Business
Dual Class Equity
Dual class equity refers to a structure in which a company issues two classes of shares, with one class having more voting rights than the other. This allows founders and insiders to retain control over the company even as they sell off a portion of their ownership. Dual class equity is controversial, with critics arguing that it can lead to a lack of accountability and poor corporate governance.
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eBook - ePubResponsible Leadership in Corporate Governance
An Integrative Approach
- Brad Jackson, Ljiljana Erakovic, Monique Cikaliuk, Chris Noonan, Susan Watson(Authors)
- 2022(Publication Date)
- Routledge(Publisher)
Dual-class companies include some of the most successful and highly valued companies in the world, such as corporate giants Facebook Inc., Alphabet Inc. (parent of Google), Berkshire Hathaway Inc., and News Corp. From a corporate governance perspective, dual-class companies are claimed to reduce accountability, entrench management, and skew incentives (Bebchuk & Kastiel, 2017, 2019 ; Papadopoulos, 2019). Dual-class companies are more likely not to have independent board chairs or leadership, engage in related-party transactions, and have less gender diversity on the board. Having a class of shares with superior voting rights, which is predictably opposed by many institutional investors, may free a company from short-term market pressures and allow a greater to focus on growth and long-term strategy. Alternative approaches are available to encourage longer-term strategic planning. French companies bestow double voting rights on those who hold shares beyond two years. This, of course, rewards past behaviour as opposed to future commitment (Mayer, 2013). Shareholders have a number of relationships with the company. As well as shares giving individual rights to shareholders to act through the general meeting as an organ of the company, shareholders are also investors. Accumulation of blocks of shares by major shareholders, the rise of socially responsible investment and increasingly active institutional investors like BlackRock mean that boards meet with investor groups (McNulty & Nordberg, 2016). Indeed, every guide to good governance emphasises the importance of board-investor relations. Shareholder–Board Relationships The differing legal rights, interests, and ability of shareholders to, individually and collectively, participate in and influence company decisions reinforces the information uncertainty faced by boards and means board decisions affecting capital structure are often ‘political’ and not just technical
eBook - PDFFounders without Limits
Dual-Class Stock and the Premium Tier of the London Stock Exchange
- Bobby V. Reddy(Author)
- 2021(Publication Date)
- Cambridge University Press(Publisher)
For public investors, an analysis of the consequences of a dual-class structure would be simpler than that of a complicated pyramid, cross-ownership, derivative instrument or loyalty share structure. In rela- tion to board appointment rights, one could argue that it is notionally a softer arrangement than dual-class stock, and should therefore be permitted on the pre- mium tier if dual-class stock were permitted, but it is submitted that board appoint- ment rights would also be less transparent to the public, especially retail, shareholders. Instead clearly designating shares as inferior- or enhanced-voting makes it obvious where the balance of power lies in a listed company, and would be the preferred option of controllers. In the world of control-enhancing mechanisms, dual-class stock is top of the tree, and given the practical and regulatory challenges in utilising other control- enhancing mechanisms, for a founder seeking to list its company and divest of a substantial portion of its investment and/or generate significant equity financing while preserving control, there are currently no other viable options on the premium tier. However, being on a pedestal means that there are plenty looking to knock dual- class stock off its perch. In the next chapter, some of the conceptual arguments against dual-class stock will be critically analysed. Additionally, prior to investigating the benefits and detriments of dual-class stock from the perspective of founders and public shareholders in Part II of this book, the next chapter will also set out where the discussion in Part II sits within the concept of ‘firm purpose’. First among Equals? 141 4 Shareholder Democracy and Corporate Purpose In theory there is no difference between theory and practice, while in practice there is.
eBook - PDF- Kose John, Anil K. Makhija, Stephen P. Ferris, Kose John, Anil K. Makhija, Stephen P. Ferris(Authors)
- 2013(Publication Date)
- Emerald Group Publishing Limited(Publisher)
Keywords: Dual class discount; executive compensation; private benefits; family ownership and control INTRODUCTION Despite the corporate governance problems associated with dual class own-ership structure, corporations continue to finance their expansion and inno-vations with dual class shares. Noted examples of such public offerings are Google’s IPO in 2006 and Facebook’s IPO in 2012. Empirical evidence indicates that dual class companies sell at a discount compared to their comparable single class companies because of the corporate governance problems, specifically, the agency problems which are associated with shareholders who control the company with majority votes but little equity investment. As the divergence between the controlling shareholder’s voting and equity rights widens, the incentive for managers to extract private ben-efits from the corporation increases ( Bebchuk, Kraakman, & Triantis, 2000 ; Grossman & Hart, 1988 ; King & Santor, 2008 ; Smart, Thirumalai, & Zutter, 2008 ). Hence, investors discount the value of dual class companies. The valuation discount of dual class firms is documented in the literature (Gompers, Ishii, & Metrick, 2010; King & Santor, 2008 ; Smith, Amoako-Adu, & Kalimipalli, 2009 ). Based on the median Tobin’s Q ratio in Table 3, we also estimate the dual class discount to be 9.3% during our 2001 2007 sample period. Though the dual class discount has been empiri-cally established and researchers tend to explain the discount in terms of the extraction of private benefits by the controlling shareholder, except Masulis, Wang and Xie (2009) little or no research has precisely shown how the extraction of private benefits is accomplished.
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