The Way SPACs and Dual Class Shares Drive Unicorns to Go-Public

The Indonesia Stock Exchange (IDX) has been improved since earlier this year to welcome three unicorns. Some relaxation has been prepared, one of which is allowing them to go public using SPAC (Special Purpose Acquisition Company) and dual class shares. These are currently being discussed in the internal unit.

DailySocial received a statement that IDX's Company Assessment Director, I Gede Nyoman Yetna Setia said SPAC and dual-class shares (DCS) are currently in internal review, discussing with authorities and stakeholders regarding the potential for implementation and regulation in Indonesia.

He said, in every drafting process of regulation, his team will first make comparisons with several other stock exchanges in other countries to determine the best practices in Indonesia.

"Indeed, by considering several things such as corporate governance, protection of public investors, and compliance with applicable laws and regulations," he said.

Separately, quoting from Bisnis.com, Nyoman said that the IDX is currently studying the potential for implementing DCS with a multiple voting share (MVS) structure. MVS is a type of share with more than one vote for each share.

MVS implementation in several countries usually regulates the maximum ratio between shares with voting rights is 1:10 or 1 share has 10 voting rights. This is different from ordinary shares, with only one voting right for each share, which is called the ordinary share.

"In terms of best practice in several global exchanges, DCS with MVS classification usually can only be held by founders who also involve as company management or key parties who can ensure the sustainability of the company's vision or innovation in the long term."

Pros and Cons

Essentially, SPAC and DCS are trends in the United States which is the hub for all tech companies. Amvesindo's Chairman, Edward Chamdani observed whether SPAC can be implemented in Indonesia, it will be quite similar to the practice of reverse listing but with a guarantee of a much cheaper cost and process.

“In reverse listing, there is a risk that the company's shell suddenly has a tax or legal problem. Meanwhile, the SPAC is guaranteed to be clean as it is new. Of all the companies intend to merge with SPAC, the sponsor is flexible, as long as it can provide sufficient value and funds,”  Edward said to DailySocial.

The downside also applies to founders, because they have to sell a percentage of shares and at a lower value than the market price.

The DCS practice is capturing lots of attention in the United States. Around 26 of the 134 companies that went public in 2018, 25 of 112 new companies registered in 2019, and 32 of the 165 companies that were newly registered in 2020 adopted DCS.

This fact has motivated stock exchanges in other countries such as Hong Kong, Singapore and Shanghai to create relaxation to regulations expecting markets to be more attractive, especially for tech companies. Moreover, Hong Kong had previously lost as Alibaba and other big companies turned around and go public in New York.

Edward explained that his team would really appreciate the IDX's steps if DCS practice could be implemented in Indonesia because this will be a new breakthrough. For investors, DCS is not a strange concept as it is similar to preferred stock when investors signed the shareholder agreement issued by the company during the rights issue.

The preferred shareholders have higher voting rights than common shareholders, although this practice is less common in Indonesia.

The DCS existence is essential for tech startup founders because in  startup journey they are likely to make various series of funding which causes their shares diminished.

When it becomes a public company, DSC serves to convince investors that the company can achieve a certain vision and mission in the long term under its control. Although the founder has technically less shares, the voting rights are greater than the common stock.

"If the stock exchange can implement this, it will be a positive thing because most of tech companies are driven by a founder figure."

When go public, company benchmarks are usually valued from the financial statements and good corporate governance (GCG). Disruptive and innovative technology companies are strongly influenced by the founder figure to strengthen the company's abstract vision and mission.

Edward also expects that from the investor's point of view, he will be more familiar in the future with the characteristics of technology companies which benchmarks are invisible from EBITDA, enterprise value (EV), or price to earnings ratio (PE). Therefore, even though they still around negative profit and loss (P&L), in the next 10-20 years, by understanding the disruptive roadmap of these companies, it will become a valuable company.

"The closest example is when Amazon go public, every income is always converted into assets, therefore, they do not pay dividends to shareholders. With such knowledge, investors can think long term, not just quarterly."

Behind the glittering promises of DCS, there is always a negative vibe as the capitalist system eliminates democratic elements. One share is no longer valued as one vote. Google even has three types of shares, Class A, B, and C. Each Class B share has 10 voting rights filled by Google insiders. Meanwhile Class A common stock sold to the public is worth only one vote and Class C does not have voting rights.

Academics from Queen Mary University of London, Min Yan said that another debate is about a shift to how to contain governance-related risks. Such steps as termination and restrictions on voting differences are designed to withhold control over several classes of shares by voting and provide mandatory protection for shareholders with lower votes. However, this action, intentional or not, jeopardizes the value of the different voting rights.

Such action is like a double-edged sword, not only helping to reduce governance risk but also undermining the isolation of controllers from external investors and market influence.

The lack of enthusiasm for technology companies to go public on the Hong Kong, Singapore and Shanghai exchanges reflects the diminishing attractiveness of the DCS structure when safeguards are tight. This situation is the opposite of what happened in the United States, because there are no such compulsory precautions there.

Yan also highlighted the key safeguards, including final provisions, maximum vote differentials, and improved corporate governance standards, as former before strategies. Given the objective of such action is to prevent potential managerial unaccountability and opportunism by restricting the ability of controlling shareholders to exercise some of their voting rights.

Because the strict former before strategy, with too much restriction of controlling power and jeopardizing the benefits of weighted voting rights under dual class shares, the action to make ex post as an alternative needs to be reconsidered.

He said, no financial authority in Asia has an effective and strong ex post regime. DCS's true success lies in its market acceptance. Whether a few or no companies intend to go public with that kind of structure, allowing two-class listing will be futile.

"Therefore, I suggest exploring more ex post mechanisms, such as aggregate litigation through a representative process that provides solutions to disadvantaged shareholders when the problem of lack of managerial accountability occurs, to reduce dependence on ex ante constraints as mandatory safeguards," he concluded.

- Original article is in Indonesian, translated by Kristin SiagianHeader photo: Depositphotos.com