Dual-Class Stock
CII's 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 have 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 one 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.
As a policy matter, "dual-class stock" broadly encompasses any equity structure providing unequal (or "weighted") voting rights, regardless of the number of share classes issued. The "dual class" debate therefore extends to triple-class companies like Snap Inc. and can extend even to unusually structured single-class companies. For example, Spotify's IPO registration statement introduced one class of ordinary shares, each entitled to one vote; but the company also granted insiders 10 "beneficiary certificates" for each ordinary share held. Each certificate provides one additional vote but no economic rights. Thus, Spotify's structure functions as de facto dual class while complying with an overly-narrow definition of "one share, one vote."
Sunset provisions: A path to alignment
An increasing number of dual-class companies are choosing to go public with time-based sunset provisions incorporated into their charters. Such a provision automatically converts the dual-class structure to one share, one vote upon a chosen anniversary of the IPO, reducing agency risk for long-term investors. Click here for examples of a range of approaches that dual class companies have taken with time-based sunsets. Since 2016, CII has supported sunset provisions if necessary to achieve alignment over a reasonable period of time. CII continues to view equal voting rights upon IPO as the optimal approach, and the overwhelming majority of U.S. IPOs indicate a consistent view. Click here for CII statistics on U.S. IPOs in 2017 and 2018.
U.S. Exchanges presented with reasonable compromise
On October 24, 2018 CII submitted a letter to NASDAQ and a letter to NYSE asking these exchnages to require newly-listed companies to either abide by the proportionality principle or wind-down their dual-class structure within seven years of IPO, unless shareholders vote, on a share-for-share basis, to extend that dual-class structure. Examples of supporters include Florida SBA (NASDAQ, NYSE); CalSTRS (NASDAQ, NYSE), Hermes EOS (NASDAQ, NYSE); a coalition of insititutional investors with $1.7 trillion AUM (NASDAQ, NYSE) and AMEC (NASDAQ, NYSE). CII encourages market participants of all type to consider publicly supporting this reasonable compromise.
Index providers: No longer blind to voting rights
Historically there have been formidable impediments to broadly addressing the separation of ownership from voting rights. The Securities and Exchange Commission lacks statutory authority to force exchanges to curb unequal voting rights of listed companies. (A federal suit brought decades ago by the Business Roundtable established judicial precedent against the SEC taking action.) Stock exchanges could voluntarily address the matter by ensuring their listing standards bar companies with dual-class structures, but U.S. exchanges have rebuffed previous proposals to act, and multiple non-U.S. exchanges with long-standing "one share, one vote" requirements recently have yielded to "race to the bottom" pressure to attract new listings. Global regulatory coordinators are empowered to provide guidance, but not to compel action.
With avenues for reform limited, CII and many institutional investors turned to three major index providers--each of which had a history of exercising discretion to under-represent parts of the investable universe, but none of which previously factored voting rights in its methodology. In the wake of Snap Inc.’s egregious no-vote IPO and requests by CII and other concerned investor groups, three public consultations were opened:
The vast majority of U.S. publicly traded companies (about 9 in 10) have a "one share, one vote" structure. Other companies typically have 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 one 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.
As a policy matter, "dual-class stock" broadly encompasses any equity structure providing unequal (or "weighted") voting rights, regardless of the number of share classes issued. The "dual class" debate therefore extends to triple-class companies like Snap Inc. and can extend even to unusually structured single-class companies. For example, Spotify's IPO registration statement introduced one class of ordinary shares, each entitled to one vote; but the company also granted insiders 10 "beneficiary certificates" for each ordinary share held. Each certificate provides one additional vote but no economic rights. Thus, Spotify's structure functions as de facto dual class while complying with an overly-narrow definition of "one share, one vote."
Sunset provisions: A path to alignment
An increasing number of dual-class companies are choosing to go public with time-based sunset provisions incorporated into their charters. Such a provision automatically converts the dual-class structure to one share, one vote upon a chosen anniversary of the IPO, reducing agency risk for long-term investors. Click here for examples of a range of approaches that dual class companies have taken with time-based sunsets. Since 2016, CII has supported sunset provisions if necessary to achieve alignment over a reasonable period of time. CII continues to view equal voting rights upon IPO as the optimal approach, and the overwhelming majority of U.S. IPOs indicate a consistent view. Click here for CII statistics on U.S. IPOs in 2017 and 2018.
U.S. Exchanges presented with reasonable compromise
On October 24, 2018 CII submitted a letter to NASDAQ and a letter to NYSE asking these exchnages to require newly-listed companies to either abide by the proportionality principle or wind-down their dual-class structure within seven years of IPO, unless shareholders vote, on a share-for-share basis, to extend that dual-class structure. Examples of supporters include Florida SBA (NASDAQ, NYSE); CalSTRS (NASDAQ, NYSE), Hermes EOS (NASDAQ, NYSE); a coalition of insititutional investors with $1.7 trillion AUM (NASDAQ, NYSE) and AMEC (NASDAQ, NYSE). CII encourages market participants of all type to consider publicly supporting this reasonable compromise.
Index providers: No longer blind to voting rights
Historically there have been formidable impediments to broadly addressing the separation of ownership from voting rights. The Securities and Exchange Commission lacks statutory authority to force exchanges to curb unequal voting rights of listed companies. (A federal suit brought decades ago by the Business Roundtable established judicial precedent against the SEC taking action.) Stock exchanges could voluntarily address the matter by ensuring their listing standards bar companies with dual-class structures, but U.S. exchanges have rebuffed previous proposals to act, and multiple non-U.S. exchanges with long-standing "one share, one vote" requirements recently have yielded to "race to the bottom" pressure to attract new listings. Global regulatory coordinators are empowered to provide guidance, but not to compel action.
With avenues for reform limited, CII and many institutional investors turned to three major index providers--each of which had a history of exercising discretion to under-represent parts of the investable universe, but none of which previously factored voting rights in its methodology. In the wake of Snap Inc.’s egregious no-vote IPO and requests by CII and other concerned investor groups, three public consultations were opened:
- S&P Dow Jones' consultation resulted in barring the addition of multi-class companies to the S&P Composite 1500 index and its components, which covers the S&P 500, MidCap 400 and SmallCap 600 indexes. Existing constituents, however, were permanently grandfathered.
- FTSE Russell's consultation resulted in excluding past and future developed market constituents whose free float constitutes less than 5 percent of total voting power. Although only a handful of companies do not meet this requirement, FTSE Russell has indicated its intention to consider raising the 5 percent threshold in the future.
- MSCI conducted the most prolonged consultation of the three, but ultimately chose to continue to ignore voting rights for the purpose of major index construction. MSCI originally contemplated modest reform: excluding no-vote shares from major indexs in cases where the company's listed shares constitute under 17% of total voting power (25% for new constituents). MSCI subsequently released an expanded consultation along with a discussion paper proposing more sweeping reform: a weight adjustment to each index security based on the proportion of total voting power in free float hands, with no exemption for existing constituents. CII's comment letter was supportive and offered three ways to soften portfolio disruption: a three-year grace period for existing constituents; immediate and permanent exemptive relief for adopters of reasonable sunset provisions; and a gradual phase-in of the new methodology. Concluding its consultation, MSCI announced on October 30, 2018 it would continue to ignore voting rights for the purpose of major index construction.
Download CII's 2019 List of Dual-Class Companies
Download CII's List of Companies with Time-Based Sunset Approaches to Dual-Class Stock
Download CII's 2017-2018 IPO Statistics
Note: For information on the use of CII's company-specific lists for commercial purposes, please call 202.261.7097.
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 include these share classes in their indexes.
CII and many investors believe no-vote shares have no place in public companies. CII continues to advocate for listing standards that promote the “one share, one vote” principle at U.S. and non-U.S. exchanges.
Download CII's List of Companies with Time-Based Sunset Approaches to Dual-Class Stock
Download CII's 2017-2018 IPO Statistics
Note: For information on the use of CII's company-specific lists for commercial purposes, please call 202.261.7097.
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 include these share classes in their indexes.
CII and many investors believe no-vote shares have no place in public companies. CII continues to advocate for listing standards that promote the “one share, one vote” principle at U.S. and non-U.S. exchanges.