Rethinking Dual-Class Voting Structures
By: Justin Brogan, RBFL Student Editor
Delaware law permits corporations to assign classes of stock differential voting rights.[1] For example, Class A stock at a given corporation could be assigned ten votes per share, while Class B stock could carry just one vote per share. Traditionally, this stock structure has been utilized by family-owned corporations to vest shareholder voting power in the hands of a few individuals, allowing the family to control the composition of the corporation’s board of directors.[2] Increasingly, however, dual-class voting structures have been utilized by technology companies, allowing the founders (who often boast technical expertise and unique vision) to retain managerial control over the company’s direction. Indeed, almost 50% of newly listed technology companies have gone public with dual-class status, joining well-known companies like Facebook and Alphabet (Google).[3]
Support for the dual-class voting structure is not universal. Some scholars argue that vesting so much voting power in the hands of a few manager-directors can entrench corporate directors, inflate executive compensation, and result in lower stock returns for shareholders.[4] Other scholars, however, suggest that banning dual-class stock status altogether would encourage many technology companies to remain private, thus preventing investors from reaping the financial benefits of these companies and stifling potential innovation.[5] The New York Stock Exchange (NYSE), NASDAQ, and the Securities and Exchange Commission (SEC) have addressed these competing concerns through informal commitments to limit the listing of dual-class voting stocks to companies who elect the dual-class voting structure at the time of the Initial Public Offering (IPO).[6]
These informal agreements, however, are not long-term solutions. Congress should consider passing legislation to allow corporations to not only elect dual-class stock status at the time of IPO, but also permit companies to utilize the dual-class stock structure through a charter resolution passed by a majority of shares voted at any time in the company’s lifecycle, subject to shareholder recertification or rejection after a predetermined number of years. This solution would afford corporations additional opportunities to raise capital, pursue alternative business models, or enter into new markets. Additionally, this approach would provide more security and flexibility to emerging companies – particularly those in the technology sector – while also providing shareholders protections not currently available to them.
The undeniable growth of these dual-class stock options in the technology sector suggests that both corporate directors and stockholders see the benefits. The current regulatory landscape provides unsatisfactorily informal protections for companies seeking to go public with dual-class stock status and forces companies to make an unnecessarily difficult decision at the time of IPO. Congress should codify a more flexible approach to allow companies to elect dual-class status, while also empowering shareholders to periodically recertify or reject dual-class status. If companies like Facebook and Google are any indication, shareholders are happy to vest trust in the technical expertise and vision of founder-directors so long as the company continues to perform well.
[1] Del. Code Ann. tit. 8, §151(a) (West 2020).
[2] WILLIAM T. ALLEN & REINIER KRAAKMAN, COMMENTARIES AND CASES ON THE LAW OF BUSINESS ORGANIZATION 199 (5th ed. 2016).
[3] Vijay Govindarajan et. al., Should Dual Class Shared be Banned?, HARV. BUS. REV. (Dec. 3, 2018), https://hbr.org/2018/12/should-dual-class-shares-be-banned.
[4] See, Paul A. Gompers, Joy Ishii, & Andrew Metrick, Extreme Governance: An Analysis of Dual Class Firms in the United States, 23 REV. FIN. STUDIES 1051, 1073 (2009); Ronald W. Masulis, Cong Wang & Fei Xie, Agency Problems in Dual-Class Companies, 64 J. FIN. 1697, 1706 (2009).
[5] Govindarajan, supra note 3.
[6] WILLIAM T. ALLEN & REINIER KRAAKMAN, supra note 2, at 201