EI 2 Equity Jurisdictions, Classes, and the Voting Process

Deciding whether to issue or hold equity is only the start. An issuer must also choose where to list and how to spread economic and voting rights among shareholders, both to keep existing owners on side and to draw in new capital. An investor who wants exposure beyond the home market must weigh trading hours, local market practices, currency exposure, and disclosure quality before deciding how to own a foreign position. This lesson covers two linked themes: how rights differ across equity classes and jurisdictions, and how the shareholder voting process runs.

A frequent motive for going abroad is to correct a home asset bias, the well documented tendency for investors to concentrate too much of a portfolio in companies from their own country. Once an investor looks past domestic shares, the choices fall into two broad camps, direct and indirect, and a company can raise equity in its own market, in a single foreign market, or across several markets at once.

Direct investing

The direct route means buying or selling a foreign issuer’s shares in that issuer’s own home market. This forces the investor to open separate local securities and cash accounts to handle purchases, sales, dividend receipts, and any tax paid or reclaimed. It also means learning local trading, clearing, settlement, and tax rules, coping with a different time zone, and sometimes facing a language barrier plus uneven disclosure and liquidity. Every transaction settles in the local currency rather than the investor’s own, which introduces foreign exchange exposure and, in some places, capital controls or distinctive tax treatment. Large institutions usually have the scale and expertise to do this; smaller and individual investors tend to hold far fewer foreign shares directly.

Issuers are rarely confined to their home exchange or to any single venue. Some list in one market outside the home country; others opt for a dual listing, with the same shares trading on two or more exchanges at once. The British oil and gas group Shell plc, for instance, lists simultaneously on the London Stock Exchange and on Euronext in Amsterdam. Note that a dual listing concerns where shares trade, not how rights are divided among share classes.

Indirect investing

The common indirect route uses a depositary receipt (DR). A DR is created when a foreign company’s shares are lodged with a bank in another country, the depository, which then issues receipts standing for those deposited shares. DRs were built to connect issuers hunting for capital abroad with investors, many of them individuals, who want to sidestep the extra cost of direct investing. How many receipts exist, and what each one costs, rests on a set ratio of receipts to underlying shares plus the currency exchange rate between the two sides.

A DR trades like an ordinary local share, quoted in the domestic currency, and gives its holder a proportional economic stake in the foreign company. In effect it lets a foreign company’s listed shares change hands on an exchange outside the home market. Receipts are usually labelled by the market in which they trade.

Depositary receipts are named after the market where they trade. American Depositary Receipts (ADRs) form the oldest and largest DR market and let non-US shares trade in US markets. European Depositary Receipts (EDRs) cover non-European shares trading in European markets, typically priced in EUR. Global Depositary Receipts (GDRs) are issued outside both the company’s home country and the United States.

Most GDRs are quoted in USD, and the issuing depository bank is usually located, or has branches, in the countries whose exchanges list the shares. GDRs cannot list on US exchanges, but they can be placed privately with US institutional investors. Their main appeal is that, because they are sold outside the issuer’s home country, they escape the foreign ownership limits and capital flow restrictions that home country might impose. The issuer picks the trading venue based on where its investor base is largest or most familiar with it. London and Luxembourg were the first exchanges to trade GDRs; the Dubai International Financial Exchange and the Singapore Stock Exchange are among the others.

DR markets outside the US and Europe

Other large economies have tried to build their own DR markets, with mixed results. Standard Chartered PLC, the British bank that earns about 90 percent of its profits in Asia, Africa, and the Middle East, floated Indian Depository Receipts (IDRs) in May 2010 to let Indian investors share in its growth. Roughly a year on, once the Securities and Exchange Board of India decided IDRs could not be converted into common stock, hedge funds and foreign institutions dumped the receipts, since the ruling killed an arbitrage that had let them buy IDRs at a discount to Standard Chartered stock in Hong Kong SAR and London. No further IDRs were listed, and Standard Chartered delisted them in mid 2020. China has pursued Chinese Depositary Receipts (CDRs) to bring Mainland companies that first listed overseas back within reach of domestic investors; in October 2020 the scooter maker Segway-Ninebot, though based in the Chinese Mainland, listed CDRs on the Shanghai STAR market while registered in the Cayman Islands.

Sponsored versus unsponsored receipts

A DR may be sponsored or unsponsored, and the difference decides who holds the voting rights. In a sponsored DR the foreign company takes a direct part in issuing the receipts, and holders enjoy the same rights as direct owners of the shares, including the vote and the dividend. In an unsponsored DR the underlying company is not involved: the depository buys the shares in their home market and issues receipts through brokers locally, and here the depository bank, not the receipt holder, keeps the voting rights. Sponsored receipts also carry heavier reporting duties; in the United States they must be registered with the Securities and Exchange Commission.

How DR prices relate to home shares

Because a DR represents a set fraction of the underlying share, its price should track the home share price once the ratio and the exchange rate are applied. Arbitrage normally keeps the two aligned, though gaps can open from different market closing times, intraday currency moves, or trading restrictions, so an analyst must always fold in the ratio and the exchange rate before judging any mispricing.

Economic rights and voting rights are often handed out in proportion to shareholding, but several jurisdictions permit an uneven split across share classes. This is the essence of a dual class share structure. A typical arrangement pairs a widely held, publicly traded class carrying one vote per share with a separate, non traded class, held by founders, family, or insiders, that carries several votes per share. The insiders can then keep a minority economic stake yet still control the company through their votes.

Three ways the rights can be split

Meta Platforms, formerly Facebook, went public on 18 May 2012, issuing 180 million Class A shares at USD38.00 each. After the IPO it had 635,881,796 Class A shares, each carrying one vote, alongside over 1,500 million Class B shares carrying 10 votes each. Founder and chief executive Mark Zuckerberg held under 1 percent of Class A but roughly 60 percent of Class B, which handed him control of well over half of all voting power. As of early 2024 his voting control still stood above 60 percent, so the company’s direction has continued to reflect his priorities more than those of most public holders.

News Corp shows a different split. The media and information group, incorporated in the United States and trading on both US and Australian exchanges, had roughly 380 million Class A and roughly 192 million Class B shares as of August 2023. Both classes carry equal rights to dividends and to assets on liquidation, but only Class B votes, at one vote per share, while Class A has no vote at all. Class A is widely held across about 15,000 shareholders of record; Class B sits with about 400 holders, among them the Murdoch Family Trust, holder of roughly 40 percent of Class B.

Tata Motors illustrates a split in both dimensions at once. In 2008, to help pay for its USD2.3 billion acquisition of Jaguar Land Rover, the Indian carmaker ran a follow on offering that added a class of differential voting rights (DVR) shares beside its ordinary shares. Each DVR share carried one tenth of the voting power of an ordinary share but paid a dividend 5 percent higher than the ordinary dividend when one was declared. The company raised INR15 billion from DVRs, offered at a 10 percent discount to ordinary shares. Investors who cared little about voting could buy in cheaper with a potential dividend advantage. Over time, though, thin institutional interest and added complexity left the DVRs illiquid, and when Tata Motors stopped paying a regular dividend for several years the DVR holders gained nothing for giving up votes; the DVRs sank to a discount of 40 percent to 50 percent against ordinary shares. Seeking a simpler capital structure, the firm retired the DVRs 15 years after issue, offering holders a 20 percent premium to market by exchanging seven ordinary shares for every 10 DVR shares.

Corporate law differs widely by country, but in most jurisdictions the shareholders of a listed company may vote on major matters at the annual general meeting or a special meeting. Management brings forward standard proposals, such as electing the board, resolutions on executive pay and dividends, and ratifying the independent auditor. Shareholders may also file a shareholder proposal, a request, or a demand, that the company or its board carry out some particular action.

The voting machinery exists to leave enough time to gather and vet proposals, identify the current shareholders, confirm who is eligible, distribute the materials, and collect the votes of those who will not attend in person or who delegate their vote to another party in a vote by proxy, so that everything is ready for counting at the meeting.

From proposal to proxy statement

Preparation begins well before the meeting. In the United States, for example, every shareholder proposal must arrive at least 120 days before the planned release of the meeting materials, and the firm must vet each one, with its acceptance or rejection open to review by regulators. The materials are gathered into what the United States calls a proxy statement: management and shareholder proposals, a detailed agenda, the voting requirements and deadlines, plus background such as board candidate credentials, company performance, and the board’s recommendation for or against each item together with its reasoning.

Custodians, beneficial owners, and the record date

Proxy statements usually reach shareholders indirectly through a custodian in whose name the shares are held for the investor. A custodian, a bank or broker, keeps the ownership records with a securities depository and handles safekeeping, settlement, and reporting for the true, or beneficial, owner of the shares. Only in rare cases is the beneficial owner also the registered holder, named directly in company records.

Eligibility to vote is limited to shareholders of record, those whose identity a securities depository or custodian confirms as of the record date, the cutoff for eligibility. A shareholder of record may not be the current beneficial owner: a broker may act as custodian, with its name on the certificates, even though the client remains the true owner. Because the record date often falls 30 days or more before the meeting, an investor who sells after the record date still votes, whereas one who buys after it but before the meeting does not. Once identified, shareholders must review the material and cast votes through a shareholder voting service before the deadline, which is usually earlier for those voting by proxy than for those attending in person.

A portfolio manager running a large, diversified book across many issuers and markets cannot research every resolution alone, so institutional investors often hire proxy advisors. These firms collect information, benchmark governance practice across issuers, make voting recommendations, and keep records of votes cast. Two firms, Institutional Shareholder Services (ISS) and Glass Lewis, dominate the US market with a combined 97 percent share and cover tens of thousands of meetings each year across more than 100 markets.

Judging shareholder proposals

Proxy advisors try to hold consistent governance standards across companies. Glass Lewis, for example, tends to back proposals that clearly tie their subject to raising firm value or cutting risk where the board has failed to act, and to advise against those that would intrude on management’s day to day running of the business without materially adding value or reducing risk. Management proposals usually cover legally required matters, whereas shareholder proposals can sometimes push boards toward actions that encroach on daily operations. The test an investor should apply is whether a proposal could materially lift corporate value or lower risk.

Many such proposals target a company’s environmental or social policy. In 2023 climate related proposals surged among oil and gas producers and firms tied to the industry. ExxonMobil faced several at its annual meeting, covering adjusted greenhouse gas reporting, a Paris Agreement Scope 3 target, direct methane measurement, and a new board committee on decarbonization risk; the board opposed each and all failed. Separately, the City of New York’s retirement plans filed a proposal at JPMorgan Chase’s 2023 meeting asking the bank to disclose, within a year, a plan to align its lending and underwriting to oil, gas, and power companies with 2030 absolute emissions reduction targets. Management advised against it, and it drew the support of just 12 percent of the shares voted.

Regulation and stewardship

Regulators act to make the process more transparent. The European Union reshaped proxy voting through the Shareholder Rights Directive (SRD), which improved information flows among institutional investors by: giving shareholders prompt electronic confirmation that a vote was received and later of how it was recorded and counted; enabling remote voting with standardized information available electronically; and tightening the duties of care and disclosure placed on intermediaries throughout the voting chain, proxy advisors among them.

For many asset managers and asset owners, timely and active engagement in voting is central to ownership. Some delegate their votes to managers; others vote actively as part of their investment policy. Voting should help the board protect and build the value of investor capital, and it is a concrete way for large investors to show their stewardship and governance principles.

Norges Bank Investment Management (NBIM), which runs Norway’s sovereign wealth fund, the Government Pension Fund Global, holding roughly NOK12,340 billion of assets as of end 2022, frames its voting guidelines for minority holdings around two pillars. The first, effective boards, rests on board independence (across the whole board, key committees such as remuneration, and the separation of chair and chief executive), board composition (sufficient time commitment, relevant industry expertise, and appropriate diversity), and accountability to shareholders (over nomination and election, board conduct, and CEO pay). The second, shareholder protection, covers approval guidelines on voting rights, meetings, and governing documents, notably a refusal to support companies with unequal voting rights across classes; reporting guidelines on auditors and the quality and timeliness of financial and sustainability disclosure; and capital guidelines setting value creation expectations for share issuance, mergers and acquisitions, and related party transactions.