Why Dual-Class Shares Catch On, Over Investor Worries
(Bloomberg) -- The governance structure used by companies such as Facebook, Alibaba and Volkswagen is going global, and not everyone is happy. Dual-class shares, as they’re known, give company founders super-sized power over their businesses even if they only hold a small slice of the stock. While the formula is popular, especially among technology firms -- it blends public shares with the private-equity model -- many investors bristle at its undemocratic nature. Adoption of the structure by exchanges in London, Hong Kong and Singapore means they’re likely to become more common, despite complaints.
1. What’s the case against dual-class shares?
Opponents say they subvert the one-share, one-vote principal designed to give equal treatment to all shareholders. Instead, under a system known as weighted voting rights, some investors in dual-class shares (usually the founders, their families and the venture capitalists who provide seed money) retain most or all of the clout. Photo-sharing app Snap Inc. took the notion to its extreme by handing zero voting rights to investors in its $3.4 billion initial public offering in 2017. Facebook Inc.’s dual-class model gave founder Mark Zuckerberg almost 58% of voting shares in the company as of March 2020, when he owned less than 13% of its outstanding stock. The implosion of office-sharing company WeWork as it prepared to go public was due in part to scrutiny of a plan to give supercharged voting power to founder Adam Neumann.
2. Which exchanges allow dual-class shares?
Though rules and formats differ, they’re permitted by bourses in the U.S., Brazil, Canada, China, Denmark, France, Hong Kong, Italy, Singapore, Sweden and Switzerland. The U.K. plans to join that list. Hong Kong and Singapore embraced dual-class shares in 2018; since then, Hong Kong has netted some of the world’s largest technology firms including Xiaomi Corp. and Alibaba Group Holding Ltd. In 2019, China approved dual class shares for its Nasdaq-style Star market in Shanghai.
3. Why such interest?
In short, because Wall Street had been bagging the hottest listings. While dual-class shares once were used mostly by family-owned firms (Ford Motor Co. and Warren Buffett’s Berkshire Hathaway Inc.) and media companies (the New York Times Co.), the floodgates opened in 2004 with Google’s dual-class initial public offering. The model was quickly followed by LinkedIn, Groupon, Zynga, Facebook and Fitbit. These companies’ shares are included in major indexes, tracked by big money managers. That makes it more likely that such stocks are held by mom-and-pop investors in retirement accounts.
4. What do investors say?
Some are raising alarms. They see risks, including abuse of management power and discouragement of takeover offers, which can dampen share prices. In February, asset managers including Janus Henderson Group Plc and Universities Superannuation Fund, the U.K.’s largest private pension manager, spoke out against the dual-class structure, saying it would weaken shareholder rights. The complaints echoed earlier stances by the Asian Corporate Governance Association against changes in Asia. In the U.S., the Council of Institutional Investors, whose members oversee around $40 trillion, wants to bar non-voting shares from stock indexes. Still, many institutional investors end up buying shares in these companies, some of which are too big to ignore. BlackRock Inc., for example, has spoken against such share structures but is one of the largest investors in Facebook and in Google’s parent, Alphabet Inc.
5. Is the structure good for companies?
Businesses with dual-class shares say they enable executives to resist the short-term expectations that often come with being publicly traded and constitute a defense against hostile takeover bids. There’s no clear, consistent proof that the shares of such firms fare better or worse.
The Reference Shelf
- London’s top investors are cautioning against eroding investor rights.
- In the International Financial Law Review, lawyers from Baker McKenzie evaluated the dual-class landscape.
- Fund managers in Singapore issued similar warnings in 2017.
- Snap’s version of totalitarian capitalism isn’t so bad, Bloomberg Opinion columnist Justin Fox wrote in 2017.
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