Saturday, July 2, 2016

Dual Class Share Structures in the News

There have recently been several high profile news items about companies using dual class share structures.

First, Facebook announced that it would issue a class of nonvoting shares so that Mark Zuckerberg could maintain his control over the company via his supervoting shares, in a move reminiscent of a similar tactic by Google a couple of years ago.

(A fun game I like to play with my students: compare the stock prices of voting shares of Google with the prices of nonvoting shares, and then talk about the two, in light of the fact that Sergey Brin and Larry Page control the majority of the voting power regardless due to their supervoting shares.)

Second, Lionsgate announced it would be acquiring Starz, in a partially cash, partially stock deal.  Because Starz has a dual class structure – with supervoting power held by John Malone – the arrangement involves Lionsgate creating a new class of nonvoting shares.  Holders of Starz A shares will get cash and nonvoting Lionsgate shares, while holders of Starz B shares (e.g., Malone) get less cash, but both voting and nonvoting Lionsgate shares.

Third, Mondelez just made a bid to buy Hershey – one that could be blocked by the Hershey Trust that controls 80% of the voting power via dual class shares.

Dual class share structures are all the rage these days.   The growing popularity of dual class structures suggests that as investors gain more power in the governance structure – via legal changes, and via the increasing concentration of share ownership – corporate managers are fighting back with new tools to cabin investors’ influence.

But dual class structures carry some fairly obvious dangers – some of which are now on full display in the show trials regarding Sumner Redstone and Viacom.  In brief, Viacom has a dual class structure with most of the voting stock held by a company called National Amusements, which itself is controlled by Sumner Redstone.  Redstone is 93 years old and recently ousted the Chair of Viacom, as well as other Viacom directors, setting up court battles in Delaware and Massachusetts regarding his competency.

With dual class structures' increasing popularity, I’m sure we can expect a lot more conflicts (and more development of the law).  It will be interesting to see whether there will be enough institutional investor pushback to cabin their use, and/or create some standardized features (sunset provisions, limits on the creation of new nonvoting share classes, etc).

https://lawprofessors.typepad.com/business_law/2016/07/dual-class-share-structures-in-the-news.html

Ann Lipton | Permalink

Comments

So glad you posted on this, Ann. Dual class structures came up at various junctures at the Berle symposium last week. They are, indeed, back on the radar--Business Roundtable et al. notwithstanding.

It will be important to consider this trend in our teaching. I typically devote little time to the dual-class structure in Business Associations, but I do try to focus more on it in Corporate Finance. I like your Google exercise for use in a Business Associations course, however, and may want to find out more about how you execute on it.

Posted by: joanheminway | Jul 3, 2016 5:08:42 PM

Glad you liked the post! Yeah, I spent a little time on this in my Business class, mainly because I personally am just really interested in balance of power issues.... so that's what my students get to learn about :-).

Posted by: Ann Lipton | Jul 3, 2016 5:18:40 PM

Great stuff. Again, thanks for sharing.

Posted by: joanheminway | Jul 3, 2016 9:01:52 PM

I am sure that when the leaders of the shareholder empowerment movement have nothing better to do, they will turn, once again, to attacking dual class share structures. In regard to institutional investor pushback, that has already occurred at Facebook. Zuckerberg's class ‘B’ (super-voting) shares will automatically transform to class ‘A’ (regular voting) shares three years after he dies or one year after he resigns. So, while that provision will hopefully not be applicable for many years, at least it is something.

Posted by: Bernard S. Sharfman | Jul 10, 2016 6:40:55 AM

Canada has struggled with the governance implications of dual class shares for some time as there are over 80 dual class firms on the TSX. Dual class firms present governance challenges especially in the buy out of the controlling shareholder as we saw in the Magna transaction in Ontario in 2011.

Posted by: Anita Anand | Jul 12, 2016 2:40:37 PM

Great post. It'll be particularly interesting to see how governance standards evolve if we experience a prolonged bear market. I'd expect dual-class listings to disproportionately fall out of favor with investors, especially for firms with unresponsive or complacent leadership. Perhaps the recent demise of Carvana is the canary in the coal mine for investors.

Posted by: Charles M. | Dec 7, 2022 1:03:04 PM

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