Dual shares: Enabling exclusive control over companies
Johny Lambridis, Portfolio Manager at Prudential, examines the uses for, and implications of, dual share structures, with a look at cases both globally and in South Africa
Most listed companies have a single class of shares, with each share carrying identical economic rights (rights to dividend payments, etc.) and voting rights. Some companies, in an attempt to vest control of the company in the hands of a certain group of shareholders, have a dual (or even multiple) class share structure where one class carries a higher voting right.
In South Africa, dual share structures are relatively common, being employed as a means for founding families or management to maintain voting control, or to underpin black ownership. Investors should therefore be aware of how they are used, as well as their benefits and drawbacks. Lower- or non-voting shares tend to trade at a discount to their higher-voting counterparts, which can be considered an advantage for initial investors who aren’t interested in voting on corporate management decisions.
In many cases, however, these structures concentrate the powers of running the company – such as naming the Board of Directors – in the hands of a few and shields management from shareholder (and therefore Board) oversight. This can lead to questionable corporate governance practices, making it important for shareholders to scrutinize these companies especially closely. At Prudential, we are very much intent on wielding our shareholder vote where we can. We would always prefer to hold the higher class of voting share, but this is not always possible.
Some well-known examples of local companies that have dual share structures (or recently eliminated them) include:
Naspers: Company management holds unlisted A shares, each with the right to 1000 votes, while Naspers listed N ordinary shares (under the ticker NPN) have 1 vote each. This allows top management and directors to maintain control of the company with only a relatively small block of shares.
Pick ‘n Pay: In 2016, Pick ‘n Pay eliminated its pyramid control structure comprising two listed companies (Pick ‘n Pay Stores and Pick ‘n Pay Holdings) that concentrated voting power in the hands of the founding Ackerman family. It was replaced with an unlisted B share structure. As a shareholder in Pick ‘n Pay Stores on behalf of our clients, Prudential voted against the transaction primarily because Pick ‘n Pay Stores shareholders were disadvantaged – they were made to bear the costs of the transaction without receiving any economic benefit.
Brimstone: Black empowerment investment holding company Brimstone has a class of listed non-voting N shares (BRN), while its ordinary listed shares have one vote each (BRT). The dual structure enables the group to ensure high levels of black shareholder control, which currently stands at 72%, while actual black economic interest is 55%.
Altron: Altron had a dual class share structure in place until recently, with both A shares and N shares listed on the JSE. The N shares carried only 1/200th of the vote of the A shares, a device originally created in order for the founding Venter family to maintain control. In March 2017 the shares were successfully unified as part of a corporate restructuring. As holders of both Altron A and N shares, Prudential was, in principle, supportive of this transaction. However, the Venter family (and other A shareholders) were compensated for losing voting control, and Prudential voted against the proposed compensation formula, determining that it was detrimental to N shareholders and that A shareholders were being overcompensated.
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