Dual Class Firms

Dual Class Firms

Dual Class Firms

The topic of dual class firms focuses on one of the core themes of corporate law & economics: the separation of ownership and control. Dual class firms have at least two classes of common shares: superior voting shares, owned primarily by firm founders, and low voting shares, held typically by outside public shareholders. Such structures can create a substantial wedge between the voting and economic interests of the controller, making potential private benefits of control more advantageous, generating considerable governance risks, and lowering firm valuation (Masulis, Wang, and Xie, 2009; Gompers, Ishii, and Metrick, 2010; Bebchuk and Kastiel, 2019).

Although dual class firms have been present for over a century, in recent times corporations are increasingly choosing to go public with disproportional voting structures. Starting with Google LLC (now Alphabet Inc.) IPO in 2004, there has been a wave of prominent IPOs that went public with dual class shares: LinkedIn Corp. (2011), Facebook Inc. (2012), Snap Inc. (2017), and Lyft Inc. (2019). According to Ritter (2018), during the three-year period (2016-2018) 35% of Tech IPOs and 15% of Non-tech IPOs in the U.S. used dual class shares. This trend has renewed a heated debate about the costs and benefits of disproportional voting structures.

For a long time, institutional investors, proxy advisors, and the CFA Institute support the “one share-one vote” principle, shaming dual class firms for unfair and poor corporate governance. By contrast, dual class share proponents argue that this structure protects visionary founders from opportunistic takeovers, allows for long-term investment, and incentivizes entrepreneurs, which would otherwise stay private, to take their company public. The latter argument is particularly acute taking into account the declining number of public companies, a tendency that has been discussed in the ECGI Community (see the ECGI Roundtable “Why Are Fewer Companies Going Public?”, in June 2019).

In recent years, institutional investors have toned down rhetoric against dual class shares, instead urging companies that adopt differential voting structures to consider a sunset provision, which is a forced unification of share classes after a certain period of time after the IPO or certain event, unless minority shareholders vote to extend the dual class share structure. Likewise, a number of countries and stock exchanges that in the past forbid dual class shares have made (or are discussing) regulatory reforms allowing firms that have shares with differential voting rights to go public (e.g., Hong Kong, London (premium listing), Singapore). Other countries have recently introduced (Italy and Belgium) or are planning to introduce (Spain) loyalty shares with tenure voting, a type of dual class share structure that provides shareholders with multiple voting rights as a function of the holding period. (See the ECGI Roundtable on Loyalty Shares, in June 2018.)

The debate on dual class stocks relates to many other aspects of corporate law & economics, including the rise of index investing, corporate innovation, the safeguarding of funded retirement schemes, and protectionism against foreign takeovers.

ECGI will continue to track the debate and make new contributions and resources available through these pages.

Queries, suggested inclusions, and project funding proposals should be directed to Prof. Anete Pajuste (anete.pajuste@sseriga.edu)

 

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Resources:

A. Betzer, I. van den Bongard & M. Goergen, ‘Index Membership vs. Loss of Voting Power: The Unification of Dual-Class Shares’ (2017)

A.M. Pacces, ‘Procedural and Substantive Review of Related Party Transactions (RPTs): The Case for Non-Controlling Shareholder Dependent (NCS-Dependent) Directors’ (2018)

A.W. Winden, ‘Sunrise, Sunset: An Empirical and Theoretical Assessment of Dual-Class Stock Structures’ (2017)

B.D. Jordan, M.H. Liu & Q. Wu, ‘Corporate Payout Policy in Dual-Class Firms’, 26 Journal of Corporate Finance 1 (2014).

C.A. Hill & A.M. Pacces, 'The Neglected Role of Justification under Uncertainty in Corporate Governance and Finance'

D. Lund, ‘Nonvoting Shares and Efficient Corporate Governance’ (2017)

D. Lund, ‘The Case Against Passive Shareholder Voting’ (2017)

D.J. Berger, S. Davidoff Solomon & A.J. Benjamin, ‘Tenure Voting and the U.S. Public Company’, 72 The Business Lawyer 295 (2017)

E.B. Rock, ‘MOM Approval in a World of Active Shareholders’ (2018)

H. Kim & R. Michaely, 'Sticking around Too Long? Dynamics of the Benefits of Dual-Class Voting'

I. Dittmann & N. Ulbricht, ‘Timing and Wealth Effects of German Dual Class Stock Unifications’, 14 European Financial Management 163 (2008).

J. Delvoie & C. Clottens, ‘Accountability and Short-Termism: Some Notes on Loyalty Shares’, 9 Law and Financial Markets Review 19 (2015)

J. Fisch & S. Davidoff Solomon, ‘The Problem of Sunsets’, 99 Boston University Law Review 1057 (2019)

K. Geens & C. Clottens, ‘One Share-One Vote: Fairness, Efficiency and (the Case for) EU Harmonisation Revisited’ (2010)

L.A. Bebchuk & K. Kastiel, ‘The Perils of Small-Minority Controllers’, 107 Georgetown Law Journal 1453 (2019),

L.A. Bebchuk & K. Kastiel, ‘The Untenable Case for Perpetual Dual-Class Stock’, 103 Virginia Law Review 585 (2017).

L.L. Dallas & J.M. Barry, ‘Long-Term Shareholders and Time-Phased Voting’, 40 Delaware Journal of Corporate Law 541 (2015)

M. Bigelli, V. Mehrotra & P. Raghavendra Rau, ‘Why are Shareholders not Paid to Give up Their Voting Privileges? Unique Evidence From Italy’, 17 Journal of Corporate Finance 1619 (2011).

M. Burkart & S. Lee, ‘One Share-One Vote: The Theory’, 12 Review of Finance 1 (2008).

M. Cremers, B. Lauterbach & A. Pajuste, ‘The Life-Cycle of Dual Class Firms’ (2017)

M. Ventoruzzo, ‘The Disappearing Taboo of Multiple Voting Shares: Regulatory Responses to the Migration of Chrysler-Fiat’

O. Arugaslan, D.O. Cook & R. Kieschnick, ‘On the Decision to go Public With Dual Class Stock’, 16 Journal of Corporate Finance 170 (2010).

P.A. Gompers, J. Ishii & A. Metrick, ‘Extreme Governance: An Analysis of Dual-Class Firms in the United States’, 23 The Review of Financial Studies 1051 (2010)

R. Adams & D. Ferreira, ‘One Share-One Vote: The Empirical Evidence’, 12 Review of Finance 51 (2008).

R.J. Gilson & A. Schwartz, ‘Constraints on Private Benefits of Control: Ex Ante Control Mechanisms versus Ex Post Transaction Review’, 169 Journal of Institutional and Theoretical Economics 160 (2013),

R.J. Gilson & J.N. Gordon, ‘Controlling Controlling Shareholders’, 152 University of Pennsylvania Law Review 785 (2003),

R.W. Masulis, C. Wang & F. Xie, ‘Agency Problems at Dual-Class Companies’, 64 Journal of Finance 1697 (2009).

S. Hauser & B. Lauterbach, ‘The Value of Voting Rights to Majority Shareholders: Evidence from Dual-Class Stock Unifications’, 17 The Review of Financial Studies 1167 (2004).

S.B. Smart & C.J. Zutter, ‘Dual Class IPOs are Underpriced Less Severely’, 43 The Financial Review 85 (2008),

T.J. Chemmanur & X. Tian, ‘Do Anti-Takeover Provisions Spur Corporate Innovation? A Regression Discontinuity Analysis’ (2017),

V. Dimitrov & P.C. Jain, ‘Recapitalization of One Class of Common Stock into Dual-Class: Growth and Long-Run Stock Returns’, 12 Journal of Corporate Finance 342 (2006)

W.C. Johnson, J.M. Karpoff & S. Yi, ‘The Lifecycle Effects of Firm Takeover Defenses’ (2017)

Z. Goshen & A. Hamdani, ‘Corporate Control and Idiosyncratic Vision’, 125 Yale Law Journal 560 (2016)

Z. Goshen & R. Squire, ‘Principal Costs: A New Theory for Corporate Law and Governance’, 117 Columbia Law Review 767 (2017).

Baran, L., Forst, A.  Via, M.T., 2018. Dual class share structure and innovation (September 4, 2018). Available at SSRN: https://ssrn.com/abstract=3183517

Bennedsen, M., Nielsen, K., 2010. Incentive and entrenchment effects in European ownership. Journal of Banking and Finance 34, 2212-2229.

CFA Institute, 2018. Dual-Class Shares: The Good, the Bad, and the Ugly. Available at: https://www.cfainstitute.org/-/media/documents/survey/apac-dual-class-sh...

Howell, J.W., 2017. The survival of the U.S. dual class share structure. Journal of Corporate Finance 44, 440-450.

Jordan, B., Kim, S., Liu, M., 2016. Growth opportunities, short term market pressure, and dual-class share structure. Journal of Corporate Finance 41, 304-328.

Lauterbach, B., Pajuste, A., 2015. The long-term valuation effects of voluntary dual class share unifications. Journal of Corporate Finance 31, 171-185.

Maury, B., Pajuste, A., 2011. Private benefits of control and dual-class share unifications. Managerial and Decision Economics 32, 355-369.

Ritter, J., 2018. A list of IPOs from 1980-2017 with multiple share classes outstanding. Available on https://site.warrington.ufl.edu/ritter/ipo-data/

Smart, S., Thirumalai, R., Zutter, C., 2008. What's in a vote? The short- and long-run impact of dual-class equity on IPO firm values. Journal of Accounting and Economics 45, 94-115.

Smart, S., Zutter, C., 2003. Control as a motivation for underpricing: A comparison of dual and single-class IPOs. Journal of Financial Economics 69, 85-110.

 

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Contact:

Prof. Anete Pajuste

anete.pajuste@sseriga.edu

 

Titiaan Keijzer (Co-ordinator)

keijzer@law.eur.nl

The Roundtable focused on loyalty shares as a legal solution for encouraging long-term ownership, a concept that is gaining traction in Europe with the support of the European Commission, and has also attracted interest in the United States. 

September 24 2018

The Roundtable focused on loyalty shares as a legal solution for encouraging long-term ownership, a concept that is promoted by policy makers, including the European Commission, some institutional investors and issuers. This event was by invitation only. Institutional and Patron members were invited.

Elaine McPartlan
April 12 2018

The Roundtable focused on the reasons and implications of fewer companies going public. The steep decline in initial public offerings in the U.S. has raised concerns about reduced opportunities for...

February 19 2019