Council of Institutional Investors

Dual-Class Stock

CII's corporate governance policies endorse the principle of "one share, one vote": every share of a public company's common stock should have equal voting rights. When a company goes to the capital markets to raise money from the public, equity investors with the same residual claims should have equal protections and rights, including the right to vote in proportion to the size of their holdings. Classical principal-agent risks are exacerbated for investors when equity structures skew the alignment of ownership and voting rights, which is why the "one share, one vote" principle has been a core focus for CII since its founding in the 1980s.  

The vast majority of U.S. publicly traded companies (about 9 in 10) have a "one share, one vote" structure. Other companies typically create a superior class of common stock with more votes per share than an inferior class, with founders, their families or other insiders holding the superior class. The ratio most frequently employed is 10 votes per superior share to 1 vote per inferior share, although a troubling number of newly public companies have shown a fondness for even more egregious ratios and more than two classes. Unequal structures are becoming more "innovative," but the end result remains the same: disproportionate control for holders of the superior class.

Dual class structures traditionally are indefinite, but that tradition is changing. Click here for examples of a range of approaches dual class companies have taken in recent years toward automatically sunsetting their superior class stock. In 2016 CII adopted a statement underscoring an expectation for newly public companies to respect the "one share, one vote" principle for the long-term, if necessary through sunset provisions going into effect within a reasonably limited period (e.g. three to five years). CII continues to view equal voting rights upon IPO as the optimal approach. Click here for statistics from CII tracking of U.S. IPOs in 2017.

There are formidable impediments to broadly addressing the problem of unequal voting rights. Stock exchnages could address the problem, but competition to attract new listings puts "race to the bottom" pressure on listing standards. The Securities and Exchange Commission faces challenges over statutory authority. A federal suit brought decades ago by the Business Roundtable established judicial precedent against the SEC taking action.  

In this context, index methodology has emerged as a path forward. Following the egregious no-vote IPO of Snap Inc. and requests by CII and other concerned investor groups, three major index providers opened public consultations on their treatment of no-vote and multi-class structures. The FTSE Russell consultation resulted in a decision to exclude past and future developed market constituents whose free float constitutes less than 5 percent of total voting power. S&P Dow Jones' consultation resulted in a broader, but only forward-looking exclusion, which bars the addition of multi-class constituents to the S&P Composite 1500 index and its components, covering the S&P 500, MidCap 400 and SmallCap 600 indexes. MSCI's consultation was originally scheduled to conclude on August 31. In Nov. 2017 MSCI broadened the consultation and temporarily barred new multi-class listings from its ACWI Investable Market Index and US Investable Market 2500 Index. On Jan. 31, 2018 MSCI released its expanded consultation along with a discussion paper endorsing a system that would reduce the weight of multi-class listings in MSCI indexes, using free float and voting power as factors. 
Feb. 7., 2018 Working paper: Cremers, Lauterback and Pajuste: The Life Cycle of Dual Class Firms
Jan. 22, 2018 Bloomberg QuickTake: Dual Class Shares
Dec. 7, 2017 Dual Class Discussion Draft: Investor as Owner Subcommittee of SEC Investor Advisory Committee
Nov. 2017 Hunton & Williams overview of legal rights with nonvoting common stock 
Aug. 1, 2017 Andrew Winden: Sunrise, Sunset: An Empirical and Theoretical Assessment of Dual-Class Stock Structures
May 10, 2017 CII: Does Multi-Class Stock Enhance Firm Performance?
Executive Summary | Full Study
April 18, 2017 Lucian Bebchuk and Kobi Kastiel: The Untenable Case for Perpetual Dual-Class Stock
April 10, 2017 CII Podcast: Why Indexes Should Say "No" to Non-Voting Shares
Sept. 13, 2017 CII letter to Roku on its dual-class IPO
August 4, 2017 CII letter to Hong Kong on New Board concept paper
August 3, 2017 CII to MSCI responding to consultation on the treatment of no-vote shares
June 20, 2017 CII letter to Blue Apron on its triple-class structure
April 27, 2017 CII submission to S&P Down Jones consultation on no-vote shares 
Mar. 29, 2017 CII letter to Singapore Stock Exchange on preserving one share, one, vote listing standard
Mar. 29, 2017 CII letter to MSCI requesting public consultation on index eligibility of dual-class companies 
Mar. 24, 2017 CII letter to FTSE/Russell requesting public consultation on index eligibitliy of dual-class companies
Mar. 9, 2017 Testimony before the SEC Investor Advisory Committee on Snap
Feb. 3, 2017 CII letter to Snap on its capital structure with no voting rights for public investors
Aug. 20, 2014 CII letter to Swift Transportation on shareowner proposal calling for one share, one vote
Aug. 12, 2014 CII letters to Cablevision SystemsDonegal GroupFacebookFordGoogle and Spirit AeroSystems on shareowner proposals calling for one share, one vote
March 27, 2014 CII letter to NYSE requesting one share, one vote listing standard
March 27, 2014 CII letter to NASDAQ requesting one share, one vote listing standard
March 27, 2014 CII letter to the London Stock Exchange on preserving one share, one vote listing standard
March 27, 2014 CII letter to the Hong Kong Exchange on preserving one share, one vote listing standard
Dec. 10, 2012 CII follow-up letter to NYSE meeting
Oct. 2, 2012 CII letter to NYSE requesting one share, one vote listing standard
Oct. 2, 2012 CII letter to Nasdaq requesting one share, one vote listing standard

UPDATED JAN 2018: Download CII's list of Dual-Class Companies
Download CII's List of Companies with Time-Based Sunset Approaches to Dual-Class Stock
NEW: Download CII's 2017 IPO Statistics
The Rise of No-Vote Shares
A growing number of companies are adopting triple-class share structures that include a separate class of stock that offers shareholders no voting rights at all. Snap Inc. was the first company in recent years to make its initial public offering (IPO) with just non-voting shares. Other young companies, including Blue Apron and Altice USA, went public with triple-class capital structures that include a class of non-voting stock in reserve.
No-vote shares are a full-scale repudiation of the “one share, one vote” principle that is core to good corporate governance. Though such shares legally are equities, they function more like subordinated partnership units; holders get a stake in the returns, whether positive or negative, but little else. Non-voting shares rob shareholders of the means to hold management and boards accountable. They amount to a perpetual-control device that lets founders hang onto 100% of their power over the company even as their economic stake shrinks. Yet many investors who use indexing strategies will indirectly invest in Snap and any other company that issues non-voting shares if major index providers provide these share classes to be included in their indexes.
CII and many investors believe no-vote shares have no place in public companies, and we are pushing back. CII asked leading index providers FTSE Russell, MSCI and Standard & Poor’s to exclude Snap (and future companies with no-vote shares) and explore measures to incentivize the adoption of the "one share, one vote" principle. All three launched public consultations on this issue. FTSE Russell's consultation resulted in the exclusion of companies whose free float shares constitute less than 5 percent of total voting power. S&P Dow Jones' consultation resulted in the exclusion of multi-class companies from the Composite S&P 1500 index and its component indexes, including the S&P 500, MidCap 400 and SmallCap 600 on a going-forward basis. MSCI on November 2 extended its consultation and declared companies with unequal voting rights temporarily ineligible for addition to its  ACWI Investable Market Index as well as its US Investable Market 2500 Index. On Jan. 31, 2018 MSCI released a discussion paper and expanded consultation proposing to reduce the weight of multi-class listings in MSCI indexes using free float and voting power as factors.

The SEC tried to address the problem broadly in 1990 when it required the national stock exchanges to prohibit dual class listings, but the Business Roundtable sued in federal court and won. The exchanges maintain authority to voluntarily amend their listing standards, but have declined to act. Thus, one might consider major index providers as "the worst venue, except for all the others" to systemically address the problem. CII continues to advocate for listing standards that promote the “one share, one vote” principle at U.S. and non-U.S. exchanges. To learn more, listen the CII podcast.