ASX’s prohibition on issuing non-voting ordinary shares is out of touch with what is permissible on foreign exchanges and has the potential to place ASX-listed companies at a distinct competitive disadvantage. Allowing non-voting ordinary shares would provide investors with greater choice and issuers with greater capital raising flexibility.
The premise that voting power should be proportionate to the economic interest held in a company is outdated.
The ability to issue non-voting ordinary shares provides investors with greater choice in pursuing their individual investment goals, and issuers with significantly more flexibility in raising capital.
The proliferation of derivative products demonstrates there is a market for acquiring exposure to a company’s economic performance without necessarily obtaining the associated voting rights. Allowing for the issue of non-voting ordinary shares creates such an investment option without the need for a derivative to be written.
Shares with superior voting rights generally trade at a material premium to those shares with limited voting rights. But not every shareholder wants to pay that premium to exercise the right to vote. In fact, there has been a steady decline in retail shareholder participation at company meetings.
Many investors will simply sell out of a company if they are unhappy with its direction rather than use their voting rights to press for change. The option of acquiring non-voting ordinary shares would be attractive for shareholders with this investment mentality.
Allowing companies to issue non-voting ordinary shares could also help stem the flow of start-ups (particularly in the tech industry) pursuing offshore listings, such as that proposed by local technology poster-child Atlassian.
Australia’s equity market would be more attractive if entrepreneurs and start-up companies could raise equity capital without necessarily having to cede control of decision-making. They can stay in the driver’s seat and pursue their long-term strategy without risking the potential for value destruction from shareholder myopia. Indeed, such concerns are likely to be compounded by the increased levels of shareholder activism in Australia (see Corrs M&A Alert).
Google’s proposal to issue a non-voting share class is a recent example of founding entrepreneurs seeking to retain control by either holding ‘super-voting’ shares or by issuing non-voting shares to outsiders (ASX does not permit the issue of ‘super voting’ shares either).
The same strategy has been popular with other technology start-ups like Facebook, LinkedIn and Groupon. With the resurgence of founder-driven technology IPOs (including Freelancer, iSelect and OzForex), ASX should be maximising its chances of capturing such listings.
Governments also stand to benefit from the added flexibility of a non-voting ordinary share class, which would provide more flexibility for structuring privatisations of public assets and for foreign investment in areas where there are perceived national interest concerns.
For example, allowing non-voting ordinary shares would provide Qantas with the flexibility to pursue increased foreign investment without the politically-charged risk of foreign owners acquiring more control over decision-making in the airline.
The way forward
Any ability by ASX-listed companies to issue non-voting ordinary shares would not be without its detractors.
Historically, concerns have been raised regarding management accountability and market confusion. However, these concerns can be managed by appropriate safeguards, such as disclosure requirements, shareholder approval and sunset clauses.
Whilst some studies suggest that multi-class ownership structures can result in underperformance over an extended period, increased price volatility and reduced corporate governance controls, the literature is not determinative. Indeed, there are multiple-class listed companies (such as Berkshire Hathaway) which have consistently outperformed their single-class counterparts.
Some of ASX’s principal competitors, including NYSE, LSE and TSX, permit the issue of non-voting ordinary shares, which affords companies listed on those exchanges a more flexible framework for raising capital. Recently SGX has been re-examining its prohibition on multiple share classes, with HKSE potentially following suit in light of its failure to secure the Alibaba Group listing.
ASX briefly flirted with allowing the issue of non-voting ordinary shares in 2007, but shelved that proposal following a mixed response from stakeholders.
The time is ripe for ASX to follow the lead of its competitors or risk becoming a dinosaur securities exchange.