With Single Class of Shares, Twitter’s IPO Breaks Industry Trend

Posted on by Truan Savage

For its Initial Public Offering, Twitter, Inc. hopes to differentiate itself from its competitors.1 It has tried to do this from day one. In its recent S-1 filing, the media and technology company broke a long running industry trend by offering a single class of shares to the public.2

In the past decade, beginning with Google, Inc., Silicon Valley technology companies have reinvigorated the market for dual-class shares.3 Companies that offer two classes of shares do so to separate cash-flow rights from control-rights among shareholders.4 This capital structure is a deviation from the traditional one-share one-vote structure, and has the effect of concentrating the control of a company in the hands of a small group of shareholders.5

It is no coincidence that dual-class share structures have been popular among new technology companies. For one, entrepreneurs use them to raise money for their companies without losing control.6 This, in turn, allows them to focus on long-term growth instead of being required to meet quarterly benchmarks.7 Silicon Valley entrepreneurs justify dual-class offerings by arguing that that the characteristics of the current tech industry are not adaptable to traditional corporate governance structures.8 They also argue that dual-class shares are a fair bargain: shareholders get what they pay for.9 Technology companies argue that a discounted-share is a fair exchange for better long-term value.10

However, while disproportionate shareholder control may be valued in well-performing companies, it can also have negative consequences in other circumstances. For one, when owners are entrenched they aren’t subject to the incentivizing forces of corporate raiders.11 Some also argue that dual-class share structures can encourage unethical behavior.12 Additionally, despite the desire of entrepreneurs to focus on long-term growth, studies have shown that entrenched ownership actually has a negative effect on company value.13

Still, the trend in Silicon Valley has been clear. Since Google offered multiple classes of shares in 2004, Facebook, Zynga LinkedIn, Yelp and Groupon have all followed suit.14 This makes Twitter’s decision to issue a single class of shares all the more surprising.

Some argue that Twitter’s decision is in response to shareholder concerns about entrepreneur entrenchment in Silicon Valley.15. Compared to its peers, Twitter might be more concerned about what shareholders think, and are thus willing to subject themselves to more outside control.16 Twitter’s owners might also be satisfied with the amount of control they will have after the IPO, which hasn’t been officially determined.17 They also may just be caving to large investors from the get-go, since some have expressed their opposition to dual-class share systems, and Twitter may treading lightly in the wake of Facebook’s disappointing IPO.18

The incentive to issue a single class of shares could also have come from the Federal Government. Twitter is the first IPO to have the opportunity to qualify as an emerging growth company under the Jumpstart Our Business Startups (JOBS) Act.19 This qualification will allow Twitter to gain a number of governance benefits which might be sufficient to effectively control the company in the way entrenching ownership otherwise would.20

Regardless of the intention behind Twitter’s decision to issue a single class of shares, it still subjects the company to a number of risks. Twitter could now immediately be subject to buyout offers.21 Twitter is an extremely attractive purchase option to technology companies sitting on large stockpiles of cash, of which there are many.22 If anything, their S-1, both in its details of the company’s potential and governance choice, should make Twitter an even more attractive buyout target. Of course, Twitter would have to present such a decision to their shareholders, which they may be happy to do, but this may not ultimately be in Twitter’s best interest since studies have shown that shareholders of target companies experience a significant increase in share value on average.23

  1. See Olivia Oran & Nicola Leske, Twitter Roadshow: Less Exuberance, More ‘Nuts and Bolts’, Reuters (Oct. 30, 2013), http://www.reuters.com/article/2013/10/30/net-us-twitter-ipo-idUSBRE99N1AE20131030. ↩

  2. See Peter Kafka, One Thing Twitter Won’t Have When It Goes Public: Two Classes of Shares, All Things D (Oct. 3, 2013), http://allthingsd.com/20131003/one-thing-twitter-wont-have-when-it-goes-public-two-classes-of-shares/. ↩

  3. Editorial, Will Twitter Have Second-Class Shareholders?, Bloomberg View (Oct. 20, 2013) [hereinafter Second-Class], http://www.bloomberg.com/news/2013-10-20/will-twitter-have-second-class-shareholders-.html. ↩

  4. Institutional Shareholder Services, Shearman & Sterling, L.L.P., & European Corporate Governance Institute, Report on the Proportionality Principle in the European Union 10 (2007). ↩

  5. See Kafka, supra note 2. ↩

  6. See Cory Hester, IPO Watch: Twitter Breaks From Trend With Exclusion of Dual-Class Structure in its Offering, Thomson Reuters Westlaw Business Law Currents (Oct. 4, 2013),  http://currents.westlawbusiness.com/Article.aspx?id=6d241975-9254-429f-8953-8ebbc92da516&cid=&src=&sp=. ↩

  7. James Surowiecki, Unequal Shares, The New Yorker (May 28, 2012), http://www.newyorker.com/talk/financial/2012/05/28/120528ta_talk_surowiecki. ↩

  8. Steven M. Davidoff, In Silicon Valley, Chieftans Rule With Few Checks and Balances, Dealbook (July 4, 2012), http://dealbook.nytimes.com/2012/07/04/in-silicon-valley-chieftains-rule-with-few-checks-and-balances/. ↩

  9. Peter N. Flocos, Towards a Liability Rule Approach to the “One Share One Vote” Controversy: An Epitaph for the SEC’s Rule 19c-4?, 138 U. Pa. L. Rev. 1761, 1776 (1990); see also Grossman, supra note 18, at 1789. ↩

  10. See Second-Class, supra note 3. ↩

  11. See Id. See also Kafka, supra note 2. ↩

  12. See John Bussey, The Two-Edged Sword of Dual-Class Shares, Wall St. J. (Aug. 19, 2011), http://online.wsj.com/article/SB10001424053111904292504576484971843643158.html. ↩

  13. See Id. ↩

  14. Davidoff, supra note 8. See also Hester, supra note 6. ↩

  15. See Kafka, supra note 2. ↩

  16. See Eric Jackson, Will No Dual Class Structure Create A Bidding War For Twitter?, Forbes (Oct. 4, 2013), http://www.forbes.com/sites/ericjackson/2013/10/04/will-no-dual-class-structure-create-a-bidding-war-for-twitter/. ↩

  17. See Hester, supra note 6. ↩

  18. Gina Chon, No Class: Investors Are Tired of Giving Their Money to Tech Founders Without Strings Attached, Quartz (June 26, 2013), http://qz.com/98074/in-the-next-wave-of-tech-ipos-big-investors-are-shunning-dual-class-stock-structures/. See also Michael J. De La Merced & David Gelles, Twitter Prepares to Feed New Hunger for I.P.O.’s, Dealbook (Oct. 27, 2013), http://dealbook.nytimes.com/2013/10/27/twitter-prepares-to-feed-new-hunger-for-i-p-o-s/. ↩

  19. See Hester, supra note 6. ↩

  20. See Id. ↩

  21. See Jackson, supra note 16. ↩

  22. See Id. ↩

  23. See Daniel R. Fischel, Organized Exchanges and the Regulation of Dual Class Common Stock, 54 U. Chi. L. Rev. 119, 148 (1987). ↩

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