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. public companies (about 9 in 10) have a "one share, one vote" structure. In contrast, companies with differential voting rights have a superior class for founders (and sometimes other insiders) and an inferior class for public investors, whose total economic risk at stake often dwarfs that of the superior class holders.

The per-share voting power disparity most typically employed is 10/1, but many recent dual-class IPOs have shown a fondness for ratios even more egregious. Examples inlcude exercise bike provider Peloton, social media sites Pinterest and Snap, ride-sharing app Lyft and software company Domo. Before shelving their IPO plans, office space provider WeWork (We Co.) and mixed-marial arts promoter Endeavor Group were each planning to bestow their insider class with 20 times the power of the public investors' class.

Sunset provisions of seven years or fewer: A credible 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, typically upon a chosen anniversary of the IPO, reducing agency risk for long-term investors. Click on the navy button in the right-hand column for examples of a range of approaches that 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, 2018, and 2019.

Delaware Bar, U.S. exchanges hold reasonable solutions in their hands
On September 13, 2019 CII submitted a letter to the Delaware Bar petitioning for legislation to prevent multi-class voting structures from extending beyond seven years after the IPO, unless each class, voting separately, supports extending that structure by a majority of outstading shraes.  

On October 24, 2018 CII submitted a letter to NASDAQ and a letter to NYSE similarly 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); LACERA (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
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.  
Resources
Nov. 26, 2019 ACGA: Letter outlining erosion of Asian public equity standards
Nov. 14, 2019 Financial Times: Dual Share Structures Could Erode Accountability at the Top
Sept. 30, 2019 Bloomberg: Goldman Gives New Reason IPOs May Suffer: Multi-Class Shares
Sept. 25, 2019 Fortune: One Bright Spot from the WeWork Debacle: Turns Out Investors Actually Care about Governance
Sept.13, 2019 CII letter to the Delaware Bar petitioning for legislation to reasonably limit dual-class stock 
June 25, 2019 The Hill: IPO Parade Marches on while Corporate Governance Suffers
July 18, 2018 CII Summaries of Key Academic Literature on Multi-Class Stock and Firm Value
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 
Examples of supporting letter: CalSTRS
Oct. 24, 2018 CII letter to NASDAQ proposing listing standard for Dual-Class Sunset Provisions
Examples of supporting letter: CalSTRS
Sep. 14, 2018 CFA Institute: Dual-Class Shares: The Good, the Bad and the Ugly
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
Mar. 11, 2019 CII letter to Levi Strauss
Feb. 13, 2019 CII letter to Lyft
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 List of Dual-Class Companies
Download CII's List of Companies with Time-Based Sunset Approaches to Dual-Class Stock
Download CII's 2017-2019 IPO Statistics

Note: For information on the use of CII's company-specific lists for commercial purposes, please call 202.261.7097.

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?
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 one's economic stake.

Additionally, it is important to recognize the deep institutional impediments to addressing this issue elsewhere. The Securities and Exchange Commission 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, but the for-profit model and intense competition for new listings is not an especially conducive environment for voluntarily raising listing standards toward investors' long-term interests. 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.