Introduction

In conjunction with the tabling of Revised Budget 2023 on 24 February 2023, the Prime Minister and Finance Minister of Malaysia, Datuk Seri Anwar Ibrahim, unveiled the government's plan to facilitate the listing of dual-class shares on Bursa Malaysia as part of its strategic efforts to promote the listing of local high-growth technology companies on the Malaysian bourse.

Dual-Class Shares Structures

Dual-class shares ("DCS") deviates from the "one share, one vote" principle.1 Under a DCS structure, a company may issue different classes of shares, such as Class A and Class B, each with different voting rights. Class A shares, typically issued to founders and key executives, hold greater voting power (e.g., 10 votes each), while Class B shares, for public shareholders, carry less voting power (e.g., 1 vote each). Following this DCS structure, the founding shareholders would be given voting power disproportionate to their shareholdings, allowing them to maintain control of the company while enabling access to capital financing.

While DCS structures are novel to Malaysian capital markets, the modern adoption of DCS structures can be attributed to Google LLC's IPO in 2004, which sparked a trend in using such structures by companies seeking to retain control in the hands of founders. Between 2004 and 2020, 12.6% of companies went public with a dual-class structure.2 DCS structures are popular among technology giants listing on stock exchanges like Alphabet Inc. (formerly Google LLC), Facebook, Alibaba Group, and even closer to home, Grab Holdings, which was previously listed under this structure on NASDAQ in December 2021.

For example, the SEC filing reveals that Grab Holdings, has two classes of shares consist of Class A shares (1 vote each) and Class B shares (45 votes each). The founder of Grab Holdings, Mr. Anthony Tan controls about 62.4% of the total voting power of all issued and outstanding ordinary shares, despite owning only 3.6% of them as of March 31, 2022. By virtue of his control of that total voting power, he effectively has the ability to elect and remove the entire board of directors of Grab Holdings.

The acceptance and development of DCS structures in the APAC region are showing great promise. In the first half of 2018, both Hong Kong Exchanges and Clearing Limited (HKEX) and Singapore Exchange (SGX) made changes to their listing rules to allow companies with DCS structures to list on their stock exchanges. Most recently, the Financial Services Authority (OJK), a regulatory body in Indonesia, introduced regulations on dual-class shares to encourage fast-growing start-ups and technology-related companies to go public on the Indonesia Stock Exchange.

Conundrum of Dual-Class Shares

The conundrum of dual-class shares revolves around the contentious trade-off between corporate control and shareholder rights. While DCS structures offer founding shareholders the ability to retain significant decision-making power, it comes at the cost of diluting the voting rights of other public shareholders.

Proponents of the DCS structure claim that it empowers founding shareholders to make crucial decisions for the company's long-term growth and innovation, benefiting all shareholders. However, opposing arguments raise valid concerns. Concentration of voting rights in the hands of a few shareholders may lead to poor corporate governance and questionable transactions not aligned with public shareholders' interests. For example, founding shareholders might prioritize their own interests to the detriment of public investors.

The challenge for the Securities Commission and Bursa Malaysia is to design a thoughtful DCS framework that finds a delicate balance between corporate control and safeguarding shareholders' interests.

Protection measures

As of the date of writing, the concept paper for the proposed DCS regime has not been published by the Securities Commission ("SC") and Bursa Malaysia ("Bursa") and no specific timelines have been set for the introduction of the DCS regime. We anticipate that the new DCS regime, once introduced, will likely include similar safeguards (without limiting to the foregoing) as other stock exchanges that permit the listings of DCS:

  1. Maximum voting right: The voting rights attached to enhanced voting rights shares will be capped at a certain multiple of the voting rights of ordinary shares. For example, HKEX and SGX capped the enhanced voting right at 10 votes per share.
  2. Minimum market capitalisation: Bursa and SC may set a minimum market capitalisation for DCS issuers to qualify for listing. For instance, SGX allows dual-class share listing for companies with a minimum market capitalisation of SGD 300 million, while HKEX requires a minimum market capitalisation of HK$10 billion or if less than HK$40 billion of market capitalisation, meets higher revenue test of HK$1 billion in the most recent audited financial year.
  3. Enhanced corporate governance measures: We anticipate that specific matters, such as variation of class rights, appointment and removal of directors and auditors, amendments to the constitution, and winding-up of the company, will likely require decisions on a "one share, one vote" basis, similar to HKEX and SGX practices.
  4. Enhanced disclosure: Bursa and SC may impose stringent disclosure requirements on DCS issuers, with additional warnings, rationale for having DCS structure, and associated risks to be disclosed in prospectus, listing documents and annual reports.
  5. Unique stock code: Bursa and SC may require DCS issuers to prominently display a unique stock code or symbol in the stock name, distinguishing them from listed companies with regular voting structures. For instance, companies with DCS structure listed under HKEX will have a marker "W" for the stock name.

Concluding remarks

The proposal to list DCS on the Malaysian bourse is a timely and welcoming development as it aligns Bursa with internationally recognized stock exchanges like NASDAQ, HKEX, and SGX, enriching the ecosystem for public listed companies. A robust and transparent DCS regime will be vital in establishing Bursa as a preferred listing destination for high-growth, innovative companies, and technology unicorns in Malaysia. However, Bursa and SC must uphold a high corporate governance standard to safeguard investors' interests and avoid compromising on them to accommodate the listing of DCS.

Footnotes

1. Section 71(3) of the Companies Act 2016 provides that each share in a company, other than preference share, confers on the holder the right to one vote for each share on poll on any resolution of the company.

2. Shobe, Jarrod and Shobe, Gladriel, The Dual Class Spectrum (September 8, 2021). 39 Yale J. Reg., BYU Law Research Paper No. 21-26, Available at SSRN: https://ssrn.com/abstract=3919884

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