Thursday, March 15, 2018

Permanent Dual Class Shares?

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.

http://lawprofessors.typepad.com/business_law/2018/03/permanent-dual-class-shares.html

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Comments

What a great opportunity for your students. I would be interested in their thoughts about their experience and how it increased their understanding of corporate/securities law.

Posted by: Marcia Narine Weldon | Mar 16, 2018 8:56:49 AM

So far, they're telling me that they really enjoyed the experience and that it made much of what we do come alive. They ended up having time to speak directly with four of the five sitting SEC Commissioners. It was a great trip.

Posted by: Ben Edwards | Mar 16, 2018 10:01:27 AM

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