"Company" is a great institutional innovation in the history of human development. The company system, especially the limited liability system of the company's shareholders, has drawn a clear boundary of the risk of investors to a large extent, greatly released the enthusiasm of investment, and promoted the development of the economy. Companies are only one type of business, from individual businesses to partnerships to limited liability companies, each type of business meets the diverse business needs of different operators, and human civilization and wealth have achieved rapid changes in just a few hundred years. But since the birth of the British East India Company, most of the wealth of modern society has been created under the "limited liability system" of companies. Nowadays, with the development of society, operators find that the traditional company system can no longer meet the business needs. For example, the development of science and technology, Internet and other industries requires a large amount of funds. However, when founders continue to raise funds to meet the development needs of the company under the concept of "one share, one right", the proportion of equity they hold in the company is gradually diluted. Even the company lost the right to speak, resulting in the company's business direction in great uncertainty. In reality, many companies are thinking about whether they can dilute equity while still maintaining control of the company's shareholders' meeting or general meeting. Jiao Hanwei, lawyer of Shanghai Guolinghouse Law Firm, will discuss the dual-class share structure of the company from a legal perspective based on practical experience for reference by operators.

What is a dual-class share structure?

Dual-class share structure is not a legal term, usually refers to a corporate governance system created based on the concept of "same shares with different rights". Companies implementing dual-class share structure usually issue two kinds of shares or stocks with different voting rights, such as ordinary voting shares, where one share enjoys one vote. The other is a super-voting stock, where one share has N votes. Among them, ordinary stocks are mainly issued to the majority of public investors or financial investors, while super stocks are mainly issued to the company's founder or management, with the ultimate purpose of realizing the founder or management's control of the company's shareholders' meeting or shareholders' meeting through the special setting of the voting rights of stocks. In practice, many companies will name two kinds of shares with different voting rights as class A shares and Class B shares, so the dual-class share structure is also called AB share structure. The opposite of the dual-class share structure is the single-class share structure. What is a single-tier share structure? Single-tier share structure is usually a corporate governance system based on the concept of "one share, one right". Companies with single-tier share institutions usually issue only one share or stock, and each share or stock has the same voting rights, dividend rights and other shareholder rights. At present, most companies in our country are single-layer equity institutions. Compared with the single-tier share structure, the dual-tier share structure is an institutional innovation. Shareholders of a company can use the dual-tier share structure to control the company's shareholders' meeting or shareholders' meeting while holding limited shares.

The Pros and cons of dual-class share structure?

Compared with the single-tier share structure, the biggest advantage of the dual-class share structure is that the founder of the company will not lose the control of the company's shareholders' meeting or equity meeting because of financing and other behaviors, so as to keep the company's business policy will not be interfered with by some short-sighted investors or financial investors. The dual-class share structure also has a great disadvantage, that is, the actual controller of the company has a great moral hazard, and there is a possibility of power abuse. Under the dual-class share structure, the same shares or stocks have the same right to distribute dividends, but they enjoy different decision-making rights. Usually, the founder or the management has more say, and they may abuse their voting rights to do things that maximize their interests, such as offering themselves high wages and transferring benefits through unfair related party transactions. Alibaba implemented A dual-class share structure, before the listing of Ali's shareholding structure is: Japan's SoftBank holds 36.7% shares, Yahoo holds 24% shares, holding some A-shares; Mr. Ma and his partners own only about 10 percent of Alibaba, holding Class B shares. The voting rights of each B share are equal to the voting rights of 10 A shares. Although Ma Yun and the management only hold about 10% of the shares, they have about 63% of the voting rights through the dual-class share structure design and control the entire Alibaba shareholders' meeting. In 2013, Alibaba originally planned to list on the Hong Kong Stock Exchange. At that time, the Hong Kong Stock Exchange adhered to the position of "one share, one right" based on the concept of fairness, and Ali finally landed on the New York Stock Exchange, which allows dual-class share structure, reflecting the concerns of the Hong Kong Stock Exchange about the drawbacks of dual-class share structure. It is true that the contribution and value of the founder or management are great, but in the absence of checks and balances of power, the founder or management may abuse their power, thereby harming the interests of the company and the majority of the shareholders of the company. Companies adopt dual-class share structure, usually in two ways: one is to implement dual-class share structure before the initial public offering (IPO) of shares; The other is a dual-class share structure in the form of a share conversion after an initial public offering (IPO). Compared with the two, before the initial public offering of shares, the company is not a public company, the number of shareholders is limited and the relationship is close, and the shareholders can supervise the operation of the company to a certain extent, so the moral hazard of the dual-class share structure is small. After the IPO, the company becomes a public company with a large and dispersed number of shareholders, most of which do not participate in the operation of the company and cannot effectively supervise the operation of the company, so the moral hazard is relatively large. Also based on this consideration, at present, the New York Stock Exchange, Nasdaq, chinext have banned the use of dual-class share structure after IPO, and only allow the use of dual-class share structure before IPO.

Is dual-class share structure legal?

The company's operation needs to be based on legality, and the operation without legality does not have any operating value, and the company's ownership structure is no exception. Is dual-class share structure legal in our country? On the issue of dual-class share structure, there is a process of change in our legislation. Before the amendment of the Company Law in 2005, "same shares, same rights" and "same shares, same benefits" were the basic concepts of the Company Law of China, and the Company Law of China did not recognize the dual-class share structure of "same shares, different rights". The Company Law revised in 2005 has changed, which is mainly reflected in the shareholding structure of limited liability companies. The revised Company Law stipulates: "The shareholders shall exercise their voting rights in accordance with the proportion of capital contribution at the shareholders' meetings; Except as otherwise provided in the articles of association." Therefore, under the current company law, it is the mainstream for shareholders of limited liability companies to exercise voting rights according to the proportion of capital contribution, but the Company Law allows the articles of association of limited liability companies to make different provisions, and the provisions of the articles of association take precedence over the law. Based on the provisions of the law, the shareholders of a limited liability company can agree on their own voting rights in the company's articles of association that are inconsistent with the proportion of capital contribution, that is, the dual-class share structure with different rights is implemented. Can a joint-stock company implement a dual-class share structure? The Company Law has always held a cautious attitude towards the dual-class share structure of joint-stock companies because of the combination of joint-stock companies, but it did not change when the Company Law was amended in 2005. Article 103 of the current Company Law stipulates that each share held by a shareholder who attends a general meeting of shareholders shall have one vote; However, the shares of the Company held by the Company have no voting rights; Article 126 states: "The issuance of shares shall follow the principle of fairness and justice, and each share of the same class shall have the same rights." On the one hand, "one share, one right" is the basic principle of joint stock company expressed in the current Company Law. On the other hand, in practice, the dual-class share structure is the legal obstacle for the joint stock company to be listed in the main board market of our country, which must be cleared before listing, so the dual-class share structure of joint stock company generally holds a cautious attitude. After the launch of the science and Technology board this year, there have been new changes in the dual-class share structure of joint stock companies. In the science and technology innovation board, the CSRC introduced the concept of "same share with different rights" and allowed qualified dual-class share structure joint stock companies to be listed directly. On June 21, the Supreme People's Court of China issued Several Opinions of the Supreme People's Court on Providing Judicial Guarantee for the Establishment of the Science and Technology Innovation Board and the Pilot Reform of the registration System, and affirmed the validity of the "same shares with different rights" system of joint stock companies in the form of opinions. At this point, our company's implementation of dual-class share structure is no longer there are institutional obstacles, whether limited liability company, or joint stock company, are legal. However, before the amendment of the securities law, joint-stock companies with dual-class share structure will still encounter institutional obstacles in listing on the main board.

Dual-class share structure case

(1) Jingdong Company

Jd.com is a dual-class share structure company listed on Nasdaq. The share capital of Jingdong Company is divided into Class A shares and Class B shares, and Class A shares are one share with one vote; One Class B share has 20 votes. Investors hold Class A shares; Founder Liu Qiangdong owns Class B shares. According to JD Group's 2018 annual report, Tencent is the largest shareholder of JD.com, holding 17.8% of the shares of JD.com, but only has 4.5% of the voting rights; Liu Qiangdong is JD.com's second-largest shareholder, with a 15.4 percent stake, but Liu Qiangdong holds 79 percent of the voting rights. Therefore, after several rounds of financing of Jingdong, although Liu Qiangdong is no longer a major shareholder in the usual sense of corporate equity, he still firmly controls the company's shareholders' meeting through the dual-class equity structure.

(2) Xiaomi Corporation

Xiaomi is the first dual-class company listed after the Hong Kong Stock Exchange once again allowed the "same share with different rights". Millet company prospectus shows that millet company's share capital is divided into Class A shares and Class B shares, Class A share holders enjoy 10 votes per share, while B share holders enjoy 1 vote per share. Among them, Class A shares are only owned by Lei Jun and Lin Bin, and Class B shares are owned by outside investors. Lei Jun holds 31.41% of the company's equity, but has 55.7% of the voting power through the dual-class share structure; Lin Bin holds 13.33 percent of the company's shares and 30 percent of the voting rights through a dual-class share structure, giving them a combined 85.7 percent of voting rights. Through the dual-class share structure, the control of Xiaomi's shareholders' meeting is firmly in the hands of founding shareholders Lei Jun and Lin Bin.

(3) Youke Company

Youkede Technology Co., Ltd. is the first dual-class share structure company listed after China's science and Technology innovation Board allows "the same share with different rights". The company has A dual-class share structure in which the company's capital is divided into Class A shares and Class B shares, with Class A holders entitled to 5 votes per share and Class B holders entitled to 1 vote per share. Among them, the company's joint controlling shareholders and actual controllers Ji Xinhua, Mo Xianfeng and Hua Kun have Class A shares, and other shareholders and investors have Class B shares. The company's common controlling shareholders and actual controllers Ji Xinhua, Mo Xianfeng and Hua Kun together hold 26.8% of the company's shares, but enjoy 64.7% of the voting rights through the dual-class share structure. Through the dual-class share structure, the control of Youke's shareholders' meeting is firmly in the hands of Ji Xinhua, Mo Xianfeng and Hua Kun.

Jiao Hanwei

Chief partner and lawyer of Shanghai Guohillhouse Law Firm

Have more than 10 years of legal service experience and more than 5 years of cosmetics business experience, familiar with law, familiar with business, He is good at providing enterprises with legal counsel, contract review, brand management, business compliance, business negotiation, intellectual property management, tax planning, equity transfer, corporate structure design, equity incentive, investment and financing, restructuring and merger, dispute resolution and other solutions for the whole stage of enterprise development from the perspective of law and business operation.