Dual Class Shares in the UK

What are Dual Class Shares and Share Structures?

A dual-class share is the issuing of various types of shares by a single company. When multiple share classes are typically issued: one share class is offered to the general public to gain other shareholders, while the other is often retained by the company founder. These share structures allow founders to keep majority control of the listed companies and give investors only limited access to the company through non-voting shares.

Start-ups or high growth tech companies, such as Google, Facebook, Snapchat or Lyft, frequently use this share structure to retain significant control as they argue that the usual one-share one-vote model is not appropriate for companies on their trajectory.

How can these shares help the UK market after Brexit?

Although Dual Class Shares can be a controversial approach to ensure market growth, there has been discussion recently within the UK Government about altering listing rules to attract high-growth companies as there is little traction for this type of share structure in the UK. Downing Street believes that introducing dual-class shares will be an integral way to ensure that London remains a pre-eminent market after Brexit.

• One of the reasons for this is that dual-class share structures allows entrepreneurial founders to concentrate on long-run strategy and performance without the interruption or worry of meeting near term targets and therefore protects the company from short-termism behaviours. Furthermore, if you look at some of the most successful technology companies in history, they are all founder-lead and thus is promising for the rise in value of the dual-class shares and their success.
• Additionally, the UK have seen the benefits of allowing companies to list with dual-class shares after the events of 2014 when Hong Kong’s stock exchange rejected Alibaba’s application for an initial public offering (IPO) because the company wanted to adopt a dual-class share structure. This decision meant that Hong Kong lost the world’s biggest IPO, as the Chinese Company eventually went to New York and raised $25 billion. Now Hong Kong has changed their rules to allow companies to list with dual-class shares with the aim of broadening their capital markets access and enhancing its competitiveness; which has inspired the UK government to discuss the potential of doing the same.
• On the other hand, the potential introduction of Dual-Class Shares has received backlash from investors and other financial experts who state that these shares place too much power in the hands of the company Founders, with little or no representation of the minority shareholders. Many investors and shareholder representative groups have always opposed dual-class shares, arguing that they would weaken the UK’s high standards of Corporate Governance Code, which sets out the standards of good practice for listed companies. This is due to the disproportionate control within a Dual-Class Share with many experts warning against giving the founder too much power as this can lead to a lack of accountability and thus more problems than benefits. The UK investors have pushed back against dual-class shares demanding for the UK authorities to think twice before altering the listing rules to accommodate founder-led IPOs.

To conclude, although the Dual Share Plan seems to be controversial and unpopular decision, it could be an integral way to ensure the continual growth of the UK market during the unpredictability of Brexit. Initially, Brexit will narrow the investment opportunities and exclude regular shareholders from companies that could have years of potential growth. Therefore, bearing this in mind and the fact that the UK tech scene that continues to play a larger role in the UK economy, the dual-class shares offer a suitable path to investment in the UK capital markets.