When Facebook CEO Mark Zuckerberg took his social media company public in 2012, few investors blinked an eye at the dual-class ownership structure in place that allowed Zuckerberg to retain control. Five years later, most investors in Snap were also sanguine about CEO Evan Spiegel keeping the reigns of his mobile app maker.
Toppan Vintage, a trusted financial printing and communications company, in partnership with Mergermarket, is pleased to present the newest edition of M&A Pulse newsletter on dual-class stock, private fundraising, and digital shareholder meetings, among other topics. In order to understand how these issues will impact companies and their investors in the coming months, Toppan Vintage commissioned Mergermarket to interview leading experts in the field.
Toppan Vintage question: Dual-class shares have been in the spotlight recently, with such CEOs as Mark Zuckerberg of Facebook and Evan Spiegel of Snap having retained control of their companies without owning a majority stake. Do you think this trend will continue or expand among new companies, or do you see it being rolled back instead? Is this arrangement problematic? Leading industry experts weigh in...
John Jenkins, Editor, TheCorporateCounsel.net says: I don’t see these dual-class structures going away or being rolled back, unless investors stop buying IPOs of companies with this structure or regulators intervene. I don’t think the SEC is inclined to take this up, and given the competition for listings, I can’t see the exchanges making a major push on this issue either.
From what I’ve seen, I think the studies are inconclusive as to whether or not dual-class stock is “good” or “bad,” but I wouldn’t characterize these structures as “problematic.” To me, that kind of characterization buys into a narrative that says the institutional investors who drive the IPO process don’t have any responsibility to fend for themselves. I don’t agree with that.
Institutional investors understand extremely well what they are buying into, and nobody is forcing them to buy IPOs of dual-class companies. This is the deal that the people who own these companies are willing to offer, and they sometimes have the leverage to do it. I’m not very sympathetic to arguments that say it’s too cumbersome for public investors to push back against these structures in IPOs.
I think it’s important to keep in mind that the tech folks didn’t invent this – the Dodge brothers had high-vote stock when they listed their company on the NYSE in 1925, and Ford did when it listed in 1956 (and still does). This isn’t some innovative new structure; it’s been around forever – and we had this debate at least once already. What’s different now is that there’s been a battle for some time now between institutional investors and management over who calls the shots at public companies, and this has become its latest front.
John Campbell, Partner, Morrison & Foerster adds: As John pointed out, there has been debate for some time about these arrangements – there are various arguments pro and con, such as responsiveness to providers of capital versus the ability to manage a company for the long term, particularly by entrenched founders. Clearly, institutional investors don’t like them and there has been fairly extensive commentary about why they are problematic. There has been a move to exclude dual-class (high-vote/low-vote) securities from major indexes driven by objections from institutional investors. But money talks – many of the institutional investors who don’t like dual-class shares buy them, in some cases a lot of them (for example, Norway’s sovereign wealth fund objects to dual-class listings and has spoken out about them but has large positions in both Facebook and Alphabet). And you see a move on the part of exchanges to be more open to them because they want to compete for and win large listings with the fees and prestige associated with them. For example, the Hong Kong exchange has recently proposed rules that would permit dual-class listings, thought to be a direct response to its loss of the Alibaba IPO listing.
I think these structures are here to stay, at least as long as some companies remain very hot commodities for investors. There’s little incentive on the part of the issuers to shy away from them at this point.
Brian Tayan, Researcher, Corporate Governance Research Initiative, Stanford Graduate School of Business weighs in: Dual-class shares are controversial, but they are not inherently bad. Founders use them to maintain some level of control over their companies – primarily to ward off unsolicited takeovers at a market value they believe is below the long-term potential of the firm. In some cases they are right about this, and in some cases they are wrong. Research shows that performance (good or bad) is not necessarily correlated with whether a company has dual-class shares, but is correlated with whether companies have overall good governance practices. Indices, some active managers, and some pension activists are putting pressure on companies to drop their dual-class structure. You might see over time that companies promise to phase out a dual-class share structure after so many years of being a public company (say, seven). Or, rather than offer a class of shares with reduced voting rights, they can offer shares with no voting rights. This way, investors who don't care to have a vote can purchase zero-vote shares at a discount to the voting shares, and those who want voting rights can pay the appropriate premium for them. In all cases, I wouldn't expect dual-class structures to entirely disappear. They serve a valuable purpose for some companies, depending on the industry (such as newspapers that want editorial independence) and stage of growth (new companies who believe their patents, intellectual property, or market opportunity are underappreciated by the market).
Keir Gumbs, Partner, Covington & Burling says: Dual-class shares have been around for more than 100 years, as John noted. What I think is interesting is that there’s a perception that this is a new phenomenon, whereas I think it's much more like fashion, in that what was new became old and it's suddenly becoming new again. I think the question now is, in light of the investor push-back on dual-class stock, whether or not we would expect other companies to follow the same approach that some of the recently listed companies with dual-class stock have pursued.
I actually think that if you're an entrepreneur and you're thinking about going public, you would be reluctant to use dual-class stock because of the investor reaction. With that said, I don't think the push-back that has happened recently will lead to the elimination of the tool completely. I think a company will essentially have to conduct a cost-benefit analysis on the issue before going public.
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The Shifting Tides of Corporate Governance
Experts debate the merits of dual-class stock, private fundraising, and digital shareholder meetings, among other topics.