Dual-class shares are a corporate structure where a company issues different classes of shares, each with varying voting rights and dividend policies. Typically, Class A shares carry one vote per share, while Class B shares carry multiple votes per share. While this can be extended to more than two classes, “dual-class shares” has come to designate any structure which deviates from the “one share, one-vote” principle.
This has significant implications for corporate governance. For instance, Mark Zuckerberg’s Class B shares, which carry 10 votes each, have allowed him to retain 60 percent of Facebook’s voting rights with only 16 percent of its shares. This allows founders to retain control through multiple funding rounds, thus focussing on long-term goals without pressure from short-term market fluctuations. This can be particularly beneficial for tech companies or startups requiring time to develop innovative products.
However, this structure can lead to entrenchment, where a small group of shareholders, typically founders or early investors, retain disproportionate control. This can lead to misalignment between the interests of the controlling shareholders and the minority shareholders, potentially impacting corporate decisions adversely.
From a performance perspective, dual-class shares present a mixed picture. New companies (Facebook, Alphabet) and older ones (Ford) using this structure are proof enough that it can coexist with strong market performance. However, there are concerns about the long-term sustainability of such a structure, particularly if the interests of the controlling shareholders diverge significantly from those of the other shareholders. Moreover, the perception of a lack of democratic corporate governance can negatively impact investor sentiment, potentially leading to a discount on share prices.
While this structure protects founders from hostile takeovers and undue influence from activist shareholders, it can also limit the ability of minority shareholders to influence corporate policy, including critical decisions like mergers and acquisitions, executive compensation, and corporate strategy. At the extreme end, companies may issues shares carrying zero voting rights; this was the case of Snap Inc. in its 2017 IPO, during which CEO Evan Spiegel was explicit about his intention to make all stockholder decisions.
Those governance concerns have led to calls for more regulation of dual-class share structures. In a 2017 campaign, the Investors Stewardship Group – which brings together a wide range of major financial players, from BlackRock to the California Public Employees’ Retirement System, with managed assets tallying up to $17 trillion – demanded their blanket ban. However, this complex issue warrants a more nuanced approach. Allowing dual-class shares with minimal intervention is sensible in markets where strong regulatory oversight, robust protections for minority investors, and good levels of investor sophistication mitigate the associated risks. Conversely, they may require targeted regulation in less developed markets, with higher risks of control abuse and weaker investor protections.
Aside from bans, possible regulatory or dissuasive measures include:
Sunset clauses and other conditions subsequent: A sunset clause is a provision that automatically converts dual-class shares into common shares after an agreed amount of time. The automatic conversion may also be effected when the share changes hands, by sale or as a result of the death of its original owner. This mechanism has gained traction as a means to balance founder control with shareholder democracy. For example, Google’s 2014 stock restructuring implemented a sunset provision that converted Class C shares (without voting rights) to Class A shares, effectively addressing shareholder concerns over unequal voting rights. Implementing sunset clauses could alleviate such concerns by ensuring a gradual transition to a more democratic share structure.
Exclusion from indices: Market indices’s eligibility requirements can be an instrument in upholding investor interests and good governance practices. Following the Snap Inc. IPO, the S&P Dow Jones implemented a policy excluding multi-class share companies from entering the S&P 500, which worsened Snap’s already sinking share price.
Voting power caps: A cap on maximum voting power prevents extreme disparities between investors. Such a cap could be written into law or into the listing rules of stock exchanges. Following its listing reform last April, the Hong Kong Stock Exchange has allowed in multiple-class shares companies under conditions including that top-class shares carry no more than 10 times the voting power of ordinary shares.
Enhanced disclosure requirements: Regulatory bodies could mandate detailed disclosures about the actions and intentions of controlling shareholders, such as providing comprehensive reports on decisions made by controlling shareholders, conflicts of interest, and the impact of these decisions on minority shareholders.
Voting-rights adjustment mechanisms: Companies could be mandated to adopt mechanisms whereby they temporarily return to “one share, one vote” in the event of significant corporate decision, like a merger or an acquisition. This would level the voting field in scenarios in which broader shareholder support is critical, while allowing dual-share structures the rest of the time – although this effectively reduces the protection they afford against hostile takeovers. Temporary adjustment may also be relevant in decisions that alter the dual-class share structure itself.
Dual-class shares challenge accepted notions of corporate control and shareholder democracy. While they offer benefits in terms of long-term strategic planning and protection from market volatility, they also pose risks related to corporate governance and shareholder rights. Their regulation must avoid one-size-fit-all thinking, acknowledging instead the varying capabilities and risks of different market environments.