The WSJ reports:
Tech companies are structuring their IPOs so that founders and executives wind up with far more votes than actual shares. The exaggerated voting power gives those few shareholders dominance over all corporate decisions, ranging from the election of directors to whether to sell the company someday.
That ownership structure makes it possible for companies to assign different voting rights to different groups of shareholders, as Facebook did in its IPO in 2012. Class B shares held by Chief Executive Mark Zuckerberg and other early investors have 10 votes per share, while Class A shares sold to the public have one vote per share. Snap has three classes of shares.
This has prompted much hand wringing by the usual suspects:
“It reduces the role of a board member to that of an adviser who works at the behest or pleasure of the founder,” says Mark Lonergan, founder and managing partner of executive-search firm Lonergan Partners in Redwood City, Calif.
The Council of Institutional Investors, which represents large pension funds and other shareholders, has proposed barring Snap from stock-market indexes such as the S&P 500 because the company’s structure “will undermine the quality and confidence of public shareholders in the market.” ...
It’s hard for investors to resist promising tech IPOs even if that means they will wind up with little or no voice at the company. “As a firm, we much prefer shareholder-friendly management teams and boards with good corporate governance,” says Dan Ernst, a senior analyst at asset manager Welch Capital Partners LLC in New York.
I've addressed this issue a couple of times:
- Revisiting the One-Share/One-Vote Controversy: The Exchanges’ Uniform Voting Rights Policy, 22 Securities Regulation Law Journal 175 (1994)
- The Short Life and Resurrection of SEC Rule 19c-4, 69 Washington University Law Quarterly 565 (1991)
The strongest argument against dual class stock rests on conflict of interest grounds. Although managers are fiduciaries charged with protecting the shareholders’ interests, the disparate voting rights plan typically will give them voting control. Knowing they cannot be ousted by the shareholders, the managers’ temptation to act in their own self-interest is obvious.
While management’s conflict of interest may justify some restrictions on some disparate voting rights plans, it hardly justifies a sweeping prohibition of dual class stock. First, not all such plans involve a conflict of interest. Dual class IPOs are the clearest case. Public investors who don’t want lesser voting rights stock simply won’t buy it. Those who are willing to purchase it presumably will be compensated by a lower per share price than full voting rights stock would command and/or by a higher dividend rate. In any event, assuming full disclosure, they become shareholders knowing that they will have lower voting rights than the insiders and having accepted as adequate whatever trade-off is offered by the firm in recompense. In effect, management’s conflict of interest is thus constrained by a form of market review.
Note that this argument does not depend on the market being able to accurately price corporate governance terms. It’s simply an anti-paternalism argument. The fact that I think (although I admit there is some doubt) that markets accurately price the governance terms of offerings simply buttresses the underlying philosophical case.