Help or a Hindrance: Long-running Debate over Dual-class Stock Continues

Posted on by Alex Belica

It’s a question almost as old as the stock market: should public corporations be able to use a dual-class share structure that preserves a key shareholder’s influence. A number of well-known companies including Ford Motor Company, Facebook and News Corp. maintain dual-class structures that grant outsized voting power to one person or a small number of individuals that own A-class shares.1 Such dual-class structures—previously popular among 1920s industrialists—made a big comeback among tech IPOs in the 2010s with companies including Facebook, GoPro, Groupon, LinkedIn, Square, TripAdvisor, Yelp, Zillow and Zynga all issuing multiple classes of shares with disparate voting rights.2 Approximately 16% of IPOs on U.S. exchanges since 2013 had two or more classes of stock.3

The trend came to a halt in 2017 when Snap Inc. went public with a class of shares that had no voting rights at all, prompting a backlash among the investment community.4 The outcry prompted S&P Dow Jones Indices to ban new dual-class offerings from their flagship indexes and other US exchanges also chose to implement restrictions.5

Academics and investors have long debated the effects of such alternative structures providing for disparate levels of voting rights. Opponents argue that dual-class structures lower valuations as the market penalizes such companies because the structure leads to weaker oversight and allows managers to pursue their own interests ahead of the common shareholder.6 Common shareholders often lack the voting power to remove board members or management that does not have an effective vision for the future of the company.7 Indeed, there is strong historical evidence that such structures can lead to lower stock prices. A report from Institutional Shareholder Services Inc. commissioned by the Investor Responsibility Research Center Institute in 2012 found that “the average 10 year total shareholder return for control companies with multiclass structures was 7.52 percent, compared to 9.76 percent for non-controlled companies and 14.26 percent for control companies with a single share class.”8

Proponents of dual-class structures argue that they allow managers with innovative ideas to focus on long term goals, ultimately delivering higher returns, as opposed to pursuing short term profitability.9 These arguments bear specific importance in the tech industries where an innovative founder’s unique ability to predict and monetize the next big thing surely represents part of the companies’ value proposition. Proponents admit that stock prices might be lower for common shares of dual-class companies but argue such discounts are offset by higher dividends.10 They argue that a major advantage of the dual-class structure is that it allows competent management or innovative founders to raise new equity capital without ceding control.11

There is anecdotal evidence that dual-class structures have helped companies make long-term oriented decisions. Take for instance Ford Motor Company, whose controlling family has weathered the boom and bust cycles of the notoriously tumultuous American automotive industry. Today, every one of its US competitors has either been absorbed or bankrupted with the survivors requiring a government bailout to recover. The book American Icon by Bryce G. Hoffman recounts how the Ford family, which has continually maintained control of the company since its founding through a dual-class structure, was able to act decisively to keep the company out of bankruptcy.12 In 2006, the family made the risky decision to use the entire company as collateral, including rights to the famous Ford logo, to secure capital that allowed them to weather the financial crisis as their American competitors went bankrupt.13 Similarly, some argue that the dual-class structure of New York Times Company is a key feature that has allowed the paper to survive the decline of print journalism and stake out strong legal positions in favor of First Amendment freedoms.14

After the S&P Dow Jones Indices move to ban dual class structures for new listings, some experts have argued for alternatives that preserve more flexibility for new companies.15 In a February 2018 speech, the newly confirmed Democratic Securities and Exchange Commission member Robert Jackson Jr. argued that the total ban by such major exchanges has gone too far. Instead, he argues exchanges should force companies to retire their dual class stock over time.16 Jackson reasons that allowing innovative founders to wield control over their company for a set period of time makes more sense than perpetual structures where investors must also trust the founders’ heirs.17 He cited SEC data that showed companies with dual-class stock that contain sunset provisions outperform their perpetual counterparts.18

Jackson also argued that a complete ban on new dual-class listings in major exchanges could have the effect of shutting everyday investors out of a chance to buy into innovative companies like Facebook.19 Instead of complying with the new ban, some of these companies innovative companies would simply look to list elsewhere leaving everyday investors who rely heavily on index funds without a piece of the action.20

Although the debate over the value of dual-class listings is unlikely to be resolved soon, there is a strong argument that the S&P Dow Jones Indices total ban is not the optimal solution.

  1. Dave Michaels, Facebook, Snap and Other Firms Targeted by SEC Regulator’s Attack on Dual-Class Shares, Wall St. J. (Feb. 15, 2018), https://www.wsj.com/articles/facebook-to-viacom-targeted-by-sec-regulators-attack-on-dual-class-shares-1518730229. ↩

  2. Andrew Winden, Sunrise, Sunset: An Empirical and Theoretical Assessment of Dual-Class Stock Structures, Harvard Law Sch. Forum on Corp. Governance and Fin. Reg.  (Aug. 5, 2017), https://corpgov.law.harvard.edu/2017/08/05/sunrise-sunset-an-empirical-and-theoretical-assessment-of-dual-class-stock-structures/ (The NYSE, the biggest US exchange, prohibited dual class stock until 1980s when lobbying by companies prompted a rule change). ↩

  3. Michaels, supra note 1. ↩

  4. Id. ↩

  5. See Chris Dieterich et. al., Stock Indexes Push Back Against Dual-Class Listings, Wall St. J. (Aug. 5, 2017), https://www.wsj.com/articles/stock-indexes-push-back-against-dual-class-listings-1501612170. ↩

  6. See Winden, supra note 2. ↩

  7. See id. ↩

  8. Institutional Shareholder Services Inc., Controlled Companies in the Standard & Poor’s 1500: A Ten Year Performance and Risk Review 3 (Oct. 2012), https://irrcinstitute.org/wp-content/uploads/2015/09/FINAL-Controlled-Company-ISS-Report1.pdf. ↩

  9. Id. ↩

  10. Stephen Bainbridge, What to do about dual class stock (if anything)? ProfessorBrainbridge.com (Nov. 5, 2015), http://www.professorbainbridge.com/professorbainbridgecom/2015/11/what-to-do-about-dual-class-stock-if-anything.html. ↩

  11. Id. ↩

  12. See Bryce G. Hoffman, American Icon: Alan Mulally and the Fight to Save Ford Motor Company 150-151 (2012). ↩

  13. See id. ↩

  14. See Joe Nocera, How Punch Protected The Times, N.Y. Times (Oct. 1, 2012), http://www.nytimes.com/2012/10/02/opinion/nocera-how-punch-protected-the-times.html. ↩

  15. Michaels, supra note 1. ↩

  16. Robert Jackson Jr, Comm’r SEC, Perpetual Dual-Class Stock: The Case against Corporate Royalty at University of California Berkley Law School (Feb. 15, 2018). ↩

  17. Id. ↩

  18. Id. ↩

  19. Id. ↩

  20. Id. ↩

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