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Key Finding

Loyalty voting structures often exclude institutional shareholders, enhancing control like dual-class structures


Loyalty voting structures (LVS) are designed to provide registered shareholders with multiple voting rights following a specified holding period. In theory, this concept strikes a balance between dual-class structures (DCS), which enshrine founder control, and open structures that allow for control challenges. LVS entail a single class of shares, enabling all shareholders to possess multiple votes without incurring additional costs, while also limiting the privilege through a transfer sunset provision. Notably, LVS also preserve a key control advantage of DCS for founders, as they minimize the likelihood of control challenges through contested board elections. However, in practice LVS distinguish between bearer shares that are fully fungible and registered shares that allow the company to verify the holding period. Institutional shareholders often find it impossible to register their shares, thereby being deprived of multiple voting rights. Consequently, LVS effectively function as a mechanism to enhance control akin to dual-class structures. Transforming loyalty voting structures into a better dual class for institutional shareholders would require some legal and significant procedural modifications.

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