- CII Policies
- CII Advocacy Priorities – 2021
- CII Correspondence and Testimony
- Comment Opportunity Tracker
- Non-Financial Disclosure
- Investor-Company Engagement
- Majority-Supported Shareowner Proposals
- Director Elections
- Independent Board Leadership
- Executive Compensation
- Dual-Class Stock
- Divestment Debate
- Legal Issues
Dual-Class Stock
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. A growing proportion of newly public companies have differential voting rights that enable founders (and sometimes other insiders) to wield control over public compnaies without holding a commesurate equity stake.
The good news is that the overwhelming majority of newly public companies (three in four) embrace equal voting rights upon going public, and an increasing proportion of dual-class companies include time-based sunset provisions in their charters at the time of their initial offering, which ensures that equal voting rights will be adopted without further expense to the company upon a chosen anniversary of the IPO. (CII recommends seven years or fewer.) For examples of a range of approaches that companies have taken with time-based sunsets, click on the navy button to the right. 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's Dual-Class IPO Snapshot: First 6 months of 2021 and Click here for CII's historical statistics on U.S. IPOs in since 2017.
[Insert pie chart from 1H 2021: Dual class IPOs and use of time-based sunsets]
[Insert paragraph on pending legilsation here.]
[Subpage 1: CII Advocacy on Dual-Class Stock (covering bill in greater detail and pst enagement with ABA, exchanges justifying the need for legislative route]
[Subpage 2: Index Providers and Dual-Class Stock]
[Move into Subpage 1:]
In 2019 CII submitted a letter to the Delaware Bar and a letter to the American Bar Association petitioning to amend corporate law in those jurisdictions to prevent multi-class voting structures from extending beyond the seventh anniversary of an IPO, unless each class, voting separately, supports extending that structure by a majority of outstading shares. The ABA rejected CII's petition. The Delaware Bar also declined to recommmend the adoption of CII's proposed amendments.
In 2018 CII submitted a letter to NASDAQ and a letter to NYSE similarly asking these exchanges 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. CII encourages market participants of all types to consider publicly supporting this reasonable compromise.
[Move into subpage 2]:
CII and some institutional investors turned to three major index providers in the wake of Snap Inc.’s egregious no-vote IPO, which led to three public consultations:
The good news is that the overwhelming majority of newly public companies (three in four) embrace equal voting rights upon going public, and an increasing proportion of dual-class companies include time-based sunset provisions in their charters at the time of their initial offering, which ensures that equal voting rights will be adopted without further expense to the company upon a chosen anniversary of the IPO. (CII recommends seven years or fewer.) For examples of a range of approaches that companies have taken with time-based sunsets, click on the navy button to the right. 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's Dual-Class IPO Snapshot: First 6 months of 2021 and Click here for CII's historical statistics on U.S. IPOs in since 2017.
[Insert pie chart from 1H 2021: Dual class IPOs and use of time-based sunsets]
[Insert paragraph on pending legilsation here.]
[Subpage 1: CII Advocacy on Dual-Class Stock (covering bill in greater detail and pst enagement with ABA, exchanges justifying the need for legislative route]
[Subpage 2: Index Providers and Dual-Class Stock]
[Move into Subpage 1:]
In 2019 CII submitted a letter to the Delaware Bar and a letter to the American Bar Association petitioning to amend corporate law in those jurisdictions to prevent multi-class voting structures from extending beyond the seventh anniversary of an IPO, unless each class, voting separately, supports extending that structure by a majority of outstading shares. The ABA rejected CII's petition. The Delaware Bar also declined to recommmend the adoption of CII's proposed amendments.
In 2018 CII submitted a letter to NASDAQ and a letter to NYSE similarly asking these exchanges 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. CII encourages market participants of all types to consider publicly supporting this reasonable compromise.
[Move into subpage 2]:
CII and some institutional investors turned to three major index providers in the wake of Snap Inc.’s egregious no-vote IPO, which led to three public consultations:
- 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 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 with a discussion paper contemplating more significant reform: a weight adjustment for each index security based on the proportion of total voting power in free float hands, with no exemption for existing constituents. CII's supportive comment letter offered three ways to realize the benefits of this proposal while softening 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 major index construction.
Download CII's List of Dual-Class Companies
Download CII's List of Companies with Time-Based Sunset Approaches to Dual-Class Stock
Download CII's 2017-2020 IPO Statistics
Download CII's Snapshot of Dual-Class IPOs from the First Half of 2021
Note: For information on the use of CII's company-specific lists for commercial purposes, please e-mail lucy@cii.org.
What counts as dual-class?
As a policy matter, "dual-class stock" encompasses any equity structure involving unequal (sometimes described as "weighted") voting rights, regardless of the number of share classes issued. The "dual class" debate therefore extends to triple-class companies like Snap Inc. as well as some unusually structured single-class companies.For example, Spotify's entry into the public markets included 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." In determining whether a company has a dual class structure, CII adheres to the test of whether voting influence has inconsistencies across outstanding common (or "ordinary") equity; preferred stock is not considered due to its elevated economic rights.
Why do index providers have an appropriate role on this issue? [Move to subpage Index Providers and Dual-Class Stock]
Providers of public equity indexes have an extensive history of exercising discretion to under-represent parts of the "investable universe" that don't meet certain fundamental norms of equity. The S&P 500, for example, has long-excluded master limited partnerships (MLPs), business development corporations (BDCs) and limited liability companies (LLCs). In 2018 the index continued to exercise discretion by excluding prospective entrants that violate the norm of proportionate voting influence according to economic stake.
Additionally, it is important to recognize the role of indexes within the context of deep institutional impediments to addressing this issue elsewhere. The Securities and Exchange Commission currently lacks statutory authority to require exchanges to curb unequal voting rights due to a federal suit brought decades ago by the Business Roundtable, establishing judicial precedent against the SEC taking action. Stock exchanges could address the matter by requiring listed companies to have equal voting rights or reasonable sunset provisions, but the for-profit model and intense competition for new present conflicts for these "self-regulatory organizations." Major U.S. exchanges have rebuffed formal proposals to act since 2014. Further reducing the likelihood of exchange-based reform, 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, permitting dual-class structures in certain circumstances. Global regulatory coordinators like the International Organization of Securities Commissions (IOSCO) are empowered to provide guidance, but not to compel action.
Exchanges in Germany, France, Italy, Switzerland, Sweden, Canada, Hong Kong, Singapore and the U.K. permit public companies to issue multi-class stock. In other jurisdictions, such as Japan, dual-class offerings are technically allowed, but they are not market practice. Examples of markets that forbid the practices are Belgium, Spain, South Korea, India and Russia.
Download CII's List of Companies with Time-Based Sunset Approaches to Dual-Class Stock
Download CII's 2017-2020 IPO Statistics
Download CII's Snapshot of Dual-Class IPOs from the First Half of 2021
Note: For information on the use of CII's company-specific lists for commercial purposes, please e-mail lucy@cii.org.
What counts as dual-class?
As a policy matter, "dual-class stock" encompasses any equity structure involving unequal (sometimes described as "weighted") voting rights, regardless of the number of share classes issued. The "dual class" debate therefore extends to triple-class companies like Snap Inc. as well as some unusually structured single-class companies.For example, Spotify's entry into the public markets included 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." In determining whether a company has a dual class structure, CII adheres to the test of whether voting influence has inconsistencies across outstanding common (or "ordinary") equity; preferred stock is not considered due to its elevated economic rights.
Why do index providers have an appropriate role on this issue? [Move to subpage Index Providers and Dual-Class Stock]
Providers of public equity indexes have an extensive history of exercising discretion to under-represent parts of the "investable universe" that don't meet certain fundamental norms of equity. The S&P 500, for example, has long-excluded master limited partnerships (MLPs), business development corporations (BDCs) and limited liability companies (LLCs). In 2018 the index continued to exercise discretion by excluding prospective entrants that violate the norm of proportionate voting influence according to economic stake.
Additionally, it is important to recognize the role of indexes within the context of deep institutional impediments to addressing this issue elsewhere. The Securities and Exchange Commission currently lacks statutory authority to require exchanges to curb unequal voting rights due to a federal suit brought decades ago by the Business Roundtable, establishing judicial precedent against the SEC taking action. Stock exchanges could address the matter by requiring listed companies to have equal voting rights or reasonable sunset provisions, but the for-profit model and intense competition for new present conflicts for these "self-regulatory organizations." Major U.S. exchanges have rebuffed formal proposals to act since 2014. Further reducing the likelihood of exchange-based reform, 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, permitting dual-class structures in certain circumstances. Global regulatory coordinators like the International Organization of Securities Commissions (IOSCO) are empowered to provide guidance, but not to compel action.
Exchanges in Germany, France, Italy, Switzerland, Sweden, Canada, Hong Kong, Singapore and the U.K. permit public companies to issue multi-class stock. In other jurisdictions, such as Japan, dual-class offerings are technically allowed, but they are not market practice. Examples of markets that forbid the practices are Belgium, Spain, South Korea, India and Russia.