Council of Institutional Investors

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 winds down the dual-class structure 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 temporal 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.

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. Early supporters included BlackRock, T. Rowe Price, CalPERS and CalSTRS. 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.
 
Resources
Dec. 10, 2018 Bloomberg: When one Man Dominates a Company: The Problem with Mark Zuckerberg Types
Oct. 24, 2018  CII letter to NYSE proposing listing standard for Dual-Class Sunset Provisions 
Example of supporting letter: CalSTRS
Oct. 24, 2018 CII letter to NASDAQ proposing listing standard for Dual-Class Sunset Provisions
Example of supporting letter: CalSTRS
Sep. 14, 2018 CFA Institute: Dual-Class Shares: The Good, the Bad and the Ugly
July 18, 2018 CII Summaries of Key Academic Literature on Multi-Class Stock and Firm Value
June 4, 2018 LA Times: Hype and Plunder
May 22, 2018 Bernstein Litowitz Berger & Grossman: When One Share Does Not Mean One Vote: The Fight Against Dual-Class Capital Structures
May 20, 2018 Baran, Forst and Via: Dual Class Share Structure and Innovation
May 15, 2018 WSJ Heard on the Street: Can Super-voting Stocks Survive the CBS Challenge?
Mar. 21, 2018 Kim, Michaely: Sticking Around too Long? Dynamics of the Benefits of Dual-Class Structures
Mar. 21, 2018 Kilpatrick, Townsend and Stockton: Low Vote Share Debate Heats Up 
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
 
Correspondence
Nov. 8, 2018 CII letter to Qualtrics International
Sept. 11, 2018 CII letter to Zekelman Industries
Aug. 24, 2018 CII letter to Eventbrite
June 25, 2018 CII letter to Domo
May 14, 2018 CII letter to GreenSky
May 14, 2018 CII letter to Pluralsight
May 9, 2018 CII letter to MSCI on treatment of unequal voting structures
April 18, 2018 CII letter to Pivotal Software
April 18, 2018 CII letter to Vrio
March 22, 2018 CII letter to Hong Kong Stock Exchange
Feb. 27, 2018 CII letter to Dropbox
Oct. 20, 2017 CII letter to Stitch Fix
Oct. 18, 2017 CII letter to MongoDB
Oct. 6, 2017 CII letter to Switch
Sept. 13, 2017 CII letter to Roku 
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
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
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
 





 
Download CII's 2018 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


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. To learn more, listen the CII podcast.