Saturday, July 2, 2016
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).