“One Share, One Vote? A Debate on Dual Class Share Structures” was the title of this year’s Morrison & Foerster Lecture in honor of Marshall L. Small, held at Stanford Law on May 20, 2019. The side favoring a ban, or at least sunset provisions, on dual class shares was slightly more convincing in their arguments.
One Share, One Vote: Debating for Each Side
On the side of at least encouraging sunset provisions for dual class share structures were:
- Anne Sheehan, Member, SEC Investor Advisory Committee; Senior Advisor, PJT Partners
- Robert J. Jackson Jr., Commissioner, U.S. Securities and Exchange Commission
Arguing on side of letting the “market” decide were:
- David M. Lynn, Partner, Morrison & Foerster LLP
- Joseph A. Grundfest, W. A. Franke Professor of Law and Business; Senior Faculty – Rock Center for Corporate Governance, Stanford Law School
Getting Ready for Debate
One Share, One Vote: As Advertised
Dual class share structures typically grant management and pre-IPO investors shares with superior voting rights that give them voting control disproportionate to their equity stake. The most common structure provides for shares that have ten votes for each vote held by public stockholders.
Although these structures are not new, they are increasingly common in tech-sector IPOs. Their prevalence has fueled debate as to whether these structures adequately protect public investors or promote companies’ long-term interests. Many institutional investors call for prohibitions on public listing of dual-class stock. Others want to cause dual-class structures to expire seven years after an IPO. In contrast, the Hong Kong and Singapore stock exchanges long barred dual-class listings, but recently changed course to permit such trading.
Proponents argue that dual class structures encourage founders to go public and give them the freedom and flexibility to execute their long-term vision. Opponents counter that dual class shares insulate founders from the consequences of their own mismanagement, inefficiently create a wedge between ownership and control, and anti-democratically perpetuate minority rule. They also complain that even if dual class shares are rational in a company’s early years, at some point that structure is no longer beneficial. Why should a CEO’s grandchildren have super-voting shares?
One Share, One Vote: Debate Results
A poll of the audience was taken before and after the debate to determine which side was more persuasive.
- Should Dual-Class Structures be Banned?
- Should Dual-Class Structures Face Mandatory sunset?
#1 showed a substantial change, with more favoring an outright ban after the debate. Before the debate only 26% agreed. At the end, as I recall, it was more like 33%. #2 was more popular both before and after the debate and showed little or no change as a result of discussion. (68% favored initially; maybe 69% after the debate)
One Share, One Vote: Some of the Arguments
Those favoring at least a sunset argued there should eventually be accountability to unaffiliated shareholders, otherwise we risk having a good part of our economic system ruled by corporate royalty. Dual-class shares decline in relative value starting in year 7-8. The worst companies may be least likely to use a dual-class structure without a sunset.
By market cap, more than 80% of 2018 IPOs were one share, one vote. 33% of dual class offerings included sunset provisions. Exchanges should set standards but it is now a race to the bottom. If investors cannot do anything to hold boards accountability, investors will lose faith in the market. Mandatory sunsets make sense.
Opponents cited the Game of Thrones. Lords and ladies had vote but others did not. Our system of private ordering works. (editorial: yes, in a world of dragons and constant warfare in countries with little regard to meeting basic needs like putting food on the table) If investors don’t like it, don’t buy it. Prohibition is a bad idea. There hasn’t been a major failure, so why address a nonexistent problem?
Why treat dual-class any different from other possibly desirable corporate governance features like classified boards and majority voting provisions? Those invested in Chinese companies listed on US exchanges have no effective remedy. US companies are already at a competitive disadvantage to them. A ban or sunset would make it worse. The market allocates votes to the highest value users. Why no outrage against Chinese companies? Disclosure is required. A mandatory ban or sunset would be “revenge of the governance nannies.”
The other side countered with private ordering doesn’t work here. Investors have little say in structuring IPOs. Mega-funds are largely based on investing in the indexes, so they cannot pick and choose. Dual class shares are currently excluded from S&P 500 and underweighted in MSCI indexes. Dual-class founders are spending other people’s money.
Sunset does not necessarily mean automatic conversion in seven years. Maybe unaffiliated shareholders vote. Should super-shares be compensated when converting? We should get more input from market players before mandating anything.
Other alternatives were discussed. Time-base voting would be a challenge. Portfolio rebalancing would play in. Would we need data tag each individual share? Large institutional investors and management would get more authority. Hedge funds and others could reallocate super-voting shares through derivatives.
Sunsetting dual class shares could be done using metrics other than time, such as dilution of the founder’s economic interest, transfer of the founders interest, death, incapacitation or departure of the founder. See Fisch, Jill E. and Solomon, Steven Davidoff, The Problem of Sunsets (2018). Faculty Scholarship at Penn Law.
My Takeaway
It was an entertaining evening with lots of good-natured jabbing and needling. I was a little disappointed to see the large classroom less than half full, especially given the prominence of the panelists and importance of the topic.
Dual-class shares will exacerbate our increasingly dual-class society. We are “the world’s richest” country but median wealth in the United States is lower than it is in Slovenia, even though our mean wealth is much higher. 
Huge disparities in wealth result in mistrust of basic institutions in society and dysfunctional governance. There is a direct correlation between inequality and polarization of political parties. See Can American Capitalism Survive?: Why Greed Is Not Good, Opportunity Is Not Equal, and Fairness Won’t Make Us Poor by Steven Pearlstein.
We already have what some are calling a “Guardian Council” of millionaires. See Table 4.1 below from Democracy in America?: What Has Gone Wrong and What We Can Do About It by Benjamin I. Page and Martin Gilens.
As a shareholder advocate, I will be negotiating at companies with dual-class share structures to sunset such provisions. Taking a page from Fisch and Solomon, I will also be looking at sunset mechanisms other than time, such as market cap… not only for dual-class shares but for other entrenchment devices as well, such as classified boards or the right to call a special meeting.
However, my primary objection to dual class shares is not that it is bad at the individual company level, although it may be. Unrestrained greed and power may work for the individual company but not the society. The question of dual class shares should be examined from the level of society as a whole. Seen from that perspective, these structures are likely to lead to rule by corporate royalty, monopoly, polarization between haves and have nots and increased social problems. Given those inherent issues, a rise in the use of dual class share structures would likely lead to the use of more regulations to address externalities – the harm done to others by less democratic businesses. Maybe dual class companies would have to become certified B corporations. Maybe the US would become more socialist, like Sweden.
In the meantime, I will continue to advocate for proposals such as the following:
Facebook Shareholders Seek Better Oversight
Amid company controversy, shareholders at the May 30th Facebook annual meeting will ask that Mark Zuckerberg hand over his oversized control of the company and create a governance structure allowing all shareholders one vote per share.
At Facebook, two shares of stock exist – ordinary shares with one vote (class A), and insider shares with 10 votes per share (class B). Critics of dual-class voting structures point out that it may be essentially impossible for class A shareholders to “outvote” the founders, even on significant or concerning matters. NorthStar’s shareholder proposal asks the board to “take all practicable steps in its control to initiate and adopt a recapitalization plan for all outstanding stock to have one vote per share.”
The proposal, brought by NorthStar Asset Management, Inc. of Boston, received support of an estimated 81% of outsider class A shareholders at the 2018 annual meeting.
“We’ve brought this proposal year after year because the source of Facebook’s poor corporate governance is the share structure. Shareholders and the Board are powerless due to Zuckerberg’s outsized voting rights,” explained NorthStar Asset Management, Inc. CEO Julie Goodridge.
“Through these shareholder resolutions each year, common shareholders have repeatedly shown concern regarding management’s super-voting rights, and this year’s proposal is timely given the seemingly endless string of issues at Facebook,” stated NorthStar’s Director of Shareholder Activism and Engagement, Mari Schwartzer.
NorthStar argues that the controversies following Facebook are rooted in how insulated from criticism the CEO and board have become, thanks to the dual-class share structure. According to Goodridge:
The company has faced serious allegations – from data privacy scandals to being implicated in human rights abuses in Myanmar and India, but shareholders have no way to address controversy through their voting rights. This puts our investment at risk. Critics are calling for the company to be split up or for Zuckerberg to step down. Yet if he did resign, shareholders would suddenly be faced with a disgruntled founder with majority voting power – and that could be dangerous for the company.
NorthStar has filed a voluntary exempt solicitation with the SEC to urge shareholder support. Find it on the SEC’s website at the following link: NorthStar’s Facebook exempt solicitation.
I have a secondary proposal at Facebook to elect directors by majority vote in uncontested elections. Of course, such a shift would only be meaningful if NothStar’s proposal is adopted.
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