Dual-Class Voting Share Structures
Dual-class shares: what are they?
Dual -class voting share structures are on the rise in North America. In the United States, an increasing number of companies, especially in the tech sector, are adopting dual-class structures, including powerhouses such as Google, Linkedin, Facebook and Snap Inc. Despite strong pressure from “one share, one vote” activists, who argue that such arrangements undermine shareholder democracy, dual-class stock structures are on the rise: in 2015, 15% of U.S. IPOs had “weighted voting rights” while only 1% of them did in 2005.
Dual-class voting structures are distinct from the classic single-class structure, which gives each share equal voting power. Dual class voting stock structures involve two or more classes of shares – one of which has considerably more voting power than the others. For example, one class A share of Bombardier Inc., which are held exclusively by Bombardier’s controlling families, carries 10 votes, while each common share carries a single vote.
What are their advantages?
By holding on to their “supervoting” shares, the controlling shareholders have the option of “unloading” a high percentage of their shares while maintaining control of their company. For example, Mark Zuckerberg, Facebook’s CEO, sold $356.8 million worth of Facebook shares in February 2018 to fund his philanthropic efforts. Since Zuckerberg’s preferred shares have ten times the voting power of ordinary shares, he can do so without risking giving up the control over his company.
Dual class shares structures allow entrepreneurs such as Zuckerberg to execute their long-term vision without being at the mercy of investors. In 2014?, Zuckerberg acquired Instagram for $1 billion; Zuckerberg closed the deal without consulting his board of directors. Why would he? Since he owns a large majority of the shareholder votes, he is answerable only to himself. Zuckerberg's acquisition was (very) worthwhile: in March 2018, Instagram was estimated at $35 billion dollars. Dual-class voting companies enjoy other perks: they are almost totally protected against takeovers such as poison pills, and they are not at the mercy of activist hedge funds.
While dual-class voting share structures come with a number of benefits, they have raised a number of concerns. First, uneven voting structures can lead the supervoting share owners to make decisions to maintain power while disregarding the best interests of the business, undermining shareholder democracy. When Snap Inc. went public in 2017, it was heavily criticized for offering shares with zero voting rights. Also, dual-class structures can lead to the “elderly leader problem,” a situation that occurs when an elderly leader is perceived to lack the competence to hold voting control. However, this is highly unlikely in an early start-up scenario.
The current Canadian landscape
In Canada, companies with a dual-class voting share structure have posted annual returns of 12% over the past 10 years, almost twice as high as their single-class counterparts who have shown a 7% return over that timespan. While dual-class structures are criticized, and banned from certain stock exchanges, they have a proven track record and can be very beneficial for early start-ups with solid founders. Early tech start-ups should consider dual-class voting structures to be able to execute their long-term vision while avoiding constant investor pressure and hostile takeovers.
Boris Degas is a 3rd year law student and caseworker at the BLG Business Venture Clinic.
Blog posts are by students at the Business Venture Clinic. Student bios appear under each post.