Theory, Evidence, and Policy on Dual-Class Shares: A Country-Specific Response to a Global Debate

Abstract

Dual-class shares have become one of the most controversial issues in today´s capital markets and corporate governance debates around the world. Namely, it is not clear whether companies should be allowed to go public with dual-class shares and, if so, which restrictions (if any) should be imposed. Three primary regulatory models have been adopted to deal with dual-class shares: (i) prohibitions, existing in countries like the United Kingdom, Germany, Spain, Colombia, or Argentina; (ii) the permissive model adopted in several jurisdictions, including Canada, Sweden, the Netherlands, and particularly the United States; and (iii) the restrictive approach recently implemented in Hong Kong and Singapore. This paper argues that, despite the global nature of this debate, regulators should be careful when analysing foreign studies and approaches, since the optimal regulatory model to deal with dual-class shares will depend on a variety of local factors. Namely, it will be argued that, in countries with sophisticated markets and regulators, strong legal protection to minority investors, and low private benefits of control, regulators should allow companies going public with dual-class shares with no restrictions or minor regulatory intervention (e.g., event-based sunset clauses). By contrast, in countries without sophisticated markets and regulators, high private benefits of control, and weak legal protection to minority investors, dual-class shares should be prohibited or subject to higher restrictions (e.g., time-based sunset clauses and stringent corporate governance rules). Intermediate solutions should be adopted for countries with mixed features. Therefore, the key question to be addressed from a policy perspective is not whether companies should be allowed to go public with dual-class shares, as many authors and regulators seem to be discussing, but whether dual-class class shares should be allowed and, if so, under which conditions, taking into account the particular features of a country.

Keywords: dual-class shares, corporate governance, investor protection, outside investors, moral hazard, entrenchment, private benefits of control, tunneling, IPOs, innovation, tech companies, capital markets, securities regulators, insiders, voting rights, access to finance, economic growth

JEL Classification: K22