The fight over the issuance of dual-class shares is beginning another round.
The Council of Institutional Investors—a non-profit association of pension funds and endowments with combined assets of about $4 trillion—is expressing “deep concern” about Lyft’s initial public offering filing “because of its egregious dual-class share capital structure and the lack of sunset provisions to unwind it within a reasonable time period.”
Sunset provisions, it says, are “an essential tool” for protecting public investors in dual-class companies by ensuring adoption of “one-share, one-vote” voting power that is directly proportional to an investor’s capital at risk.
Lyft’s IPO filing with the Securities and Exchange Commission revealed plans to create two classes of stock: Class A shares with one vote per share for public shareholders, with the founders holding Class B shares that have 20 votes per share. This means that the founders will have voting control over the company even though their equity stake in Lyft is less than 10 percent. The Lyft filing is particularly troubling given that dual-class voting structures typically have 10-1 voting power, and as a large private company, Lyft currently is “one-share, one-vote.”
The share structure should come as little surprise. Companies that broker in “disruptive technology” are increasingly testing the limits of how much they can disrupt traditional shareholder arrangements.
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.Tech companies, in particular, have increasingly favored tiered voting structures in recent years, with dual-class and multi-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.
The objective of the share structure is to give founders and their core team greater say in how their companies are run, with the ability to be nimble and pursue long-term strategies otherwise endangered by the short-term performance demands of typical shareholders.
There is no shortage of critics regarding the stratified stock issuances.
“Lyft’s dual-class share structure leaves investors virtually powerless,” says Ken Bertsch, CII executive director. “This is highly risky for long-horizon investors and for the integrity of the capital markets. The message the filing sends is that the Lyft founders can govern the company as supreme monarchs in perpetuity and also that they have a ‘let them eat cake’ attitude toward their investors.”
Instead, Bertsch says: “Lyft should incorporate provisions to adopt a ‘one-share, one-vote’ structure within a reasonable amount of time. CII and many institutional investors support seven-year time-based sunsets as a sensible solution to the growing problem of unequal voting rights, which deprive shareholders of the means to hold executives and directors accountable.”
CII wrote to Lyft board members on Feb. 13, requesting that they put in place a time-based sunset on the dual-class structure. It has also petitioned the New York Stock Exchange and Nasdaq, urging the exchanges to step in.
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 IPO to a single class of common shares with equal voting rights. CII’s members believe that equal voting rights are a fundamental tenet of strong corporate governance.
A growing number of companies are making their public debut with time-based sunsets, CII says. Of 38 U.S. companies that went public in 2017 and 2018 with multi-class structures, it tracked 11 (29 percent) that incorporated simple time-based sunsets.
“A small but growing share of multi-class IPO companies have used time-based sunsets successfully,” it adds. Examples include Groupon (which converted to a single share class after five years) and Texas Roadhouse (which converted after five years).