US Corporate Law 20 Episodes (19)
WVR in the U.S. | Choice of stock structure for Google, Snapchat, JD.com, and Xiaomi | The demise and rebirth of WVR in Hong Kong stocks |
Many entrepreneurs should have heard of the "same share with different rights" structure, which allows the founders of the company to maintain control after the company has grown, so it is highly sought after by entrepreneurs. So what kind of mysterious mechanism is the different rights of the same shares? In this issue, let's talk about the same shares with different rights.
Some people may ask, why do you only talk about different rights for the same shares until now? Isn't this something that should be considered from the very beginning of the company's establishment? Indeed, when many entrepreneurs found me, they said that I wanted to start a company and create a structure with different rights for the same shares. But I can tell you that the real WVR is definitely not what you think it is.
1. Three theories to refute rumors
(1). The different rights of the same shares are used to prevent investors from seizing power?
This is completely wrong. If you're talking about investors, it's preferred stock holders. Correspondingly, the founding team took common stock. Entrepreneurs and investors, one takes common stock and the other takes preferred stock. Then it becomes "different shares with different rights". It is not the same stock with different rights we are talking about here.
(2). Is the same share with different rights a check and balance between founders?
This statement, I can say, is not at all in America, at least. WVR in the United States is a structure that is only considered when a company is about to go public, not a structure between founders when the company is just established. In fact, many well-known companies in China that use the same shares and different rights, such as Xiaomi and JD.com, also adopted the same shares and different rights when they were about to go public, rather than the structure at the beginning of the company's establishment.
(3). WVR is a one-vote veto for some major matters?
Many entrepreneurs say that they want to have different rights for the same shares, but after talking with them, they find that what they want is actually a veto on some important matters. In our next example, you will find that the WVR is actually "one share top ten shares", not a one-vote veto. Not only in the US, but also in China. In the "Shanghai Stock Exchange's Science and Technology Innovation Board Stock Listing Rules", it is also clearly stated that "the number of voting rights held by each special voting share is greater than the number of voting rights held by each ordinary share, and the rights of other shareholders are the same as those of ordinary shares."
2. Different rights for the same shares in the United States
Let's look at two examples.
(1). Google
Now almost everyone knows about WVR, and all companies want to do WVR. But in fact, before Google's listing restart in 2004 abolished the WVR for more than half a century, the last company to adopt WVR was Ford.
Google's WVR is divided into Class A shares and Class B shares. Among them, Class A shares are sold to shareholders who publicly purchase shares on Nasdaq, and these shares have one vote per share. Class B shares are owned by founders Page, Brin, and core members of the company, with 10 votes per share. That is to say, as long as Class B shares account for more than 9.1% of the shares, the voting power can be higher than that of all Class A shares combined.
But even so, more and more shareholders are buying shares publicly on the Nasdaq. When the absolute number of Class A shares exceeds Google's 90.9%, Google's founders and core members still have the possibility of losing the vote.
So in 2014, Google grandly launched Class C shares. This is a kind of stock that is treated worse than Class A shares. Although it is also sold to stockholders who bought it through public channels on Nasdaq, these Class C shares have no voting rights at all. It can be said that Class A shares are a reward for investors who bought Google shares earlier, and Class C shares can only be said to be who blame you for getting on board.
(2). Snapchat
In 2017, snapchat, a social tool that burns after reading, was listed on the New York Stock Exchange. Snapchat seems to have learned from Google's experience and launched three types of stocks: Class A, Class B, and Class C. Class A shares are for stockholders that are publicly traded on the NYSE, and Class B shares are for outside executives and early investors of the company. Class C shares are just those of the company's two founders, Evan Spiegel, and Bobby Murphy.
3. The demise and rebirth of the WVR in Hong Kong stocks
After talking about the different rights of listed companies in the United States, let's take a look at Hong Kong stocks.
The same share with different rights was also a common shareholding structure adopted by companies listed on the Hong Kong Stock Exchange. However, in 1989, the Hong Kong Stock Exchange officially abolished the structure of the same shares with different rights. Until 2014, Ali's plan to use the same shares with different rights to impact Hong Kong stocks failed, and instead listed on Nasdaq, Hong Kong stocks missed the largest IPO in history of 25 billion US dollars. The Hong Kong Stock Exchange finally moved back to the same stock with different rights in 2018.
Here we also give two examples.
(1). JD.com
After JD.com was listed on the Hong Kong stock market, it adopted Class A and Class B shares, of which Class A shares were publicly traded in Hong Kong stocks to shareholders. The Class B shareholders are insiders of the company, the most important of which is Liu Qiangdong. The gap between the two-tier shares of JD.com is even more disparate. One share of Class A shares has one vote, while one share of Class B shares has 20 votes. This means that although Liu Qiangdong only holds 15.5% of the stock, he has nearly 80% of the voting rights.
(2). Xiaomi
Two of Lei Jun and Lin Bin own Class A shares, and the others own Class B shares. Lei Jun holds 31.41% of the shares and has more than 55.7% of the voting rights. Lin Bin owns 13.33% of the shares and has 30% of the voting rights.
4. The "special voting rights" of the Sci-tech Innovation Board
For a long time, Chinese company law does not allow the same shares with different rights. Until March 1, 2019, the Science and Technology Innovation Board officially launched shares with special voting rights, marking that the different rights of the same share can also be legally enforced in China.
However, it should be noted that not all companies listed on the STAR Market can use the same shares with different rights. Rules for the Listing of Stocks on the Science and Technology Innovation Board of the Shanghai Stock Exchange
2.1.4 If the issuer has a differential arrangement of voting rights, the market value and financial indicators shall meet at least one of the following criteria:
(1) The estimated market value is not less than RMB 10 billion;
(2) The estimated market value is not less than RMB 5 billion, and the operating income in the most recent year is not less than RMB 500 million.
Having said so much, everyone should also realize that different rights for the same share are by no means a one-vote veto on certain matters, nor is it a way to prevent investors from seizing power, nor is it a solution to mutual distrust within the founding team. The road to entrepreneurship is a long way to go, and it is too early for the same shares with different rights.
Here are 20 lectures on US corporate law, focusing on the necessary legal knowledge for startups. Thanks for watching, see you next time.
