The shareholder empowerment movement has renewed its effort to eliminate, restrict or, at the very least, discourage use of dual-class share structures—that is, classes of common stock with unequal voting rights—in initial public offerings. Of particular interest to the movement, which is made up primarily of public pension funds and union-related funds that hold more than $3 billion in assets, was the recent Snap Inc. IPO that sold nonvoting stock to the public, a first for IPOs with dual-class shares.
Typically, a company will issue a class of common stock “ordinary shares” to the public that carry one vote per share, as Facebook Inc. did in its IPO, while reserving a separate “super-voting” class that provides founders like Marc Zuckerberg with at least 10 votes per share. This structure allows the founders to maintain control of the company without having to own the majority of outstanding common stock.
Even though it offered no voting rights in the shares sold to the public, the Snap IPO was a huge success. Snap priced its IPO at $17 per share, giving it a market valuation of roughly $24 billion. The book was more than 10 times oversubscribed and Snap could have priced the IPO at a price of up to $19 per share.
The Council of Institutional Investors, the trade organization that represents the shareholder empowerment movement, has asked the S&P Dow Jones Indices, MSCI Inc. and FTSE Russell to exclude Snap Inc. and other companies with nonvoting stock from their indices unless they include extremely restrictive provisions, such as maximum sunset provisions—triggers that would terminate the super-voting characteristics of the founders’ shares—of three to five years. Moreover, consistent with the CII’s general policy, the letters the council sent also advocate for a forced conversion of all dual-class share structures to one-share, one-vote, unless the majority of ordinary shares vote to extend the dual-class structures for a maximum of five years.
The movement’s advocacy is not confined to those IPOs with dual-class shares listed on the U.S. stock exchanges. It also is attempting to persuade the Singapore stock exchange not to allow dual-class share structures of any kind.
If the movement is successful, this shift would not be trivial, as many of our most valuable and dynamic companies have gone public by offering shares with unequal voting rights. Besides Snap and Facebook, other companies that have gone public with dual-class shares include Alphabet Inc. (Google); LinkedIn (acquired by Microsoft for $26 billion in 2016); Comcast; Zoetis Inc.; Nike, Inc.; and Alibaba Group Holding Ltd. Two of these companies, Alphabet and Facebook, rank in the top 10 in the world based on market valuation. Berkshire Hathaway Inc., a company that also uses a dual-class share structure, also ranks in the top 10, although it only started using the structure after Warren Buffet bought control of the company.
Public companies with dual-class share structures have an aggregate market value of close to $4 trillion. As reflected in their market valuations, they are some of our most important companies, helping to fuel the growth of the economy.
The movement’s vigorous response to Snap’s hugely successful IPO was unsurprising. The CII, since its founding in 1985, has promoted a “one-share, one-vote” policy as one of its bedrock principles. But this policy of “shareholder democracy” should not be confused with political democracy, where each person gets one vote. In shareholder democracy, voting power is assigned according to property ownership – i.e., how many shares the person or entity owns. Dual-class share structures clearly violate the CII’s policy of shareholder democracy and are an obvious threat to the movement’s power. That is, the more public companies that utilize a dual-class share structure, the more controlled companies exist and the less power the movement has.
Most importantly, the movement’s advocacy comes into strong conflict with what many believe to be the great strength of our system of corporate governance: the private ordering of corporate governance arrangements, with dual-class share structures being an optimal result of that ordering. Consistent with this understanding, NASDAQ Inc. recently declared:
One of America’s greatest strengths is that we are a magnet for entrepreneurship and innovation. Central to cultivating this strength is establishing multiple paths entrepreneurs can take to public markets. Each publicly-traded company should have flexibility to determine a class structure that is most appropriate and beneficial for them, so long as this structure is transparent and disclosed up front so that investors have complete visibility into the company. Dual class structures allow investors to invest side-by-side with innovators and high growth companies, enjoying the financial benefits of these companies’ success.
At its core, the shareholder empowerment movement advocates shifting corporate decision-making authority to shareholders, and thus away from boards of directors and executive management, the most informed loci of corporate authority. Shareholder empowerment, not maximizing shareholder wealth, is the movement’s objective. This movement must be stopped from opportunistically interfering with the use of dual-class share structures in IPOs.
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