Time-Based Sunsets and the Problem of Early Unifications of Dual-Class-Share Structures
I am responding to the Council of Institutional Investors’ (“CII”) request that the NASDAQ Stock Market (“NASDAQ”) amend its listing standards to require companies seeking to go public with dual-class shares (classes of common stock with unequal voting rights) to include in their certificates of incorporation a time-based sunset provision (a forced unification of shares into one share structure with equal voting rights after a certain period of time) that must go into effect no more than seven years after the initial public offering (IPO), unless the minority shareholders vote to extend up to an additional seven years.
This letter argues that such a mandatory provision would be extremely unwise and harmful to our most important public companies and their shareholders, current as well as future. As a creation of private ordering, the absence of time-based sunset provisions in dual-class-share structures serves a significant value-enhancing purpose. It prevents the risk that a premature and therefore suboptimal unification of shares may occur. This risk has so far been ignored by those advocating for the implementation of a mandatory time-based sunset provision.