Are dual or multi-class capital structures permitted and how common are they?
The Austrian Stock Corporation Act expressly allows shares vested with different legal positions, i.e. membership rights. In practice, the most prevalent form of non-common shares in Austria is the issue of non-voting preference shares with preferential dividend rights. The law also permits the granting of individual rights such as individual presence rights when resolutions are to be passed resp. specific approval rights to an amendment to the articles of association, capital increases or similar structural decisions such as mergers or split-offs.
The principle of equal treatment only prohibits arbitrary unequal treatment of shareholders but allows differentiation on objective grounds. If the articles of association specify several classes of shares, the respective membership rights have different contents and the different legal treatment does not affect the equal treatment requirement. The downside of this flexibility is, however, that dual or multi-class capital structures increase the complexity of the decision-making process and the efforts required for the holding of general meetings. Therefore public companies tend to reduce non-voting preference shares with preferential dividend rights by converting preference shares into common shares, or, in the case of new issues, to refrain from issuing preference shares.
Typically, each common share shall have the right to one vote in shareholders’ meetings, and it is not possible to have shares with multiple voting rights. Brazilian companies may, however, issue preferred shares, which can be issued without voting rights (although companies listed in the Novo Mercado are required to issue only common shares).
In addition, the Brazilian Corporation Law sets forth that it is possible to include in the company’s by-laws a provision restricting the number of votes by each shareholder. Nevertheless, the companies listed in the Novo Mercado and Level 2 listing segments are not permitted to include in their by-laws any provision restricting the number of votes of shareholders to a percentage below 5 per cent of the stock capital, except in a few cases provided in the listing rules.
Shareholders holding preferred shares must be accorded the following privileges, on a cumulative or non-cumulative basis: (i) priority in the distribution of fixed or minimum dividends; or (ii) priority in capital repayment, at or without a premium. In order to be traded on the securities market, preferred shares without voting rights or with restricted voting rights must confer on their holders at least one of the following privileges: (i) payment of dividends corresponding to at least twenty-five percent (25%) of the average profits at year-end; or (ii) payment of dividends at least ten percent (10%) higher than those paid to common shares; or (iii) the right to tag these shares along in a public offer for disposal of control, receiving dividends at least equal to those paid to common shares.
In addition, common shares in a closely-held corporation may belong to different classes, depending on: (i) their non-convertibility into preferred shares; (ii) the requirement that the shareholder be Brazilian; or (iii) the right to vote separately for election of certain officers of the company.
Preferred shares may also belong to one or more classes, and carry rights and/or privileges that may include the right to elect certain members for the company's administrative bodies, even if these preferred shares are granted no other voting rights. In government companies that undergo privatization, a special class of preferred shares exclusively owned by the government may be created (the so called “golden share”). In this case, the company’s bylaws may confer specific powers upon the golden share, including the power to veto resolutions of the general meeting in certain matters.
Multi-class capital structures are permitted, with great flexibility possible for an SAS but more limited flexibility for an SA or an SARL.
For an SA or SCA, further, double voting rights are permitted for shares held longer than at least two years; for listed companies, this double voting right is automatic, unless the bylaws provide for no such right or a longer minimum holding period.
An SA can issue, besides common shares, preferred shares having preferential financial and/or other rights (priority dividends, liquidation preference, right to board seats, etc.). Preferred shares can be either voting (with the same voting rights as common shares) or non-voting (but non-voting preferred shares must not make up more than one-fourth of all shares of a listed company or one-half of all shares of a non-listed company). Under the proposed Loi PACTE, a non-listed SA could issue preferred shares with voting rights either greater or lesser than those of common shares.
Further, the maximum number of votes for any shareholder can be limited by the bylaws (but this limit will not apply subsequent to a tender offer resulting in holding of at least two-thirds of the capital or voting rights).
For an SARL, all shares must have equal voting rights, but the bylaws may provide that some shares will have financial rights different from others.
Some German stock corporation have, besides ordinary shares, also non-voting preference shares, which usually entitle the holders to an add-on dividend distribution. German stock corporation law does not permit shares with multiple voting rights.
Dual and mutli-class capital structures are permitted. In particular, companies may issue common or preference shares. The preference right can take various forms, such as receiving dividend (in full or in part) prior to the common shares, receiving priority over capital from share capital reduction or liquidation proceeds, etc. Preference shares can also be convertible. A company may also issue warrants and founders titles. All of the above capital structures can be issued in various classes, as well as in different tiers.
There is no restriction on dual or multi-class capital structures for private companies but listing applicants have long been required to adhere to the principle of proportionality between the voting power and equity interest of shareholders, which is commonly known as the “one-share, one-vote” principle.
There has been heated debate in Hong Kong over the past few years as to whether dual or multi-class capital structure should be permitted for companies planning to go public. In 2014, Alibaba Group, one of the tech giants in China, picked New York over Hong Kong for its initial public offering partly because multi-class capital structure for listed companies was banned in Hong Kong. After years of discussion, the Stock Exchange has, in April 2018, announced to amend the Main Board Listing Rules permitting listing applicants to deviate from the classic one-share, one-vote principle, which took effect on April 30, 2018 (Hong Kong Stock Exchange, “Consultation Conclusions – A Listing Regime for Companies from Emerging and Innovative Sectors”, April 2018). Listing applicants now seeking to elect dual or multi-class capital structures are expected to comply with the Main Board Listing Rules and in particular, the recently-introduced Chapter 8A of the Main Board Listing Rules. Chapter 8A provides that any listing applicant is required “to demonstrate the necessary characteristics of innovation and growth and demonstrate the contribution of their proposed beneficiaries of weighted voting rights to be eligible and suitable for listing with a WVR [weighted voting rights] structure as set out in guidance published on the [Hong Kong Stock] Exchange website and amended from time-to-time.” Listing applicant seeking to list with a weighted voting right structure should also ensure that “all holders of listed securities are treated fairly and all holders of listed securities of the same class are treated equally”.
The change of rules is definitely an advantage for companies that have shares with different voting rights, including some of the global leading and most influential technology companies. Xiaomi Corp (HKEx stock code: 1810), one of the world’s leading technology company and mobile devices manufacturer, listed in Hong Kong in July 2018 as the first listed company in Hong Kong with weighted voting rights. The second one is Meituan Dianping (HKEx stock code: 3690), a food delivery service platform in China. The company was listed on the Hong Kong Stock Exchange in September 2018 with a market capitalization of about HK$400 billion (US$51 billion).
Dual or multi-class capital structures have been permitted at the TSE since 2008, and in 2014, a certain company actually listed its class shares on the TSE. However, no other such company has listed its shares on the TSE since then, and this company has been the only example of a dual class listing company in Japan.
Different categories of shares are allowed in limited cases under the Companies Code and the by-laws, whilst multiple or dual voting rights shares are not permitted.
The KCC permits class shares, and examples are shares entitled to (i) preferred dividends or distribution of residual assets, (ii) exercise of voting rights, (iii) redeemable rights and (iv) conversion rights. For a Company to issue class shares, this must be provided for in its AOI with specific terms and conditions and the number of each class share. Issuance of class shares must be registered and be publicly disclosed and recorded on share subscription forms, shareholder registry and share certificate. Class shares may be issued within the extent set forth in the AOI, in the type and number of shares determined by the promoters at the time of incorporation or by the BOD at the time of issuing new shares.
Class shares are widely used in practice; however, class shares must also apply the principle of “one voting right per share” and comply with certain legal restrictions. For example, the total number of class shares having no or limited voting rights cannot exceed 25% (50%, if listed company) of the total number of issued shares.
Swiss law is rather flexible when it comes to equity (and debt) capital structures and it is permitted to issue several classes of shares as well as debt instruments. It is, however, only allowed to create voting shares by attributing them different nominal values (meaning that all shares technically carry one vote but have different dividend rights). Moreover, it is also possible to issue participation certificates, which do not bear any voting rights. According to a study conducted by a Swiss proxy advisors for the year 2016, approx. 14 percent out of the 168 reviewed listed companies have made use of this possibility; the overall trend is, however, towards the principle of 'one share one vote', i.e. capital structures in which the voting power is in proportion to the respective capital share. Only very few companies have issued participation certificates.
Dual- or multi-class capital structures are permitted in the United States. Dual-class structures divide a company’s equity into two or more different classes with distinct rights and characteristics. Typically, one class of shares will have significantly more voting power than the other. In comparison, the more common single-class structure gives all shareholders equal equity and voting power.
The vast majority of U.S. publicly listed companies have a “one share, one vote” structure. However, a growing number of companies are going public in the United States with dual-class structures. Nearly 20 percent of U.S. companies going public in 2017 had a dual-class share structure, compare to just 1 percent in 2005.
However, there have been recent efforts to curtail the use of dual and multi-class structures for public companies in the United States. In 2017, S&P Dow Jones banned companies with dual- or multi-class capital structures from being listed on many of its indices (although companies currently on the indices are permitted to be grandfathered) and the FTSE Russell announced it would begin excluding companies that have a public float constituting less than 5 percent of the company’s total voting power. In October 2018, the Council of Institutional Investors (“CII”) petitioned both the NYSE and NASDAQ to amend their listing standards to require listed companies to provide in their charters that the share structure will convert automatically to a one-share, one-vote structure no more than seven years after the date of a company’s initial public offering, subject to extension by a vote of a majority of the outstanding shares of each share class, voting separately, on a one-share, one-vote basis.
All shares have the same basic rights and share capital structures are flexible. However, except in certain sectors (eg investment companies), it would be atypical for a premium listed company to have multiple classes of shares.
However, as a matter of company law, multiple classes of shares are permitted and there is no limit on the number of classes of shares that can be created. The rights of shares can be enhanced or restricted under a company's constitution.
Where shares are to be listed, the entire class of the shares must be listed and the shares must be freely transferable, fully paid up and not subject to any liens or other restrictions on transfer.
Corporations from a variety of industries have adopted dual class capital structures in Canada. Dual class structures remain relatively uncommon but have been a fixture of the Canadian financial markets for over 65 years. All dual class capital corporations listed on Canada’s senior stock exchange, the Toronto Stock Exchange (“TSX”) must have coattail requirements (except those grandfathered) granting rights to the subordinate voting share class to participate in a take-over bid made for the superior voting share class. Securities law requirements also apply to the creation of, or conversion to, a dual class capital structure at a public company, so such structures are typically implemented in connection with the company’s initial public offering.
As mentioned (see point 6 above), the by-laws may provide for the existence and issuance of special classes of shares, granted with certain rights or obligations, e.g. (i) multiple-voting rights (up to no more than 3 votes per share) or limitations/conditions to the exercise of voting rights, (ii) specific rights regarding the distribution of profits or the apportionment of losses, (iii) rights or obligations relating to the transferability of the shares (lock-up, pre-emption, right of first offer, drag and tag-along, etc.), (iv) prior approval or veto rights on specific matters to be resolved upon by the general shareholders’ meeting, (v) etc.
Multi-class capital structures are commonly used in private equity and other tailor-made investment schemes, with the aim of protecting the position and the investment of specific shareholders.