Tuesday, July 3, 2018

Sharfman on Dual Class Shares and Empty Voting

Bernard Sharfman has posted Dual Class Share Voting versus the “Empty Voting” of Mutual Fund Advisors’ and it is an interesting read.  He argues: 

Dual class shares (shares with unequal voting rights) arise when the board of directors of a company decides to raise capital through the sale of newly issued shares, but wants one or more insiders, who may be giving up economic control through the issuance of the shares, to retain voting control in the company.  Typically, this occurs in an initial public offering (IPO), but it can also occur before.  In an IPO, a company will usually issue a class of common stock to the public that carries one vote per share (ordinary shares), while reserving a separate class, a super-voting class, that provide insiders with at least 10 votes per share.  However, both types of shares will have equal rights to the cash flow of the company.  The issuance of dual class shares may create a wide gap between voting and cash flow rights over time, especially if the insiders periodically sell a significant amount of their ordinary shares.

But this is the critical point.  A dual class share structure cannot exist without the permission of those shareholders who are purchasing the ordinary shares at the price offered.  The bargaining process that leads to the issuance of dual class shares is referred to as “private ordering.”  . . . .

. . . 

By contrast, the empty voting of mutual fund advisors is not a firm specific corporate governance arrangement that results from private ordering.  It is the consequence of the industry practice of centralizing the voting of mutual funds into the hands of their advisor’s corporate governance department.  As a result of this delegation of voting authority, mutual fund advisors have the voting power, but not the economic interest in the shares that they vote. 

I am not evangelical about dual-class shares, but I do appreciate his point on private-ordering, which is similar (as I have noted before) to my take in many circumstances. His distinction between dual-class shares and empty voting for mutual fund advisors is a compelling one, and I recommend checking out the whole post. 

https://lawprofessors.typepad.com/business_law/2018/07/sharfman-on-dual-class-shares-and-empty-voting.html

Contracts, Corporations, Joshua P. Fershee | Permalink

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