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 (see, for example, the Investor Coalition for Equal Votes initiative). 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.