Thursday, March 15, 2018
I had the pleasure of taking a group of students to Washington for the most recent meeting of the SEC's Investor Advisory Committee. Among other things, they discussed issues with dual class shares. In a nutshell, dual class shares give one set of shareholders much greater voting control than other sets. In practice, it provides a means for insiders to permanently entrench themselves and retain control over a corporation even as their economic stake declines. A number of leading companies (Facebook, Snapchat, and Google) have pursued similar structures aimed at entrenching existing founders and owners.
The committee issued a recommendation and suggested that the Commission take a close look at the kinds of risks these arrangements may create. It also highlighted how these developments could widen the separation between ownership and control for many corporations:
For instance, while Snap disclosed the major governance provisions it planned to adopt, its IPO registration statement did not clearly disclose that those provisions would enable each of the co-founders to reduce his equity stake to below 1% of total economic ownership without relinquishing control. The fact that the governance structure adopted by Snap could – without further shareholder check – lead over time to such a dramatic divergence between economic and voting interests could be made significantly more salient and clear to investors. A reasonable investor might (wrongly) presume that existing SEC rules, state laws or listing requirements would prevent such a dramatic change over time.
It's an issue worth keeping a close eye on as more and more corporations adopt dual-class structures. In particular, it's worth thinking about whether the justifications for having founders retain more control extends to indefinite control.