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Dual-Class Stock Structures and Society How Unequal Voting Rights Affect Innovation, Insiders, Investors, and the Public
Martin Chang November 29, 2017
Contents I. Introduction .................................................................................................................. 1
II. Background and History ........................................................................................... 5
a. History ................................................................................................................... 5
b. Procedure of Issuing Dual-Class Stock ................................................................. 7
III. The Principal-Agent Problem ................................................................................... 8
a. Insider (Agent) Interests ........................................................................................ 9
b. Public Shareholder (Principal) Interests .............................................................. 11
i. Market Efficiency ............................................................................................ 11
c. Societal Interests ................................................................................................. 16
i. Balancing Benefits and Disadvantages ............................................................ 16
IV. Solutions ................................................................................................................. 17
a. Ban on Dual-Class Structures ............................................................................. 17
b. Sunsetting Dual-Class Structures ........................................................................ 18
c. Private Ordering .................................................................................................. 20
d. Conclusion on Regulation ................................................................................... 22
V. Solutions Within Private Ordering.......................................................................... 23
a. Fiduciary Duties to Non-Voting Shareholders .................................................... 25
i. Lessons From Duties to Minority Stockholders .............................................. 25
ii. Lessons From Duties to Preferred Stockholders ............................................. 27
b. Venture Capital ................................................................................................... 28
c. Investor Knowledge (How the Public Values Voting Rights) ............................ 29
VI. Summary ................................................................................................................. 30
I. Introduction
In July of 2017, the S&P Dow Jones Indices announced that it would ban from its
flagship index, the S&P 500, companies that issue multiple stock classes with unequal voting
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rights.1 The week prior, rival index provider Financial Times Stock Exchange (FTSE) announced
that it would exclude from its indices, including the Russell 2000, companies giving less than 5%
voting rights to public investors.2
The simplest form of multiple-class stock structure is the dual-class, each class of which
can have different characteristics from the other. One of the most controversial differences is
that one class will have greater voting rights than the other. For example, Facebook’s Class A
stock, offers one vote per share.3 Its Class B shares, owned by company insiders, hold the same
economic rights (also called cash flow rights) upon liquidation of the company (through
bankruptcy or merger) as Class A shares, but have ten votes per stock.4
The changes at the index companies were a response to investor pressure, especially
institutional investors,5 who want to reverse what they see as a worrying trend of multiple class
structures. For example, the Council of Institutional Investors (CII), an association of “more
than 125 public, union and corporate employee benefit plans, endowments and foundations with
combined assets that exceed $3 trillion,” has a very large influence.6 The CII advocates for a
“one-share-one-vote” principle, first outlined in a 2016 policy statement.7 The pressure to
1 Nicole Bullock, Investors hail S&P 500 move over multiple class shares, FINANCIAL TIMES (Aug. 1, 2017), https://www.ft.com/content/0a441900-76ca-11e7-a3e8-60495fe6ca71. 2 Benjamin Robertson & Andrea Tan, FTSE Russell's Dual-Class Stock Limits Would Bar Snap Shares, BLOOMBERG MARKETS (July 27, 2017, 5:46 AM), https://www.bloomberg.com/news/articles/2017-07-27/index-plan-to-dump-some-dual-class-stocks-would-bar-snap-hyatt. 3 Charles Kane, What Facebook's Latest Stock Move Means for Investors and the SEC, FORTUNE (May 7, 2016), http://fortune.com/2016/05/07/facebook-stock-mark-zuckerberg-sec/. 4 Id. 5 Hazel Bradford, Council of Institutional Investors calls for ‘one-share, one-vote’ structures, PENSIONS & INVESTMENTS (Mar. 23, 2016), http://www.pionline.com/article/20160323/ONLINE/160329947/council-of-institutional-investors-calls-for-one-share-one-vote-structures. 6 Bradford, supra. Stephen Bainbridge, Understanding Dual Class Stock Part I: An Historical Perspective (Sept. 9, 2017), http://www.professorbainbridge.com/professorbainbridgecom/2017/09/understanding-dual-class-stock-part-i-an-historical-perspective.html. 7 Bradford, supra.
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change listing rules was a response to companies pushing for multi-class stock issues of
continuously fewer and fewer voting rights. The most extreme example of this was the initial
public offering (IPO) of Snap in March of 2017, the first one to consist of entirely non-voting
stock.8 But Snap’s path was paved by Facebook, Google, Viacom, Berkshire Hathaway, and
other well-established companies with multi-class structures.9
Super-voting stock classes allow insiders to retain control of the company even when
they do not own a proportional amount of economic rights. Critics of such arrangements argue
that this increases the risk of bad corporate governance. Investors have no way of reeling in
management, such as through electing new directors. The only recourse they have is to sell their
stock. Without this oversight, insiders seek to protect their private interests, which can include
the freedom to pursue personal interests without payoff to public shareholders, and to pay
themselves well by voting for high executive salaries. Studies have found that firm value is
lower when insiders’ voting-rights exceed their cash flow rights.10
On the other hand, proponents argue that dual class stock allows for long-term thinking,
insulating founders from short-term gain pressures associated with public investors.11 Mark
Zuckerberg has cited two examples where he believes inside control was important to
Facebook.12 In 2006, Yahoo offered to buy the company for $1 billion, but—as we know—he
8 Michael Greene, Snap IPO Gets Investors Fired Up Over Dual-Class Stock, BLOOMBERG BNA (Mar. 9, 2017), https://www.bna.com/snap-ipo-gets-n57982084963/. 9 Myles Udland, Facebook has a new class structure and Mark Zuckerberg is still in control, BUSINESS INSIDER (Apr. 27, 2016), http://www.businessinsider.com/facebook-new-stock-structure-2016-4. 10 Paul A Gompers, et al., Extreme governance: An analysis of dual-class firms in the United States, 23 THE REVIEW OF FINANCIAL STUDIES (2009). 11 Kathleen Chaykowski, How Facebook Is Making Sure Zuckerberg Stays In Control Forever, FORBES (Apr. 27, 2016), https://www.forbes.com/sites/kathleenchaykowski/2016/04/27/how-facebook-is-making-sure-zuckerberg-stays-in-control-forever/#7b094613e97c. 12 Id.
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didn’t sell.13 In 2012, after Facebook went public, there was great pressure to start advertising
on mobile devices, but he resisted, in order to first build out a better user experience.14 In each
case, he suggested that public investors would have pushed for the wrong, short-sighted move.15
Of course, self-proclaimed visionaries outnumber actual ones, so even if we accept that
some managers can create value by separating voting and economic rights, not all will. Others
argue that the market will be able to distinguish between the two, and require a greater discount
for untested or risky founders.16 This argument suggests a position that the marketplace, not the
government, is the best regulator. I will discuss this position, known as the “private ordering”
solution, more fully below.
Although the trend may be well underway, the outcomes and consequences are unclear.
Will dual-class stock affect the climate of investing; the doctrines of corporate fiduciary duty;
pushback from investors, regulators, and elected politicians; and the overall economy?
Section II presents background and history; Section III discusses the principal-agent
problem involved, along with the constituents affected; Section IV weighs the benefits and
disadvantages of different proposals in the literature and concludes that a private ordering is best;
Section V discusses how courts, investors, and other market participants can best adapt to the
problems still remaining under a private ordering system, and Section VI summarizes the
argument and conclusions found, along with an outlook of the future.
13 Id. 14 Id. 15 Id. 16 David J. Berger, Dual-Class Stock and Private Ordering: A System That Works (May 24, 2017), https://corpgov.law.harvard.edu/2017/05/24/dual-class-stock-and-private-ordering-a-system-that-works/.
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II. Background and History
Delaware’s General Corporation Law allows corporations to issue multiple classes of
stock, each class having voting powers, dividend rights, or other special rights or limitations that
can be specified by the corporation in its charter.17 States following the Model Business
Corporation Act also have the ability to “authorize one or more classes or series of shares that:
(1) have special, conditional, or limited voting rights, or no right to vote....”18 However,
leniency in allowed stock structures has not always been the case.19
a. History
Although the recent trend in multi-class structures rejects the accepted norm of “one-
share-one-vote,” Professor Bainbridge argues that “limitations on shareholder voting rights in
fact are as old as the corporate form itself.”20 Before statutes arose in the mid-nineteenth century
granting the ability to anyone to form a corporation, legislatures would grant corporate charters
under three distinct systems of shareholder structure.21 In one system, the charter adopted a one
share one vote scheme.22 In another, each shareholder received one vote regardless of the
number of shares owned.23 The third lay between the two extremes, limiting the voting rights of
large shareholders, such as a cap on the number of votes they could cast, or a scheme following a
complicated formula.24 Instead of the outsized voting power of insiders today, insiders (large
shareholders) of earlier times generally had greater economic ownership than voting ownership.
17 Title 8, § 151, Delaware General Corporation Law. 18 § 6.01, Model Business Corporation Act (2006). 19 Bainbridge, supra. 20 Id. 21 Id. 22 Id. 23 Id. 24 Id.
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After corporations were allowed by statute rather than legislative charter, most states converged
on a one vote per share standard.25 Maryland is representative, adopting this standard in its first
general incorporation statute in 1852.26 However, corporations were free to deviate from the
standard, and after the turn of the twentieth century, many corporations experimented with dual-
class structures.27 The outcry was present then as now, and in 1926, the New York Stock
Exchange (NYSE) announced that it “will give careful thought to the matter of voting control”
when deciding to whether to list a company’s stock.28 One-share-one-vote became the norm
despite prominent exceptions such as Ford and Hershey.29 NASDAQ started operation in 1971,
allowing firms with dual-class structures to be listed.30 By 1984, pressure had mounted from
companies threatening to leave NYSE for NASDAQ, and NYSE lifted its ban on multi-class
structures.31 Some observers, including the Council of Institutional Investors, have characterized
the move as a race to the bottom, while others lauded it as a boon to the economy.32
Today, the pressure towards allowing dual-class structures, along with the backlash
against it, continues to mount. Alibaba, the Chinese e-commerce company, chose to list on
NYSE over the Hong Kong stock exchange (HKEX), citing HKEX’s strict ban on dual-class
shares—such pressures causing Hong Kong regulators to begin softening their views.33
25 Id. 26 Id. 27 Id. 28 Id. 29 Id. 30 Id. 31 Id. 32 Id. 33 Enoch Yiu, Securities watchdog’s retreat on new share listings paves way for dual-class shares, SOUTH CHINA MORNING POST (Sept. 15, 2017), http://www.scmp.com/business/banking-finance/article/2111201/securities-watchdogs-retreat-new-share-listings-paves-way.
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b. Procedure of Issuing Dual-Class Stock
Companies issue dual-class stock in various ways. One way is during the initial public
offering (IPO), when the company’s stock is first sold on a national securities exchange, such as
the NYSE or NASDAQ.34 All the stock sold publicly may be of a limited-vote type, compared
to the stocks owned and kept by pre-IPO insider owners of stock, which have super-voting
rights, often by factor of ten.35
Another time dual-class (or in the case of Google, triple-class) stocks are issued is after
IPO.36 When the company brings in money through their sale, these issues are sometimes called
recapitalizations.37 As an example of a non-recapitalization issue, Google issued its Class C
stock, with no voting rights, as a dividend to its existing Class A owners, with one vote per share,
as part of its stock split.38
The timing of dual class issues implicates different concerns, at least regarding
shareholders. When issued as part of an IPO, there are no pre-existing public shareholders to be
affected, so the scrutiny rests on the allegation that buyers of IPO stock overpay for the dual-
class stock and are harmed when it later decreases in value. One reaction of this risk is caveat
emptor—the idea that investors should protect themselves with more knowledge; investors don’t
need to invest in dual-class companies, and those who do may rightfully see value in them, so
government limitations on these types of stock issues are unwarranted. However, not only active
34 U.S. Securities and Exchange Commission, Fast Answers (Nov. 1, 2017), https://www.sec.gov/fast-answers/divisionsmarketregmrexchangesshtml.html. 35 Raj Bhuptani, How Does IPO Pricing Work?, FORBES (Nov. 8, 2013), https://www.forbes.com/sites/quora/2013/11/08/how-does-ipo-pricing-work/#728f34fe2b74. 36 Id. 37 Id. 38 Google Inc., Schedule 14A (proxy statement, 2012) at p. 56 , available at https://www.sec.gov/Archives/edgar/data/1288776/000119312512222158/d320628ddef14a.htm.
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investors are affected in today’s economy. Many people have their money in pension funds,
mutual funds, and index-following securities, which gives them the sense that these are safe
investments, only exposed to the risk of overall market failure.39 If the trend of dual-class
companies continues, however, the risk of added principal-agent problems, can affect the
marketplace.
III. The Principal-Agent Problem
The principal-agent problem, and the closely-related problem of moral hazards, is a
problem of misaligned incentives.40 People put their efforts toward goals that benefit themselves
the most. Consider the case where an owner (principal) hires a manager (agent) to run her
company. When manager compensation is not tied to performance of the company, as in the
case of payment only through a salary, managers have incentives to perform only as well as it
takes to keep their job. They will use their leftover time and energy to try maximizing other
private interests, even when doing so may harm the company. Owners can monitor managers to
make sure they are doing a good job. However, monitoring itself has costs; and firing and hiring
different managers has its own transactional costs.
Compensating management through stock shares is one way to remove the misaligned
incentives. However, this works only to the extent that management’s private interests do not
outweigh the value of their stock. People’s private interests differ in value. As discussed below,
they may be willing to give up billions of dollars, but not to cede control of a company. They
39 Allison Schrager, The real reasons America’s pensions are hurting (October 3, 2013), http://blogs.reuters.com/great-debate/2013/10/03/the-real-reasons-americas-pensions-are-hurting/. 40 Michael C Jensen & William H Meckling, Theory of the firm: Managerial behavior, agency costs and ownership structure, 3 JOURNAL OF FINANCIAL ECONOMICS (1976).
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may want to take their company in directions personally important to them, but without much
economic value.
Dual-class structures implicate the agency problem because it allows insiders to pursue
their private interests (through control of company assets) more cheaply than otherwise (having
to own 51% of single-class stock). It also reduced monitoring of managers. Monitoring is
conducted to the extent that its benefits justify its costs. In dual-class structures, the possibility
of a takeover by a public shareholder, or voting in a director whom management does not
nominate, is remote because of the outsized voting share of insiders. Public shareholders gain
the benefit of knowing when to buy and sell their stock, from the monitoring. But because
takeovers and influence on management are futile, scrutiny from activist investors will be
lacking.
a. Insider (Agent) Interests
Company insiders have incentives to maintain control. First, they are likely to think they
are the best ones to lead the company, due to the phenomenon that people are typically
overconfident about their abilities.41 Add to this the fact that many insiders are also founders of
the company, and this confidence grows. Many of them also have much of their wealth tied up
with the company, so they want to see the best people (themselves) lead it. However, insiders
have another reason to keep control—namely that control, in and of itself, is pleasurable for
many people. In the case of insiders of large corporations, the ability to change the world can be
very attractive.
41 Joyce Ehrlinger, et al., Understanding overconfidence: Theories of intelligence, preferential attention, and distorted self-assessment, 63 JOURNAL OF EXPERIMENTAL SOCIAL PSYCHOLOGY (2016).
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Mark Zuckerberg says he plans to give away 99% of his Facebook stock, worth about
$45 billion in 2015, within his lifetime.42 At the same time, he wanted Facebook to issue non-
voting stock, in order to raise money without diluting his voting rights.43 Control over Facebook
is likely important to him more for his position of influence than his ability to make his
remaining 1% grow as much as possible. Another example showing the value of control for its
own sake is the leveraged buyout (LBO) of Revlon by Ron Perelman, who, having been rejected
time after time again, wanted the company to the point of fetish. He arguably eventually paid
much more than it was worth.44
Dual-class structures allow insiders to maintain control when they wouldn’t be able to
afford to do so in a single-class structure.45 Even when insiders would be able to maintain
control pursuing a single-class structure, dual-class allows them to diversify their holdings and
avoid facing so much particularized firm risk.46 One study showed that insiders of dual-class
companies had a greater percentage of their personal wealth tied up with the company, pre-IPO,
than insiders of single class companies.47 Their greater amount of wealth tied to the company
was likely due to the large size of the company itself, since dual-class companies are larger and
42 Mark Zuckerberg, A letter to our daughter (Dec. 1, 2015), https://www.facebook.com/notes/mark-zuckerberg/a-letter-to-our-daughter/10153375081581634/ 43 Erin Griffith, Mark Zuckerberg Controls Facebook and He Intends to Keep It That Way, FORTUNE (Apr. 27, 2016), http://fortune.com/2016/04/27/zuckerberg-facebook-control/ 44 Connie Bruck, THE PREDATORS' BALL: THE INSIDE STORY OF DREXEL BURNHAM AND THE RISE OF THE JUNK BOND RAIDERS (Penguin Group USA. 1989). Perelman, along with many other characters of the book, was characterized by emotional obsession in pursuing these LBO’s. 45 Onur Arugaslan, et al., On the decision to go public with dual class stock, 16 JOURNAL OF CORPORATE FINANCE (2010). This study also found that companies with dual class IPOs were no less likely to be acquired than single class ones, indicating that protection from takeovers is not a primary reason for pursing dual-class structure. This was a somewhat surprising result, but since dual class companies tend to be larger, any seeming anti-takeover effects are likely because of size. 46 When insiders sell their super-voting stock, it usually converts to the low-vote class. 47 Id.
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less liquid than single-class ones.48 Insiders, therefore, had more incentives to diversify. The
study found that diversification was the most likely reason for insiders to pursue dual-class
structures—not for the opportunity to conduct long-term research and development projects, and
not to avoid becoming acquired.49
b. Public Shareholder (Principal) Interests
i. Market Efficiency
The market recognizes the agency problem and discounts the value of some dual-class
firms. Studies find the more that voting rights exceed cash-flow rights, firm value decreases.50
Because the market, and thus investors as a group, are aware of the risks when the stock is
issued, it is argued, investors are not unfairly treated.51 They may end up with less of a product
(a company more prone to bad governance), but they also pay less for it, and, as discussed above,
dual-class structures have benefits that may result in a well-performing company.52 When the
risks are properly incorporated into market prices, the market is said to be efficient with respect
48 Id. 49 Id. See also Jason Willard Howell, The Dual Class Stock Structure in the United States: A New Dataset and an Examination of Firms who Leave the Structure (2010) University of Georgia), available at https://getd.libs.uga.edu/pdfs/howell_jason_w_201005_phd.pdf. This is an interesting-sounding study (that I did not fully read) which discusses situations when insiders believe dual-class structures no longer serve them. 50 Gompers, supra. This study analyzed a comprehensive list of dual class companies in the United States. See also Ronald W Masulis, et al., Agency problems at dual‐class companies, 64 THE JOURNAL OF FINANCE (2009). Another study found the same trend in East Asian countries. Stijn Claessens, et al., Disentangling the incentive and entrenchment effects of large shareholdings, 57 THE JOURNAL OF FINANCE (2002). 51 Berger, supra. 52 Id.
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to that variable.53 An efficient market with respect to dual-class structures implies that dual-
class companies will perform any worse than a single class structured company. Critics counter
that markets are not efficient, especially around the time of an IPO, so investors do not discount
the low-vote shares enough (more below).54 Studies between single and dual-class firms show
no difference in performance for up to three years after IPO,55 but longer-term studies would be
helpful to evaluate some of the proposals discussed below, such as a 10-year sunsetting of dual
class stock.
Market efficiency comes in two flavors relevant to the dual class structure discussion.
When insider-known risks (and benefits) are incorporated into market prices, the market is called
strong-form efficient56. When only public information is incorporated, it is called weak-form
efficient.57 Markets are generally thought to be closer to weak-form efficient, because rules
prevent certain types of trading using insider information,58 and because stocks still jump in
response to public announcements.59
53 Burton G Malkiel & Eugene F Fama, Efficient capital markets: A review of theory and empirical work, 25 THE JOURNAL OF FINANCE (1970). The main argument of why market inefficiencies are difficult to find and why the ones that do exist don’t last long is that if it were discovered, an investor could use the information to predict future movements of the market, make money off the strategy, and the market would be made efficient again. 54 Lucian Arye Bebchuk, Why firms adopt antitakeover arrangements (2003). 55 Valentin Dimitrov & Prem C Jain, Recapitalization of one class of common stock into dual-class: Growth and long-run stock returns, 12 JOURNAL OF CORPORATE FINANCE (2006). 56 Malkiel, supra. A third type of efficiency, called the weak form, exists, in which public and private information, but not historical stock prices, are predictive of future prices. 57Id. 58 SEC Rule 10b-5. 59 Bin Miao & Gillian H Yeo, The efficiency of market reactions to earnings news, NATIONAL UNIVERSITY OF SINGAPORE. NATIONAL UNIVERSITY OF SINGAPORE (2009), available at http://care-mendoza.nd.edu/assets/152224/miao2009.pdf
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1. Bounded Rationality
However, some commentators argue that even semi-strong form efficiency does not exist
in the market, with respect to certain corporate governance factors, such as dual-class structures,
especially if they the stocks are issued in an IPO.60 The information is public, that dual class
structures create risk, but as the argument goes, IPO’s involve so many other factors, such as the
industry, competitive advantages, and value of intellectual property, that factors such as
disproportionate insider control, lack of diversity on the board of directors, and anti-takeover
provisions in the corporate charter are not considered deeply enough. The general phenomenon
of limited attention or processing ability is called bounded rationality. Bounded rationality has
been studied and shown to be real in certain group dynamics.61 Although scholars have
attempted to show its influence in stock market mispricings, I am not aware of any study that has
shown the connection.62 Groupthink is a phenomenon related to bounded rationality, shown
most famously in the Stanford prison experiment.63 People put into a role and surrounded by
people in the same role often behave in extreme caricatures of that role, even when such
behaviors are not conducive to the overall mission or goal.64 Prison wardens become sadistic,
60 Bebchuk, supra. 61 Herbert A Simon, Bounded rationality and organizational learning, 2 ORGANIZATION SCIENCE (1991). 62 Although I do not have access to it, a paper that purports to discuss this connection is Powell, Roberta Jane, An application of the theory of bounded rationality to risk in the stock market (Ph.D. Dissertation, 2012), abstract available at https://espace.library.uq.edu.au/view/UQ:287907. See also John R. Riddle, 361 Capital, Bounded Rationality: Tapping Investor Behavior to Source Alpha (accessed Nov. 26, 2017), http://361capital.com/viewpoints/bounded-rationality-tapping-investor-behavior-to-source-alpha/. 361 Capital is a boutique asset manager that claims to invest by exploiting patterns due to bounded rationality. 63 Craig Haney & Philip Zimbardo, The past and future of US prison policy: Twenty-five years after the Stanford Prison Experiment, 53 AMERICAN PSYCHOLOGIST (1998). 64 Id.
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and people in the same group dehumanize those outside of it.65 Such tendencies are cited when
trying to understand the stock market.66 Crowds follow each other to produce bull or bear
markets.67 Excitement over a technology company’s IPO drives prices up beyond all
reasonableness.68 This is the story we are told, anyway. Is the theory borne out in the data?
This is harder to confirm. The question is not whether investors have been burned by dual stock
companies in the past, but whether the market is incapable of pricing them.
The other, positive side of crowds, often called the “wisdom of crowds,” is the
phenomenon that even when no one in a group is sure of an answer to a question posed to them,
the group often converges to the correct answer.69 The difference in group dynamics between
the formation negative groupthink versus the formation of wisdom may be due to an adversarial,
or at least arms-length decision-making structure.70 Public sentiment surrounding an IPO
contains some of both, but may lean towards groupthink in some situations.71 For example, the
Facebook IPO was one of the first opportunities for young people to invest in a company they
were excited about and engaged with on a daily basis, perhaps driving up prices beyond a
rational value. On the other hand, even if more sophisticated investors saw an overvaluation and
decided to stay on the sidelines, the opportunity for them to borrow stock to short it (and
65 Id. 66 Riddle, supra. 67 Id. 68 Id. 69 Simon Moss, Wisdom of crowds (last updated June 28, 2016), http://www.sicotests.com/psyarticle.asp?id=291. See generally, JAMES SUROWIECKI, THE WISDOM OF CROWDS (Anchor. 2005). 70 Id. 71 Bebchuk, supra.
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therefore drive down prices), was limited.72 Company insiders are often contractually bound to a
lock-up period73 after IPO during which they cannot yet sell their stock. When the lock-up
period ends, the competing forces that drive down stock can be initiated, and stock drops at this
time may indicate a herd-mentality, groupthink dominance during IPO. For example, on the day
of expiry for the lock-up period of LinkedIn stock, the stock price fell 7%.74
Studies looking at stock performance can indicate whether IPO investors overvalue the
company. As discussed, dual class companies trade at a lower valuation than similarly situated
single class companies.75 And although the data is mixed, at least for certain periods in the last
few decades, their performance (as indicated by stock price increases) is not harmed for at least
three years.76 The data does not indicate that a mispricing occurs, but that may only reflect the
relatively short-term nature of the studies.
The proper discount on dual-class stocks should not be the same across different
companies.77 It is one thing to allow someone like Warren Buffett, who has a long track record
of returning value to investors, to have outsized voting control, and another to give such control
to someone untested. In addition to risk, another factor is the potential upside when investing
with innovators.78 One method of valuing the discount is to equate it with the premium that
72 Ram Ahluwalia, Efficient markets hypothesis and performance of IPO shares after lock-up period, MONEY.STACKEXCHANGE, https://money.stackexchange.com/questions/14730/efficient-markets-hypothesis-and-performance-of-ipo-shares-after-lock-up-period. 73 Id. 74 Id. 75 Gompers, supra. 76 Dimitrov, supra. 77 Ronald J Gilson, Evaluating dual class common stock: The relevance of substitutes, VIRGINIA LAW REVIEW (1987). 78 Id.
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would be offered to minority common stock in a LBO.79 Both represent the value of giving up,
or gaining control.80
c. Societal Interests
If markets are inefficient with respect to dual class IPO’s, it is not only the investors of
those companies who lose out. The extra dollars they overpay could go toward a better use; in
this way, market inefficiency is also a drain on the economy (i.e., results in economic
inefficieny).81
Even if the market is efficient, and investors in dual-class companies are satisfied with
what they pay for, society still may have interests in not allowing the arrangement. Some types
of contracts are not enforceable because they are against public policy.82 Most courts find that
parties cannot contract out of liability from intentional torts, and some courts even find that
contracting out of gross negligence claims is invalid as well.83 This section discusses the balance
of interests when considering whether dual class structures should be limited.
i. Balancing Benefits and Disadvantages
Proponents of dual-class structures argue that whatever problems it has is less than the
problems arising from banning them.84 Limiting its use can prevent managers from pursuing
visionary, but hard to monitor, projects in favor of short-term goals in order to please public
79 Id. 80 Id. 81 James Dow & Gary Gorton, Stock market efficiency and economic efficiency: Is there a connection?, 52 THE JOURNAL OF FINANCE (1997). This paper suggests that although market efficiency is a prerequisite for economic efficiency, it is not sufficient. 82 Walter Gellhorn, Contracts and Public Policy, 35 COLUM. L. REV. (1935). 83 Id. 84 Stephen Bainbridge, What to do about dual class stock (if anything)? (Nov. 05, 2015), http://www.professorbainbridge.com/professorbainbridgecom/2015/11/what-to-do-about-dual-class-stock-if-anything.html. [hereinafter Bainbridge, What to do]
17
investors.85 Another consequence of a ban is that founders—fearing a loss of control—will keep
keeping their companies private, and perhaps under-funded, to the detriment of society.86 A
case-by-case determination, it is argued, of the value of dual-class structures for certain types of
companies is what is needed, and this can be done most efficiently (with research funded through
profits from self-interest) by the market.87
Proponents of regulation argue that even monitoring by the market cannot identify in the
long-term which managers need more public oversight than others.88 And even if poor
performance by managers can be predicted, giving them access to capital, even at a steep
discount, is an invitation to trouble.89 Further studies, examining ten- and fifteen-year
performances after dual class issues, can inform the debate.
IV. Solutions
a. Ban on Dual-Class Structures
As a practical matter, a ban on dual-class structures would likely have to come in the
form of state law. Commentators generally find that the Securities Exchange Act of 1934 grants
the Securities and Exchange Commission (SEC) the authority to establish rules about corporate
disclosures, but not substantive governance issues.90 Specifically, the D.C. Circuit decided in
85 Arugaslan, supra, however, found that dual-class firms did not fund research and development any more than single-class ones. See also Andrei Shleifer & Robert W Vishny, Equilibrium short horizons of investors and firms, 80 THE AMERICAN ECONOMIC REVIEW (1990). This paper purports to explain why short-term investment horizons and short-term project benchmarks persist in the market, despite seeming to be a market inefficiency. 86 Bainbridge, What to do. 87 Id. 88 Lucian A Bebchuk & Kobi Kastiel, The Untenable Case for Perpetual Dual-Class Stock, (2017), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2954630. [hereinafter Bebchuck, Perpetual Dual-Class] 89 Id. 90 Stephen Bainbridge, The Scope of the SEC’s Authority over Shareholder Voting Rights (May 7, 2007), available at http://www.sec.gov/comments/4–537/4537–17.pdf.
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Business Roundtable v. SEC, that SEC’s Rule 19c-4, preventing companies with super-voting
shares from being listed on national exchanges, exceeded the agency’s authority to make it.91
Outside of the United States, countries such as Germany, Poland, and Spain have laws
limiting the use of dual-class structures.92 A country-to-country study of economic performance
as a result of governance requirements would be useful, although it would be difficult to isolate
the effects due primarily to regulation of stock classes.
b. Sunsetting Dual-Class Structures
Professors Bebchuck and Kastiel have argued for a mandatory sunsetting of dual-class
structures, in order to gain the benefits of forward thinking by company founders for a certain
time (with ten years being a good candidate), but avoid the disadvantages of founders staying in
disproportionate control past the time when their abilities no longer serve the company in the
best way.93 Companies have to be managed differently when they grow from lean startups to big
companies with more complex bureaucracies.94 And founders’ abilities to stay innovative can
decline with age.95 Their proposal would allow the dual structure to renew for another ten years
if a majority of the non-voting shareholders vote for it.96 Such sunsetting plans have previously
been implemented by some corporations through their charters, and it is not unheard of that
shareholders keep the dual class structure when management is performing well.97 For example,
Canadian company Fairfax put to its shareholders a vote to extend in time its dual-class structure,
91 Business Roundtable v. SEC, 905 F.2d 406 (D.C. Cir. 1990). 92 OECD Steering Grp. on Corp. Governance, Lack of Proportionality Between Ownership and Control: Overview and Issues for Discussion (2007), available at http://www.oecd.org/ daf/ca/corporategovernanceprinciples/40038351.pdf. 93 Bebchuk, Perpetual Dual-Class. 94 Id. 95 Id. 96 Id. 97 Id.
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and it was approved by 68.4% of the votes cast by shareholders unaffiliated with the controlling
shareholder.98
Bebchuk and Kastiel address several potential objections to their proposal. Most of them
tie into what they call the Panglossian Objection, which says that “market forces ensure that the
best governance arrangements are always adopted.”99 They argue that the market efficiency
(prices correctly reflecting all information available at the time) required exceeds the efficiency
currently seen.100 They state, based on general psychological principles, that investors show
bounded rationality and attention during an IPO.101 With all the other information to consider,
they don’t pay enough attention to, or value correctly, issues such as anti-takeover provisions in
the charter or the loss in value of non-voting stock in the far future when management can no
longer respond to the current business exigencies.102 The only way to address this market failure
is for regulation, as in the form of an SEC rule, to step in.103
What Bebchuk and Kastiel are saying, in essence, is that predictive signals of
management ability are not available for a time horizon of longer than ten years, and even if
there are, bounded rationality in the market means that prices do not reflect those signals.104 As
discussed earlier, the data is equivocal at best on whether IPO valuations are mispriced.105 Also,
research indicates that markets are constantly getting more efficient.106 Prices are more
98 Id. 99 Id. 100 Id. 101 Id. 102 Id. 103 Id. 104 Id. 105 “Bounded Rationality” section, supra. 106 Stephen Bertone, et al., (How) has the market become more efficient?, 54 JOURNAL OF BANKING & FINANCE (2015).
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accurately reflecting the available public information; exploitable patterns are getting harder to
find. Share prices now move more on the day of earnings announcements than in the past,
suggesting that new information is absorbed by the market more quickly.107 If bounded
rationality is not bumping up the price of non-voting IPO issues, the authors’ arguments lose a
lot of force. Still, if they are right that manager signaling can only forecast for up to ten years the
need for public oversight (or lack thereof), then there should be no loss to the economy of
banning longer dual-class structures, which would amount to a ban on gambling.
c. Private Ordering
A private ordering solution, to repeat, is one that lets market participants decide on the
best solution. The market consists not only of companies and investors, but also national
exchanges and advisory groups. Investors themselves have many levels of sophistication,
including activist hedge funds, institutional investors, and individual retail investors.
Many of the criticisms of banning dual-class structures come from commentators
favoring a private ordering. But even within such a solution, there are many different routes
market participants can take.
One of the most effective, but drastic, examples of shareholder activism is the corporate
takeover. Professor Bainbridge argues that proscribing dual class structures in order to limit its
anti-takeover effect “puts one a slippery slope indeed.”108 Dual-class structures are not so
distinguishable, in effect, from other schemes routinely approved by courts, such as poison pill
provisions. Bainbridge also uses some of the numerical studies discussed above to support his
107 Is efficient-market theory becoming more efficient?, THE ECONOMIST (May 27, 2017), https://www.economist.com/news/finance-and-economics/21722669-theory-changing-traders-behaviour-and-vice-versa-efficient-market-theory. 108 Bainbridge, What to do.
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hypothesis that a private ordering is best.109 One study looked at dual-class recapitalizations to
determine if existing shareholders were harmed by the recapitalizations.110 That is, the company
was already publicly traded before the dual class stock was issued. The study found that existing
shareholders did not see a drop in value in their stock after recapitalization, indicating that the
company was not perceived to be hurt by the recapitalization.111
It also found that non-voting shares are normally paid the same amount as voting shares
upon merger.112 This indicates that insiders are not in general looking to cash out at a higher rate
than non-voting stockholders, due to the premium for control.113 Indeed, it is likely that most
non-voting issues are protected by charter provisions that specify that liquidation values of
voting and non-voting stock are to be the same, as in the case of Google.114
There is a perception that companies with dual-class structures are all like Snap—with
young founders who flout governance norms and seem to have outsized opinions of
themselves—but this is not true.115 Dual-class companies have grown into household names
providing products to all socioeconomic groups.116 They exist in industries from technology
(Alphabet, formerly Google) to media (CBS, Scripps, Viacom) to financial services (Berkshire
Hathaway) to consumer products (Coca-Cola Bottling Co., Nike) to transportation and
industrials (Swift Transportation, Quaker Chemical).117
109 See, e.g., SEC Office of the Chief Economist, The Effects of Dual-Class Recapitalizations on the Wealth of Shareholders 4 (June 1, 1987). Megan Partch, The Creation of a Class of Limited Voting Common Stock and Shareholder Wealth, 18 J. FIN. ECON. 313, 332 (1987). 110 Id. 111 Id. 112 Id. 113 Id. 114 Id. 115 Bainbridge, What to do. 116 Id. 117 Id.
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Private ordering, it is argued, has resulted in a robust U.S. economy—financial crises
notwithstanding—and will continue to do so, especially because it counters the disadvantages of
short-term investor thinking.118 Finally, proponents of market ordering cite moves toward less
regulation in foreign stock exchanges, such as the Hong Kong stock exchange,119 as evidence
that the international trend is toward self-regulation by the markets.
d. Conclusion on Regulation
Regulatory decisions should be based as much as possible on scientific studies, rather
than assumptions about how people will behave in different regulatory environments. People are
complex, and restrictions imposed to plug up one problem can cause a leak to spring up
somewhere else. However, data unambiguously pointing to a single solution is difficult to come
by. It is also difficult to be objective about human nature since people have personal experiences
with others that are far more meaningful than studies purportedly showing something
different.120
With these caveats, I believe that long-term prediction of manager behavior may in some
cases be possible, and even where prediction ability is only marginal, a private ordering leads to
the best outcomes. It increases the incentive to collect profitable, predictive information, which
in turn leads managers to put out those predictive signals. Investment in visionary managers can
then be made earlier and with more accuracy, leading to better economic outcomes. Some
studies have shown that predicting performance from personal traits is possible,121 but none have
118 Berger, supra. 119 Yiu, supra. 120 See, e.g., Paul R Brewer & Marco R Steenbergen, All against all: How beliefs about human nature shape foreign policy opinions, 23 POLITICAL PSYCHOLOGY (2002). 121 Angela Lee Duckworth & Patrick D Quinn, Development and validation of the Short Grit Scale (GRIT–S), 91 JOURNAL OF PERSONALITY ASSESSMENT (2009).
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indicated that prediction can be so precise as to create a valuation in a stock market setting.
Nonetheless, studies identifying indicators of firm success are plentiful, and insiders reveal some
of their character through corporate decision-making.122 Management’s motive for pursuing a
dual-class structure may be one indicator. Although insiders are not likely to tell, or even know
themselves, the precise reasons why they prefer dual-class structures, certain indicators may be
available. For example, as discussed in “Insider Interests,” dual-class insiders have greater
financial risks and needs to diversify, pre-IPO. If, even after diversification, a large portion of
their wealth is still tied to the company’s performance, agency moral hazards are reduced. If
they cite reasons of wanting to give away their wealth, as Mark Zuckerberg has done, it may
indicate a philosophy of running the company for world betterment,123 which is a type of private
benefit (in self-satisfaction), but one that may have inadvertent shareholder benefit too.124 And
as discussed more below in “Venture Capital” and “Investor Knowledge,” there is a governance
structure even within insider management, which can curb outlier personal propensities and add
predictability to investing.
V. Solutions Within Private Ordering
Even within private ordering, government, through the judiciary, has a role to play.
Market participants often ease the judicial process by including clear provisions in corporate
charters, at least as it relates to the economic rights of dual-class shares. Non-voting issues often
122 Erkki K Laitinen, Prediction of failure of a newly founded firm, 7 JOURNAL OF BUSINESS VENTURING (1992). 123 In a recent Facebook livestream, Zuckerberg said that recently, he changed the company’s mission for the first time since starting the company—to now focus on community-building. Personal experience. 124 Paul C Godfrey, et al., The relationship between corporate social responsibility and shareholder value: An empirical test of the risk management hypothesis, 30 STRATEGIC MANAGEMENT JOURNAL (2009).
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have the same economic rights as their voting brethren, meaning that dividends are paid equally,
and liquidation rights are the same. For example, Google stated in its proxy statement
announcing the issue of non-voting Class C shares that in mergers and tender offers “holders of
shares of Class C capital stock will be entitled to receive, or to elect to receive, the same form of
consideration and amount of consideration on a per share basis as the holders of shares of
Class A common stock.”125 Altering the corporate charter to obtain a premium for super-voting
shares is not allowed, as an example of self-dealing, breaching of the duty of loyalty.126 By
avoiding giving the board discretion on such price allocations, courts don’t need to invoke
fiduciary duty review on at least this point. Before liquidation, however, super-voting
stockholders have tried to obtain premiums on their shares, either through increased dividends in
stock trade-ins.127
125 Google, supra. Google’s act of issuing non-voting stock prompted a lawsuit, which was settled. Tom Hals, Google settlement clears way for new Class C stock, REUTERS (June 17, 2013), https://www.reuters.com/article/us-google-stockplan-settlement/google-settlement-clears-way-for-new-class-c-stock-idUSBRE95G0MU20130617. Facebook tried a similar recapitalization, followed by a similar lawsuit, which, in contract, resulted in Facebook dropping its plans for the non-voting issue. Alex Heath, A power struggle between Facebook and investors just ended with Facebook dropping plans to issue non-voting shares, BUSINESS INSIDER (Sep. 22, 2017), http://www.businessinsider.com/facebook-settled-lawsuit-non-voting-shares-zuckerberg-testify-2017-9. However, no court has ever held for a plaintiff on the theory used by the plaintiffs in the Google and Facebook actions. 126 In re Delphi Financial Group S'holder Litig., 2012 WL 729232 (Del. Ch. Mar. 6, 2012). In this case, Delphi was organized under a dual class structure which gave its regular stock the same economic rights as those given to its super-voting stock. Chairman and CEO Robert Rosenkrantz, who owned 49.9% of voting rights but only 12.9% of cash flow rights, tried to amend the corporate charter so that he could receive a control premium in a merger for his super-voting stock ($53.875/share instead of $44.875/share). Stockholders tried to enjoin the merger, but the Delaware Court of Chancery allowed it to go through because a superior offer was not likely. However, it noted that Rosenkrantz likely violated his fiduciary duty by self-dealing in changing the charter to his personal benefit. Shareholders then sued him personally for damages, which resulted in a settlement of $49 million, 90% of the total $55 million he received as premium. 127 Bainbridge, What to do.
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a. Fiduciary Duties to Non-Voting Shareholders
For other actions, determining fiduciary duties may be more complicated. Dual class
companies have as much, or more, incentives to engage in self-dealing, because absent judicial
intervention, insiders will not lose control.
i. Lessons From Duties to Minority Stockholders
A stockholder owes fiduciary duties to other stockholders “only if it owns a majority
interest in or exercises control over the business affairs of the corporation.”128 He can exercise
control even when he does not own more than 50% of the corporation.129 Insiders with voting
control through super-voting shares would likely be found to be controlling stockholders even
when their economic ownership is less. As discussed, these insiders have the incentives to
extract private benefits from the company. Therefore, issues of self-dealing, implicating the duty
of loyalty, are especially relevant. Self-dealing results when both (1) the controlling stockholder
is on both sides of the transaction and dictated its terms, and (2) there is a special benefit to the
controlling stockholder in which the minority stockholders do not share.130
However, courts are uneasy about invoking self-dealing when the special benefit is non-
monetary.131 In Sinclair Oil, a controlling shareholder ran into personal financial difficulties,
and used his control over the corporation to issue large dividends, damaging the company’s long-
term prospects.132 The court held that the transaction was not self-dealing because the minority
shareholders received dividends in proportion to their ownership as well.133 It could be argued
128 Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d 1334, 1344 (Del. 1987). 129 Kahn v. Lynch Communication Systems, Inc., 638 A.2d 1110 (Del. 1994) (finding that a stockholder with 43% interest of the company had control). 130 Sinclair Oil Corporation v. Levien, 280 A.2d 717, 723 (Del. 1971). 131 Id. 132 Id. 133 Id.
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that the minority shareholders didn’t need and didn’t want the dividends to the detriment of the
company, and so the special benefit was to the controlling stockholder alone, due to his
particular circumstances.134 Courts don’t seem to want to engage in such analysis, likely
because, even if self-dealing were found, any rule that emerges would depend intricately on the
facts at hand, considering that personal benefits can be of the type with no reasonable economic
value to anyone else.
For example, consider the hypothetical situation that Evan Spiegel—CEO, director, and
controlling stockholder of Snap, Inc—decides to abandon the mobile app business and start to
research alchemy, turning lead into gold. All academic research says such a project would be
futile, but he thinks they are wrong. The benefit to Spiegel would be idiosyncratic, with no
seeming financial benefit to him—only the opportunity to pursue a childhood dream, perhaps.
Reliance on economic special benefits would likely see the plaintiff in a derivative suit lose. She
may find a winning argument based on a corporate waste doctrine, depending on how outlandish
the new corporate line of business is (searching for Bigfoot, perhaps).
Should the special benefit obtained to qualify as self-dealing be different when dealing
with non-voting stockholders as compared to minority stockholders? One might argue that
investors originally paid less for the stock, so they should expect a certain level of self-dealing,
especially of the type where founders engage in “moonshot” projects, since that type of risk is
what first brought them to success. Protection, it could be argued, should be gained by investors
through the market, and at the outset, by determining the discount they would require to absorb
that risk—not by relying on the judicial system. I come to the conclusion that protection should
be the same below, after discussing preferred stock.
134 Id.
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Another difference that arises in the context of dual class shares when self-dealing is
found is how to shift the burden to the plaintiff to show entire fairness. Normally, this can be
done by having the transaction approved by a majority of the minority of the stock votes.135
What should happen if the minority in this case has no vote? It is a natural extension, then, to
have the minority vote be in proportion to economic interest, without regard to voting rights.
After all, if voting rights were the overriding factor, the controlling shareholder would have their
way every time. Nonetheless, further, more pathological situations can be created, and a clear,
consistent guiding rule is important for courts to lay down early.
ii. Lessons From Duties to Preferred Stockholders
Analysis of the rights of preferred stockholders may shed some light on the proper
treatment of no-vote stockholders. The two have both similarities and differences. The rights of
preferred stock are variable and up for bargain between its owners and the corporation.136 Most
preferred stock does not share in the upside of increased firm value, and so it shares this feature
with debt.137 Both of these characteristics give preferred a contractual nature.138 However, the
resulting provisions of this deal-making is written in the corporate charter, which gives it also a
corporate flavor.139 Courts determining the rights of preferred stockholders sometimes apply
contract doctrines and sometimes apply corporate doctrines, depending on which side of its dual
nature is at issue in the case.140
135 Kahn, 638 A.2d at 1116 (Del. 1994). 136 William W Bratton & Michael L Wachter, A Theory of Preferred Stock, (2013), available at http://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=2392&context=faculty_scholarship. 137 Id. 138 Id. 139 Id. 140 Id.
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With this background, we can consider how the rights of preferred shareholders may
imply rights for non-voting stockholders. Preferred shareholders are often without vote, and
courts expect them to secure their rights through written provisions interpreted according to
contracts doctrines.141 Yet, preferred shareholders sometimes find themselves with fewer rights
than even contract doctrines would provide for.142 Does the no-vote rationale carry over to non-
voting common stock? Does the non-voting common a priori expect that fewer duties are owed
to them? How much less are they expecting because of the discount? If they thought there was a
difference, the transactional cost of calculating the risk of not only shirking143 but also self-
dealing, compounded by the risk a court would apply a lower standard of fiduciary duty, seems
to be a large one, discouraging the market from investing. Keeping it simple would lower
transactional costs, and for this reason, courts are likely to treat fiduciary duties owed to high-
voting, low-voting, and non-voting stockholders the same.
b. Venture Capital
Market participants have great incentives to determine the long-term consequences of
dual class structures on firm performance. For the information to be reflected in IPO prices, the
public must rely on various financial players often seen collectively as insiders. Underwriting
141 Id. 142 Steven Davidoff Solomon, Taking the Preferences Out of Preferred Stock, NEW YORK TIMES DEALBOOK (Sept. 13, 2012), https://dealbook.nytimes.com/2012/09/13/taking-the-preferences-out-of-preferred-stock/. This article describes the litigation against Emmis Communications, where a provision for preferred stock stated that rights could be changed by a greater than two thirds vote of the preferred class. The CEO then gave his employees preferred stock held initially in a trust, and because of the rule that management can vote the shares of its employees in a trust, they voted to do away with certain rights for the preferred. One might imagine this scheme to be a contractual breach of good faith, but the court approved it, suggesting not only that fiduciary duties could not be read into the contract, but also that the contract should be considered complete and that anything not expressly provisioned for should be read against the preferred stockholders. 143 Jensen, supra.
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banks, venture capitalists, and creditors all play a role. Can the public trust these financial
institutions to ensure not only an efficient market, but an efficient economy?144 In this case, at
least, these institutions’ competing interests should ensure that the public also benefits.145
Consider venture capitalists (VCs), for example. VCs have control, often through preferred stock
(sometimes convertible to common stock) and seats on the board of directors.146 The presence of
a large block stockholder, it has been found, increases firm value, even if that stockholder is not
involved in the daily management of the company.147 Concentrated ownership decreases the
transaction costs of monitoring management.148 Founders have been known to be fired pre-IPO
by insider VCs (e.g., Cisco’s founders), and so ones that last until IPO have at least some track
record of running a large corporation.149
c. Investor Knowledge (How the Public Values Voting Rights)
Investors themselves can facilitate a market reflecting true values by informing
themselves. This section discusses some of the data available to them, for comparison.
Visionary leadership is often associated with founder-led tech companies,150 which may account
for a large portion of dual-class companies from this industry. To use Google as an example, the
market doesn’t seem too worried about owning cash flow rights without a proportional amount
144 Dow, supra. 145 There are worries, however, that because VCs often exit companies at IPO, they are leaving public investors high and dry. A fuller explanation of their role can be found in: Bernard S Black & Ronald J Gilson, Venture capital and the structure of capital markets: banks versus stock markets, 47 JOURNAL OF FINANCIAL ECONOMICS (1998). 146 Id. 147 Id. 148 Id. 149 Id. 150 Gina Hall,Who are Silicon Valley’s most visionary tech CEOs?, SILICON VALLEY BUSINESS JOURNAL (Mar 7, 2017), https://www.bizjournals.com/sanjose/news/2017/03/07/top-tech-ceos-musk-cook-zuckerberg-pichai.html.
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of control. Currently, GOOGL, the ticker symbol for Google stock with one vote each, trades at
only a 1.7% premium over GOOG, the stock without voting rights.151 The premium for voting
rights (PVR) has been found to depend on many factors, with one study from 2005 showing that
the premium is lowest for manufacturing industries (mean PVR of 0.1%); highest in the finance,
insurance, real estate, and retail industries (mean PVR of 7.3%); and midway for transportation,
communications, electric gas and sanitary services (mean PVR of 1.8%).152 This would place
Google’s PVR at the midpoint. The results perhaps indicate a greater perceived risk in
management at finance, insurance, and retail company, due to a higher dependence on managers
in those industries, as compared to manufacturing. But it may also be due to a perceived lesser-
quality of management in those industries or even factors not related to management quality,
such as greater sophistication of share-class types in the finance and insurance industries.
Further studies may be able to tease out the causes from the correlates.
VI. Summary
As discussed, exchanges, indices, and different types of investors are all trying to protect
their own interests. Some of their decisions involve a public relations consideration as much as a
consideration of a direct financial benefit, as the banning of dual-class companies from the S&P
and the Russell may show. The hope of private ordering is that the self-interest of each of these
competing financial actors leads to the best possible allocation of resources for growth in the
economy.
151 988.20 for GOOG and 1,005.07 for GOOGL at close of October 20, 2017. Google Finance, https://finance.google.com/finance. 152 Quantifying the Valuation Discount for Lack of Voting Rights and Premium for Voting Rights, AMERICAN BANKRUPTCY INSTITUTE (Mar. 2005), https://www.abi.org/abi-journal/quantifying-the-valuation-discount-for-lack-of-voting-rights-and-premium-for-voting.
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Studies on different countries can offer realistic comparisons, with full consequences of
policy decisions coming to light. But that same complexity makes isolating the effects of certain
corporate governance features difficult.
If the information can be learned, I believe the market can learn it. A market solution for
the agency problem in dual-class structures has some drawbacks, such as the possibility of very
public manager and company meltdowns. And often the biggest and worst news dominates the
discussion. But it is the individually small but cumulative benefits for economic efficiency and
growth that may be the most important.
