Shares of common stock in corporations represent a bundle of rights: economic rights, such as the rights to receive dividends declared by the corporation, and governance rights, including the right to vote on certain corporate decisions. These rights are typically allocated proportionally, with each share of common stock entitled to the same economic and voting rights as every other share. However, many jurisdictions allow corporations to offer classes of common stock with unequal voting rights (a “dual class” share structure).
In recent years, several prominent companies, such as Google, Facebook, and Alibaba, have gone public with dual class structures in which a minority of the shares, held by the company´s founders and executives, have special voting rights that provide their holders with effective control, while a majority of the company’s stock, which has regular voting rights, is held by outside investors. The increase in companies going public with dual class share structures, and the corresponding desire by stock exchanges to attract public offerings, have drawn renewed attention to these structures. However, public debate regarding the use of dual class shares has existed for almost a century—at least since 1925, when Dodge Brothers listed on the New York Stock Exchange with a structure that gave the automaker’s founders total voting control with only 1.7 percent of equity.
This report surveys the prevalence of dual class shares in several jurisdictions and the laws in those jurisdictions governing their use. It also considers the approach taken by private actors, including stock exchanges, providers of stock indexes, and institutional investors, with respect to dual class shares. That discussion is followed by consideration of the empirical evidence in favor of and against restricting the use of dual class shares. The report then evaluates specific proposals to regulate dual class shares by requiring that they “sunset” after a predetermined period of time, as well as additional disclosure requirements for dual class shares.
The Committee recommends that the Securities and Exchange Commission (SEC) encourage dual class issuers to provide more robust disclosures regarding material risks associated with the dual class structure, through the SEC’s review of and comment on public filings by these issuers. For example, where appropriate, the SEC should direct a dual class issuer to disclose the risk that shares will be excluded from major indexes. The Committee also recommends that the SEC en-courage dual class issuers to disclose data showing the divergence between economic ownership and control, such as the numerical gap between a shareholder’s ownership interest and voting rights.
The full report can be found here.