The Council of Institutional Investors, which represents pension funds and other long-term investors, has filed petitions with the New York Stock Exchange and Nasdaq asking them to limit listings of companies with dual-class share structures.
Specifically, the petitions ask the exchanges to amend their listing standards to require that, going forward, companies seeking to list that have multiple share classes with differential voting rights include in their governing documents provisions that convert the share structure within seven years of the initial public offering to “one, share-one, vote.” The group says this will ensure voting power directly proportional to an investor’s capital at risk.
Dual class voting typically involves capitalization structures that contain two or more classes of shares—one of which has significantly more voting power than the other.
The debate over dual-class shares gained increased attention in March when Snap Inc., the parent company of Snapchat, a photo and video-sharing app, launched a $3.9-billion initial public offering. Only non-voting shares in the company were offered to investors.
Tech companies, in particular, have increasingly favored tiered voting structures in recent years, with dual-class and multiplayer class share structures built around limited public voting rights. Google/Alphabet, Alibaba, Facebook, Groupon, and LinkedIn are among the companies where the majority of company control resides with owners of superior shares granted greater voting rights than the class of publicly owned stock. In these systems, founders and pre-IPO insiders retain majority voting rights and control over director selection even as their ownership, risk, and skin in the game is spread among new shareholders.
In 2017, 19 percent of U.S. companies that went public on U.S. exchanges had dual-class structures with unequal voting rights, according to CII.
“While some companies that are controlled by virtue of special voting rights function as benevolent dictatorships, we have seen others stumble because of self-dealing, lack of strategic planning, and ineffective boards,” says CII Chair Ash Williams, executive director of the Florida State Board of Administration, which oversees that state’s public retirement system trust fund. “When problems emerge, external shareowners have little recourse. Now, a consensus is emerging—among investors, companies and the law firms and other IPO gatekeepers—that time-based sunsets are a sensible solution to the growing problem of unequal voting rights, which poses danger to long-term resilience of an increasing number of companies.”
BlackRock, the largest global asset manager, has taken a stand that “one share, one vote” is the preferable structure for publicly listed companies. The firm is among those that supports time-based sunset provisions for multiclass companies and believes that listing exchanges must play an important role.
“BlackRock believes that equal voting rights are a fundamental tenet of good corporate governance. Multiple stakeholders, including listing exchanges and policymakers, must play a role in setting effective corporate governance standards to protect shareholder rights,” BlackRock co-founder and Vice Chairman Barbara Novick said in a statement. “We encourage U.S. exchanges to show global leadership on voting rights by requiring companies to either automatically convert or give shareholders the right to extend a multiclass structure.”
“A confluence of events has led to what we believe is a growing consensus on the issues surrounding differential voting rights,” added Donna Anderson, vice president and head of corporate governance at asset manager T. Rowe Price. “We would like to see the U.S. stock exchanges lead the process to find a solution that serves the long-term interests of all market participants.”
CII Executive Director Ken Bertsch argues for time-based sunsets within seven years after IPO as a condition of listing on a U.S. exchange.
A growing number of companies are making their public debut with time-based sunsets. Of 38 U.S. companies that went public in 2017 and 2018 with multiclass structures, CII has tracked 11 (29 percent) that incorporated simple time-based sunsets.
“We believe seven years is sufficient time for a company to capitalize on whatever benefits and control a multiclass structure provides,” he said. “After that, it starts to look like a management-entrenchment device.”
“A small but growing share” of multiclass IPO companies have used time-based sunsets successfully, Bertsch added. Examples include Groupon (converted to a single share class after five years), Texas Roadhouse (converted after five years), and MaxLinear (converted after seven years).