- A Snapshot of Dual-Class Share Structures in the Twenty-First Century: A Solution to Reconcile Shareholder Protections with Founder Autonomy
- A Wolters Kluwer Publication
- Columbia Law School's Blog on Corporations and the Capital Markets
- Snapchat IPO LIVE at the NYSE - ABC News
- Dual-Class Stock Structures and Society
- I. Background
- California Corporate & Securities Law
- A. What Are Dual-Class Voting Structures and Why Do They Matter?
- B. The History of Dual-Class Structures in the United States
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- C. The Current Role of Dual-Class Structures in the U.S. Marketplace
- Snap inc ipo of non-voting stock professor bainbridge
- D. Stock Indices’ Extreme Backlash and the SEC’s Disapproval
- II. Dual-Class Policy Arguments
- A. The Problems with Dual-Class
A Snapshot of Dual-Class Share Structures in the Twenty-First Century: A Solution to Reconcile Shareholder Protections with Founder Autonomy
Dual-class share structures have long been the subject of a hotly contested debate both within the United States and around the world. On one hand, entrepreneurial founders of new-age technology companies want to utilize the dual-class structure to the extent of its limits.
These individuals argue that dual-class corporate structures are necessary to protect their budding companies from intense, short-sighted market pressures that public shareholders impose.
On the other hand, public shareholders are often silenced by the dual-class structure, left with no ability to vote or let their voice be heard.
Notwithstanding the ongoing debate over the appropriateness of dual-class corporate structures, recent global developments have pushed the debates to new extremes.
The intense arguments on both sides have recently been codified in extreme positions on both sides of the debate. Recent initial public offerings, like the one for SNAP Inc., which is the parent company to popular social media app Snapchat, adopted multiple-class share structures that offer public investors non-voting shares. In response, investors in the United States have lobbied various stock indices to persuade them to ban dual-class corporate structures on their indices.
However, various jurisdictions are considering removing limitations on the dual-class structure to remain competitive in the global market.
This Comment offers a framework that the United States should adopt to remain competitive in the global market, as more jurisdictions move toward allowing dual-class structures. The proposed framework balances minimal safeguards that protect shareholders from the most egregious failings of the dual-class structure while safeguarding founders’ visions for the future of their companies.
Around the world, headlines covered the initial public offering (IPO) of Manchester United, one of the world’s most iconic soccer teams. While Manchester United fans were excited by the novelty of the club entering the public market, the club’s IPO was notable for reasons other than pure sentimental value.
The club considered several different jurisdictions and exchanges to conduct its IPO, and it appeared poised to list on a stock market in Asia. Ultimately, the club listed its public shares on the New York Stock Exchange (NYSE). Though the NYSE listing may seem odd at first, given that an English soccer team, with a strong fan base in Europe and Asia, chose to conduct its IPO in a country not particularly known for its love of soccer, Manchester United was taking advantage of a more permissive business framework available in the United States.
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Currently, the United States allows financing and corporate governance models that other jurisdictions—such as those in Europe and Asia—have since banned. For Manchester United, the opportunity to use a dual-class share structure helped drive the club’s decision to list on the NYSE.
Dual-class structures have been a driving factor behind the entrance of several major international companies into U.S.
markets. For example, Alibaba, the multi-billion-dollar online commerce company, listed on the NYSE in September 2014. Similar to Manchester United, Alibaba considered several jurisdictions before ultimately choosing the NYSE. Without context, it is curious to see a company which handles more than 80% of e-retail transactions in China choose a U.S. exchange to conduct its IPO.
The Chinese e-commerce giant initially attempted to list on the Hong Kong Stock Exchange (HKEx). Alibaba’s dual-class corporate structure violated HKEx regulations. The HKEx for decades had banned these dual-class share structures. Dual-class structures have similarly been outlawed in many jurisdictions that host some of the world’s largest and well-developed stock exchanges.
Critics of dual-class structures saw their concerns take shape in American markets as recently as February 2017.
In its IPO, SNAP Inc., the parent company of the popular social media app Snapchat, stunned observers of the global economy by offering the public a new class of stock—one with no voting rights. Although arguably successful, raising $3.4 billion and selling over 200 million of the non-voting class shares, some capital markets investors were outraged. In response, several U.S.
index providers declared they would no longer allow companies with dual-class structures to be included in their indices. The Standard & Poor’s 500 Index (S&P 500) announcement came in July 2017, stating that “[c]ompanies with multiple share class structures tend to have corporate governance structures that treat different shareholder classes unequally with respect to voting rights and other governance issues.” This announcement came a week after another index provider, FTSE Russell, announced that it would require companies to offer at least 5% voting rights to investors. Arguably, SNAP’s IPO passed the limit on what U.S.
Columbia Law School's Blog on Corporations and the Capital Markets
indices were comfortable with offering to potential investors, functionally ending dual-class structure listings like SNAP.
Despite the fallout from SNAP’s IPO, all hope is not lost for companies that remain interested in dual-class structure IPOs. While various stock indices have announced partial or complete prohibitions on further listings of dual-class companies, some jurisdictions have moved in the opposite direction.
Specifically, several other countries with existing complete or partial bans on dual-class structures have taken advantage of new opportunities in the market, and are now focused on making their regulations favorable to dual-class structured companies. For example, Hong Kong’s stock exchange has proposed listing a third decisional board, designed to attract technology firms. Similarly, Singapore’s stock exchange recently allowed dual-class structure companies with primary listings on a developed market exchange to list secondarily in Singapore. As the global market begins to shift in response changing dual-class regulations, it is imperative to reexamine both the dual-class structure and relevant U.S.
This Comment seeks to provide a broad overview of the global market that currently hosts extremes on both sides of the dual-class argument. While there is a trend among stock indices to prohibit dual-class companies, many companies considering going public with a dual-class corporate structure are simply looking to list in whichever jurisdiction offers the most favorable corporate governance regulations.
Snapchat IPO LIVE at the NYSE - ABC News
Keeping the global markets in mind, this Comment proposes the proper approach the United States should take to find a balance between permissibility and prohibition. Ultimately, this Comment argues dual-class structures should continue to be permissible in the United States, though the government or exchanges should impose basic safeguards upon the structure.
Dual-Class Stock Structures and Society
These safeguards are designed to ensure that the integrity of the dual-class structure is maintained while providing some degree of protection to shareholders.
This Comment is organized into four main Parts.
Part I explains the significance of dual-class corporate structures and demonstrates its role in the marketplace, giving a general background on how U.S.
courts and lawmakers have treated dual-class structures in the past.
Part II outlines the policy debate surrounding dual-class structures, considering both the benefits of and the problems with dual-class structure governance. Part II also describes the inherent tension between shareholders and management, providing a useful background to gauge why particular entrepreneurs may like dual-class corporate structures over other corporate organization forms.
Part III discusses current regulations regarding dual-class stock on various stock exchanges around the world.
These stock exchanges all operate under the laws of the jurisdiction in which they primarily operate. Although most jurisdictions contain generally permissible laws regarding dual-class corporations, how the exchanges themselves choose to interpret those laws, as well as how exchanges promulgate their own rules, can have implications for how dual-class corporate structures are treated.
As the global economy shifts, some of these countries have altered their stance on dual-class structures, giving context to the present legal landscape over those structures in major economies across the world.
Finally, Part IV argues that the United States must reconsider its current stance on dual-class structures to remain competitive in the global marketplace.
Given changing market realities, the United States can ensure it remains dominant and attractive for corporate IPOs while placing basic safeguards on the structure to protect against the complete elimination of shareholders’ voting rights.
This Part provides a basic overview of dual-class corporate structures, and shows the utility of dual-class structures in the marketplace.
Section A offers a general background of the structure, and explains basic terminology useful in the corporate governance sphere. Next, section B explains the history of dual-class structures in the United States, and highlights how U.S.
regulatory bodies have limited dual-class structures in the past. Section C demonstrates the current role of dual-class structures in the U.S. marketplace, explaining which industries tend to favor dual-class structures.
California Corporate & Securities Law
Finally, section D focuses on modern stock index backlash against the structure in the United States.
A. What Are Dual-Class Voting Structures and Why Do They Matter?
Simply put, “dual-class” describes a capital structure that contains two or more classes of shares.
In a two-class model, typically one class of shares will hold significantly more voting power than the other. This structure is distinct from the single class structure, where all stock carries equal equity and voting power. In a single class structure, for example, shareholder A’s ten shares will have the same voting rights as shareholder B’s ten shares. Public shareholders typically receive shares with one vote per share. A dual-class corporate structure on the other hand, has different voting rights associated with different classes of shares.
While shareholders have several rights, the right to vote is significant because it gives shareholders some degree of control over the corporation they own. Chief among the right to vote is the right to elect directors. Although states may differ on what other matters shareholders have the right to vote on, common examples include the right to vote on mergers, charter amendments, and unilateral bylaw amendments. In the single-class structure example, where shareholder A holds ten shares and shareholder B holds ten shares, both A and B will have their voice heard equally when called upon to vote on a corporate matter.
On the other hand, in a dual-class system, if shareholder A holds ten shares of a preferred stock class carrying twice the weight of common stock, then shareholder A’s ten shares will outweigh shareholder B’s ten shares of common stock by a factor of two.
The dual-class structure is popular with companies in various sectors because the ability to limit classes of shareholder votes is a useful defensive measure that protects against takeovers. This model can be especially useful to founders of emerging companies, because it keeps them in control of how they run their business.
On the other hand, dual-class corporate structures present problems for public investors who may find themselves largely without a voice or vote. Issuing a secondary (common) class of stock dilutes the interest of the primary (preferred) class of stock. Members of the preferred class typically ensure their voting power outweighs that of the common class, thus keeping the holders of preferred class stock in control and largely unchecked by public shareholders, who often make up the bulk of common shareholders.
Dual-class structures have recently been used by founders of emerging technology companies, though have historically been used in other industries as well, including the newspaper and media sectors. Examples of dual-class companies include Google’s parent company Alphabet, the Ford Motor Company, and Facebook. The structure seems to have resonated especially with technology firms, possibly because tech entrepreneurs have special skills that others cannot replicate. For example, Google’s founders have argued they want to “focus on the long term,” which they believe cannot be achieved “with the short-term sway of shareholders who are more worried about quarterly profits.” By granting shareholders only minimal voting power, founders can gain access to public markets and better focus on their corporate vision.
While the tension between shareholders and corporate management is felt by companies who offer public shareholders minimal voting rights, SNAP has taken the dual-class model a step further.
SNAP has three classes of stock, each with differing voting rights. SNAP’s primary class of stock is called Class C, and each share of Class C stock holds ten votes. The second class of stock is Class B, which holds the traditional one vote per share. SNAP’s third class of stock is called Class A, and notably does not hold any votes per share. SNAP’s structure, like many other dual-class structures, keeps its founders securely in their position, as holders of Classes A and B will likely never muster enough votes to outweigh how Class C holders vote: the two holders of SNAP’s Class C stock hold 88.5% of the company’s total voting power.
To emphasize the importance of dual-class structures, consider this statement from SNAP’s Registration Statement after its public filing:
The tension highlighted by SNAP in its Registration Statement shows that the interests of shareholders and founders are often incongruous, and may demand a middle-ground solution.
The History of Dual-Class Structures in the United States
Although dual-class structures have made recent financial headlines, the structure has been around for quite some time. In U.S. business history, variations on the dual-class structure were actually the norm. Limitations on shareholder voting in the United States were initially seen in individual corporate charters granted by state legislatures, prior to the adoption of general incorporation statutes. These corporate charters had share structures that ranged from providing one vote per shareholder, to one vote per share, with various voting structures in between. Since these early corporate charters, the permissibility of these varying types of shareholder voting structures has fluctuated.
Because reform efforts were almost invariably led by corporations—apparently under pressure from large shareholders—it may be assumed that one factor pushing toward reform was a desire to encourage large-scale capital investment. Professor Bainbridge, an authority in corporate governance scholarship, argues that while corporations appeared to adhere to shareholder demands, many shareholders and corporations undermined restrictive one-vote-per-share structures. Shareholders could simply transfer their shares to strawmen, who would vote how the “true” owner directed.
While early statutory standards defaulted to one-share-per-vote, contemporary corporate law gives corporations the ability to adopt alternative share arrangements. Additionally, few limiting regulations have come from states over the years, as state law has long permitted general flexibility in corporate voting structures. State-level courts have also been friendly to dual-class structures, routinely upholding them against challenges.
In addition to individual shareholders, most of the challenges against disparate voting rights tend to come from self-regulatory organizations (SROs) like the NYSE. SROs have an ever-changing relationship with dual-class structured companies, evidenced primarily by the NYSE’s initial ban on the structure in 1926. In the 1920s, a group of companies went public or reorganized with non-voting shares, much to the dismay of the public, Congress, and President Calvin Coolidge. Fearing federal intervention, the NYSE adopted a one-vote, one-share policy. This policy stood relatively unchanged for three generations, and acted as a standard for public companies in the United States, whether they were listed on an exchange or not.
By the 1980s, however, the NYSE began facing competition from other U.S.
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stock exchanges, like the National Association of Securities Dealer Automated Quotation System (NASDAQ), that offered to list dual-class companies. Concerned about losing listings to other exchanges, the NYSE proposed amendments that permitted dual-class stock offerings and recapitalizations. Given the emerging dichotomy between various stock exchanges and general confusion in the permissibility of the structure, some form of regulation became a necessity.
Arguably, in the 1980s at least four different regulators had the authority to regulate disparate voting rights plans: SROs, state legislatures, state securities commissions (or “blue sky” commissions), and Congress. SROs, like the NYSE, were unlikely to combine efforts to adopt a uniform policy due to their own internal competition. State legislatures took a hands-off approach to the regulation of corporate capital structures, and seemed unlikely to change their policies during the late 1980s. While some state securities regulators used blue sky rules to impose some minor restrictions on dual-class structures, any further regulation by these commissions would likely be ineffective. This stems largely from the patchwork regulatory system that, if left to the states, would result in the emergence of fifty different regulatory schemes. Finally, Congress also held the power to limit dual-class structures under the Constitution’s Commerce Clause. Congress, like the other regulatory bodies, seemed unlikely to act, given that during the 1980s it had twice failed to implement proposed federal one-vote-per-share standards. While these four main bodies did not create any form of comprehensive corporate governance regulation, the Securities and Exchange Commission (SEC) promulgated its own rule.
After a significant push from investors the SEC adopted Rule 19c-4 in 1988. That Rule was designed to limit existing companies with one-vote, one-share structures from reorganizing as dual-class structures, in other words, companies were prohibited from giving greater voting rights to a particular group of shareholders after they had already been offering shares on the public market. In effect, the rule prohibited an issuer from being listed on a national securities exchange or traded through the NASDAQ if the company had taken any corporate action that had the effect of “nullifying, restricting or disparately reducing the per share voting rights of existing [common stockholders].” Even when approved by a shareholder vote, companies were restricted from changing their corporate structure if it would have any negative impact at all on the existing voting rights of stockholders.
The ruling was challenged by the Business Roundtable, a group of chief executive officers of major U.S.
companies. The D.C. Circuit held that the SEC had exceeded its authority in promulgating Rule 19c-4. This decision has been interpreted to severely restrict the SEC’s power to regulate shareholder voting rights. As a result, any impetus for regulation must come from Congress, the shareholders themselves, or from state-level regulators.
regulators and stock exchanges permit companies to offer a dual-class structure in their IPO, the arguments for and against dual-class structure have intensified as high-profile corporations continue to choose it over other corporate structures. In the aftermath of several private stock indices indicating that they will not allow companies with non-voting stock to be eligible in their private indices, the battle surrounding dual-class structures has been rekindled.
The Current Role of Dual-Class Structures in the U.S. Marketplace
Dual-class companies make up a significant number of the companies listed on exchanges in the United States, resulting in an aggregate market capitalization exceeding $3 trillion. Lucian Bebchuk and Kobi Kastiel, of Harvard’s Program on Corporate Governance, compiled data regarding dual-class companies in the major indices in the following table:
Number of Companies
% of Index
Total Market Capitalization (Trillions)
While dual-class voting is not a new corporate structure, since Google went public in 2004 there has been an upward trend in corporations opting for dual-class stock structures. In particular, there was a significant uptick in dual-class structures between 2012 and 2016, as roughly 19% of U.S.
technology companies went public with a dual-class voting structure, doubling the number of dual-class corporations from the previous five-year period. Likewise, following Alibaba’s 2014 cross-border listing, there has been an influx of Chinese companies listing in the United States with a dual-class structure.
Technology companies have been implementing the structure as a powerful anti-takeover device.
Snap inc ipo of non-voting stock professor bainbridge
LinkedIn, the popular professional social network, adopted the dual-class share structure prior to its IPO. Public shareholders were limited to less than 1% of the voting power. Square, the payment-processing company, also adopted a dual-class structure prior to its IPO. The dual-class structure may help insulate companies from the risks of emerging technologies, allowing them to experiment without the sways of short-term market pressure.
These companies, like SNAP, have taken a particular interest in the structure, and are largely responsible for reigniting the debate over its merits.
Stock Indices’ Extreme Backlash and the SEC’s Disapproval
While many institutional investor and shareholder advisory groups have long expressed opposition to dual-class structures, their arguments finally struck a chord with stock indices in July 2017.
Arguably in the direct aftermath of SNAP’s non-voting structure IPO, the stock indices felt that dual-class structure benefits had been stretched too far at the expense of investors. Mark Makepeace of the FTSE Russell noted in early July 2017, “[i]t’s quite clear that institutional investors want to put some criteria in place which means that you will not include in their benchmarks companies that have very, very low voting rights.
We’re consulting to see just where that line should be.” A few days after Makepeace’s statement, the FTSE Russell made its decision.
The FTSE Russell announced that it would require companies to offer at least 5% voting rights to investors, implying the index deeply disagreed with SNAP’s unprecedented non-voting shares. In late July 2017, the S&P 500 announced its ban on dual-class structures, stating that “companies with multiple share class structures tend to have corporate governance structures that treat different shareholder classes unequally with respect to voting rights and other governance issues.”
Decades after Rule 19c-4 was struck down, the SEC again made some disapproving remarks of dual-class structures. In a February 2018 speech at the University of California, Berkeley, SEC Commissioner Robert Jackson Jr.
made comments reflecting his belief that dual-class structures should be permitted to exist, though limited by some form of sunset provision. Commissioner Jackson argued that an outright ban on the structure hurt investors, and therefore could not be the right solution. Instead, Commissioner Jackson’s comments suggested a better solution would take the interests of both investors and shareholders into account.
The Commissioner’s speech at Berkeley summarized the current state of dual-class structures in America: although market participants are generally encouraged to lobby and promote their beliefs in and preferences for corporate governance structures, the recent opposition to dual-class among several indices has created a dichotomy of extremes within the United States. On one hand, it appears SROs entirely support, or at the very least passively accept, the existence of dual-class structures, accepting even the most egregious models of the structure, like SNAP’s. On the other hand, several indices have moved on the encouragement of investors to effectively ban the dual-class structure, or at least limit it as much as they can in their capacity as indices.
To avoid these extremes, the United States must implement a new policy, which both protects the integrity of the dual-class structure and also avoids completely squashing the rights of investors.
Commissioner Jackson’s recommendation of limiting the use of dual-class structures through sunset provisions appears to take a desirable moderate approach, which could prove beneficial to both shareholders and investors.
II. Dual-Class Policy Arguments
As dual-class structures have shifted in and out of regulation over the years, an ongoing debate has spawned. Many investors consider the potential pitfalls of the structure and argue the dual-class structure results in entrenchment and poor long-term economic returns. However, supporters of dual-class argue the structure’s centralized control allows those who have specialized skills to lead companies without interference by the market’s fluctuations. Section A will outline investors’ arguments about some of the drawbacks of the dual-class structure.
Section B will detail the benefits of dual-class structures.
A. The Problems with Dual-Class
In recent years, the anti-dual-class faction has gained an impressive roster of dissenters in the United States. Institutional investors, like the Council of Institutional Investors and various leading mutual funds, have expressed some of the strongest opposition to dual-class structures. Arguments against dual-class focus on two fundamental problems: entrenchment and poor long-term economic returns.
While proponents of dual-class argue that entrenchment is a positive force, those in opposition suggest the structure insulates poorly performing controllers from shareholder removal. To illustrate this point, Professors Bebchuk and Kastiel analyze Viacom’s controlling shareholder, Sumner Redstone, who has maintained full control of the prominent media company thanks to a dual-class capital structure. Redstone purchased Viacom in a hostile takeover and helped transform it into a $40 billion multi-media powerhouse that now encompasses the Paramount Pictures movie studio and the CBS, MTV, and Showtime television networks. By 2016, however, questions about Redstone’s mental capacity arose. The then-ninety-three-year-old Redstone allegedly suffered from “‘profound physical and mental illness’; ‘ha[d] not been seen publicly for nearly a year’[;] [could] no longer stand, walk, read, write or speak coherently[;] . . . [could not] swallow[;] and require[d] a feeding tube to eat and drink.’” Although public investors held approximately 90% of the company’s equity capital, Redstone controlled 80% of the voting shares, leaving shareholders effectively blocked from removing Redstone.
Although Redstone did eventually step down after a year-long debate over his mental competence, this example illustrates the dangers of consolidating corporate voting power in the hands of one, or a few.
Sumner Redstone is a relatively extreme example of the possible issues of dual-class structures. Critics of dual-class structures believe that corporate founders entrenching themselves in their companies for the “benefit of the shareholder” is a toxic notion, fed to public investors so the founder can escape shareholder accountability. They point to other examples of controllers behaving badly, like Lord Conrad Black of Hollinger International. Hollinger International, a Canadian public holding company, owned various community newspapers across the United States and Canada.