Saturday, December 9, 2017

Investor Advisor Committee Weighs In on Dual Class Shares

The SEC’s Investor as Owner Subcommittee of the Investor Advisor Committee has just posted a discussion draft regarding dual class share structures in advance of the December 7 meeting at which such structures were under consideration.  (As of this posting, details of what transpired at the meeting are not online).

Dual class structures are increasingly common these days; presumably, that’s in large part due to the fact that institutional investor power has become a serious threat to management control, and dual class shares are a mechanism for pushing back.  (Staying private is another mechanism, and the more that companies choose that route, the more bargaining power they have when they eventually go public, etc etc).

Suffice to say that despite various defenses of dual class shares that have been offered, the Investor as Owner Subcommittee is not impressed.  It highlights a number of risks, which basically come down to that public investors may have different views about corporate strategy than the control group – precisely the feature that endears the structure to some commenters – and that controllers may use their control to further cement their own control (i.e., Google and the nonvoting shares).  And then of course there are the risks that are backlashes the first risks: exclusion from indices and associated decline in share value and liquidity, litigation risks when investors inevitably challenge the controllers’ actions.

Since this is the SEC, the Subcommittee can’t really recommend that dual class shares be barred entirely; the best it can do is recommend additional disclosure, and that it does.  Among other things, it wants clear line items disclosing that holders of x% of equity have x% of the votes, as well as the risks that controllers may use their control to further entrench themselves, and index and listing risks.   And to make absolutely certain investors aren't confused, the Subcommittee recommends that even the label "common stock" be reserved for one share/one vote stock; stock with lesser rights should be called something else.  The Subcommittee also recommends further monitoring to identify the types of disputes that arise out of these structures.

As with many SEC disclosure requirements, the proposals seem aimed less at simply informing investors than to pressure companies into adopting certain forms of governance.  Whether the SEC takes heed in this new, highly deregulatory administration, remains to be seen.

Ann Lipton | Permalink


Two quick points. First, the report's negative view of dual class shares should not be surprising. If you look at the composition of the SEC's Investor Advisory Committee, you'll see that it has been captured by the shareholder empowerment movement. This continuing problem degrades the value of the Committee's work. Second, I believe you forgot to mention my recent paper, A Private Ordering Defense of a Company's Right to Use Dual Class Share Structures in IPOs, Villanova Law Review (forthcoming 2018), It is worth a read and does help explain why dual class shares have value.

Posted by: Bernard Sharfman | Dec 9, 2017 7:25:55 AM

Hi, Bernard. I didn't forget your paper; you must have missed the link. It's under "various."

Posted by: Ann Lipton | Dec 9, 2017 7:29:04 AM

My apologies for not noticing the link. I wrote about this "capture" in a blog post, "Let’s eliminate the SEC’s Investment Advisory Committee," .

Posted by: Bernard Sharfman | Dec 9, 2017 12:19:06 PM

Thanks for this post, Ann. I appreciate you noting the report for all to read.

My take? I am not against dual class shares, which can serve useful purposes. But I do think they--and related instruments used in securities crowdfunding--raise new disclosure issues that should be considered. I hope the Subcommittee's wire will focus the SEC on the overall issue, which is one of importance, imv.

Posted by: joanheminway | Dec 11, 2017 1:02:17 PM

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