Min Yan is an Assistant Professor in Business Law and Director of the BSc Business with Law Program at Queen Mary University of London. He holds a PhD in Law from King’s College London and Fellowship of Higher Education Academy, United Kingdom. Yan teaches/supervises students from bachelor to doctorate level and specialises in corporate law and corporate governance, and CSR. His articles appear in leading law journals including Northwestern Journal of International Law & Business, Hastings Business Law Journal, Business Law Review, Company Lawyer, Frontiers of Law in China, and European Intellectual Property Review. His monograph “Beyond Shareholder Wealth Maximisation” was published by Routledge in 2018. Before entering academia, Yan practiced law and worked as a legal counsel/consultant for commercial companies.
Queen Mary University of London
Queen Mary University of London
The Myth of Dual-Class Share Structures: Control versus Accountability
Dual-class share (“DCS”) structures offer a group of shareholders, normally founders and entrepreneurial managers as corporate insiders certain share classes with weighted voting rights. Different from the one share – one vote (“OSOV”) rule, the super voting rights enable these insiders to retain their control of the firm that is disproportionate to their equity shareholding. In other words, weighted voting rights under DCS structures decouple insiders’ control from their cash flow rights in the firm. The recent wave of high-profile DCS IPO of high-tech companies in the U.S. and the rising popularity of DCS structures in Asia bring back the spotlight on the debate of such structures. Proponents praise the decoupling protects visionary entrepreneurs/founders from undue influence of outside investors and market and thereby gives them the freedom to pursue and implement their idiosyncratic business idea. By contrast, opponents criticize such decoupling destroys shareholder democracy, and fails to align control with ownership incentive as the classic economic rationale for OSOV. Their concern is that the lack of ownership incentive together with the increased entrenchment caused by the decoupling may provide controllers twisted incentives to exercise discretion and monitor, which would in turn increase corporate governance risks and exacerbate agency problem.
After critically analyzing the economic rationale for OSOV rule — namely, how it matches economic incentives with voting power — as well as its underlying shareholder democracy, this paper rebuts most of the criticisms against DCS structure but finds the concerns over increased governance risks are to some degree valid. Though the proportionate voting under OSOV is not the answer to address agency costs, especially in the context of shareholder heterogeneity, the increased entrenchment of control due to the decoupling of control rights from cash flow rights could lead to potentially greater agency costs. There are however measures such as sunset provisions, limitation of voting differentials and the like to mitigate increased risks of agency costs brought by DCS structures. As a result, this paper is of the view that the debate over the viability of DCS structures should be shifted to how to restrain the potential governance risks brought by such structures. In addition, this paper argues that while limiting controllers’ disproportionate voting rights may provide safeguards to public/outside investors, the initial purpose of the institutional design of DCS structures may correspondingly be diminished. Thus, this paper proffers a dynamic balance conception to help researchers and policymakers to understand and evaluate the full impact of both existing and future safeguarding measures on DCS structures. Last but not least, this paper brings the attention on the rising popularity of DCS structures in the leading financial centers in Asia to see how changes can be made to accommodate the DCS structures and what they have done for striking a balance between control and accountability.