Exploring China’s Dual-Class Equity Structure: Investor Protection Measures and Policy Implications

Mainland China traditionally maintained the one-share-one-vote (OSOV) principle. Since 2019, however, Chinese authorities have introduced rules supporting the dual-class equity structure (DCES) for “innovative enterprises.” Due to concerns about investor-protection issues, China’s DCES currently operates as a “stringent permit system,” and as of the end of June 2023, only eight corporations have achieved listings with DCES adopted. This article provides a broad and profound policy analysis of the Chinese DCES system, including empirical analyses on the eight existing DCES cases. Also, this article explores the legal and economic aspects of investor-protection issues with respect to the China’s DCES. Regarding DCES rules in the context of investor protection, this article examines “three sets of investor safeguard measures”: (1) “three numerically specified rules” (this article calls the three rules the “10% equity rule,” the “10-time voting-right rule,” and the “2/3 voting-right rule”); (2) “sunset provisions” (such as event-driven sunset and time-based sunset); and (3) “rules converting special-voting shares (shares with higher voting rights) into shares with one vote” (such as conversion in mergers and a conversion in an amendment of the charter). Due to the concerns about the prevailing practice of tunneling in China, this article argues in favor of the “DCES with enhanced investor protection.” To foment founders’ entrepreneurship and allow more corporations with the DCES, however, this article recommends that the Chinese authorities gradually relax the implementation of the current DCES system of de facto stringent permit system. The future relaxation of the stringent permit system will also be beneficial for China because, as a result of the escalated tension with the U.S., China has already lost a substantial portion of its reliable DCES-IPO markets in the U.S. Also, DCES-IPO markets in Hong Kong is still inactive. Thus, the establishment of viable DCES-IPO markets will soon be necessary in Mainland China.