The debate about dual-class shares for premium listings on the London Stock Exchange usually revolves around those who think they are a good idea and those who say they rob shareholders of a voice. New entrants to the discussion say they work—but not with the governance safeguards currently proposed for the City.
Academics in Sweden, where dual-class shares are permitted, have taken a close look at proposals in the so-called Hill Review and say measures proposed to ensure the highest standards of governance won’t work and might even undermine the very reasons for introducing shares with extra voting rights.
According to Erik Lidman and Rolf Skog: “Our conclusion is that several of the conditions suggested in the review might not only hinder dual-class share structures from being useful for companies that wish to utilise such structures but would, in several cases, be detrimental to the corporate governance mechanisms that would otherwise counteract several of the problems that DCS structures can give rise to, most prominently the market for corporate control.”
The debate is a live one in the City. When Deliveroo listed last month, many big investors stayed away citing the use of dual-class shares—permitted for standard listings—as the reason. Deliveroo’s price dropped 26% on its debut wiping around £2bn from its expected market capitalisation which ended the opening day at around £5.2bn.
When he reported on proposals for the listings regime, Lord Hill recommended pushing ahead with dual-class shares which are allowed for standard listings and the AIM market, but not premium listed companies. Current arrangements have, until now, made the premium market a bastion of one-share-one-vote for shareholders.
A move to dual-class shares is viewed as a means of enabling London to become a more attractive destination for big tech companies who customarily seek to list in a way that allows founders to retain a controlling vote. London has watched the US snap up the listings of tech giants while both Hong Kong and Singapore have moved to introduce shares with weighted voting rights in recent years.
To appease those opposed to change, the Hill Review proposed five governance safeguards. A sunset clause would allow dual-class shares to last only five years. There is also a transfer sunset proposal: shares cannot change ownership and retain their extra voting rights. The review proposed a maximum voting ratio of 20:1 and holders of dual-class shares must be a director of the company. Lastly, extra voting rights would only apply to making sure owners are able to continue as a director or blocking a takeover.
According to Lidman and Skog the voting ratio rule looks “wise” but add the sunset clauses make little sense. They argue there is no evidence of “governance issues that time-based sunset clauses could potentially remedy”. Indeed, they argue sunset clauses could be damaging in that they would place “limits on any possible long-term governance upsides”. They cite Swedish companies, including H&M, where families have held dual-class shares for decades.
They also dismiss the transfer limit since it could block the allocation of “control to where it should be most effective”.
Special voting issues
Limiting the use of dual-class shares to special voting issues such as protecting management is also a problem. This, Lidman and Skog argue, is likely to stop dual-class shares “from being used by shareholders to engage in any credible way with management”.
As for limiting ownership of dual-class shares to a director, Lidman and Skog find this somewhat contradictory given that opponents argue the extra voting rights lead to “managerial entrenchment”. “If anything, the opposite requirement would be more reasonable,” they write.
Traditional opponents of dual-class shares mostly aim to protect one-share-one-vote. In its response to the Hill review the International Corporate Governance Network writes that dual-class shares “marginalise” minority shareholders, weaken investor protections and “lead to lower corporate governance standards”.
For Lidman and Skog, dual-class shares work: Sweden has them and there is, they say, little evidence of problems. Their paper suggests the London debate about safeguards may be a hot one.