governance advisers to shareholders—including much of the £200bn Local Government Pensions Scheme—says: “PIRC opposes dual-class shares. They upset the ownership and control model for companies. Usually, by creating a superclass that carries all the rights. It can make oversight by public shareholders almost impossible.”

The consultation run by Lord Hill closed at the beginning of January. The UK awaits his conclusions.