Rethinking Dual-class Share Structure in the Context of China

Abstract

The dual-class share structure enables founders to maintain control of the company while obtaining external financing. It is popular with innovative companies. However, it deviates from the default rule of “one share, one vote” and has hence elicited heated debates on the topic. This article aims to contribute to the debate on dual-class share structure in the context of China. Chinese Company Law insists on the “one share, one vote” principle, and joint stock companies are not allowed to issue weighted voting shares. This article suggests that it is necessary to allow dual-class share structure in China for two reasons. First, the immense pressure of exchange competition from other jurisdictions, and second, to meet the demands of innovative companies and heterogeneous shareholders. The China Securities Regulations Committee (CSRC) recently launched the Science and Technology Innovation Board on the Shanghai Stock Exchange, issuing a new listing rule, which allows listed company to adopt dual-class share structure. However, some defects were found on the rules of dual-class share structure and needs to be improved. First, we should modify the Company Law and allow listed company to issue weighted voting shares. Second, shareholders ought to be encouraged to lay limitations on dual-class share structure in the articles of association, rather than through mandatory legal provisions. Third, information disclosure requirements imposed on the founder ought to be enhanced to prevent the founder from procuring private benefits. Fourth, the Investor Service Center (ISC) should be allowed to bring a lawsuit on behalf of the investors as long as the number of investors who have authorized it to do so hits a certain quota, and the cases supported by the ISC should become guiding cases which has de facto binding effect for similar subsequent cases. Last of all, the application of dual-class share structure should be made available to all listed companies after this area of company law has matured after years of practice.