Why We Believe The UK Should Look Again At Dual-Class Structures And Ways In Which Core Investor Protections Can Be Maintained

Published date11 June 2020
AuthorMs Claire Keast-Butler and David Boles
Subject MatterFinance and Banking, Corporate/Commercial Law, Financial Services, Commodities/Derivatives/Stock Exchanges, Corporate and Company Law, Directors and Officers, Corporate Governance, Shareholders
Law FirmCooley LLP

What is a dual-class structure?

A dual-class structure involves two different classes of shares with differential voting rights. This means that founders and other pre-IPO holders are able to maintain voting control of the publicly listed company through holding shares with enhanced voting rights compared to the shares held by public shareholders. For example, the shares held by founders may have 10 votes per share, while the shares held by public shareholders have one vote per share. Higher vote shares convert into low vote shares when sold, so control is held by the early holders that continue to hold shares once public.

Who wants dual-class structures?

The structure is particularly attractive to rapidly growing companies, especially in the technology sector, where founders wish to retain voting control following an IPO and would argue that the traditional "one-share one-vote" capital structure is not appropriate for companies on their trajectory. One key argument in favour of dual-class structures is that they allow visionary founders to concentrate on the business' long-term strategy, growth and performance without having to focus unduly on short-term targets and being subject to shareholder activism while they are still in the high-growth phase.

What's the position in the UK?

Dual-class structures are possible as a matter of English company law. For example, Cooley acted for Endava plc, an English public company, on its IPO on the New York Stock Exchange in 2018, which involved putting in place a dual-class structure (see press release for additional details).

However, in the UK, a company with a dual-class structure would not be eligible for a listing on the premium segment of the Financial Conduct Authority's (FCA) Official List as that requires a "one-share one-vote" capital structure. A company with a dual-class structure could only seek a listing on the standard segment of the Official List. This is significantly less attractive to investors and does not allow for entry into the main FTSE indices (i.e., the FTSE 100 and the FTSE 250).

What's the position elsewhere?

The capital markets are increasingly global and UK companies have a choice of listing on a number of stock exchanges, including in particular the London Stock Exchange, New York Stock Exchange, Nasdaq Stock Market and the Hong Kong Stock Exchange.

Dual-class structures are permitted and relatively common in the United States, especially for technology companies. High-profile examples include Facebook, Google, LinkedIn, Zynga and Snap.

Since 2018, companies with dual-class structures have been able to list on the Hong Kong Stock Exchange in certain circumstances and subject to certain requirements and restrictions. Following these rule changes, Alibaba dual-listed in Hong Kong (alongside its existing NYSE listing) raising HK$88 billion (US$11.2 billion) in late 2019. Singapore also changed its rules in 2018 to allow for dual-class structures. Cooley's view is that certain of the provisions of the Hong Kong and Singapore rules could form part of a useful blueprint for how the UK premium listing regime could be amended to permit dual-class structures while maintaining the gold standard for corporate governance and investor protections.

Other European countries are also looking at this. For example, in May 2020, the Recovery Decree in Italy introduced the ability for Italian listed companies to issue multiple voting shares expressly to enhance competition with foreign...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT