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The Untenable Case for Perpetual Dual-Class Stock

Virginia Law Review, Volume 103, pp. 585-631, June 2017

Harvard Law School John M. Olin Center Discussion Paper No. 905

Harvard Law School Program on Corporate Governance Discussion Paper 2017-6

48 Pages Posted: 20 Apr 2017 Last revised: 30 Aug 2017

Lucian A. Bebchuk

Harvard Law School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)

Kobi Kastiel

Harvard Law School

Date Written: April 18, 2017

Abstract

The desirability of a dual-class structure, which enables founders of public companies to retain a lock on control while holding a minority of the company’s equity capital, has long been the subject of a heated debate. This debate has focused on whether dual-class stock is an efficient capital structure that should be permitted at the time of initial public offering (“IPO”). By contrast, we focus on how the passage of time since the IPO can be expected to affect the efficiency of such a structure.

Our analysis demonstrates that the potential advantages of dual-class structures (such as those resulting from founders’ superior leadership skills) tend to recede, and the potential costs tend to rise, as time passes from the IPO. Furthermore, we show that controllers have perverse incentives to retain dual-class structures even when those structures become inefficient over time. Accordingly, even those who believe that dual-class structures are in many cases efficient at the time of the IPO should recognize the substantial risk that their efficiency may decline and disappear over time. Going forward, the debate should focus on the permissibility of finite-term dual-class structures — that is, structures that sunset after a fixed period of time (such as ten or fifteen years) unless their extension is approved by shareholders unaffiliated with the controller.

We provide a framework for designing dual-class sunsets and address potential objections to their use. We also discuss the significant implications of our analysis for public officials, institutional investors, and researchers.

Keywords: Corporations, Dual-Class, Controlling Shareholders, Corporate Governance, Agency Costs, Sunset

JEL Classification: G32, G34, K22

Suggested Citation

Bebchuk, Lucian A. and Kastiel, Kobi, The Untenable Case for Perpetual Dual-Class Stock (April 18, 2017). Virginia Law Review, Volume 103, pp. 585-631, June 2017; Harvard Law School John M. Olin Center Discussion Paper No. 905; Harvard Law School Program on Corporate Governance Discussion Paper 2017-6 . Available at SSRN: https://ssrn.com/abstract=2954630 or http://dx.doi.org/10.2139/ssrn.2954630

Lucian A. Bebchuk (Contact Author)

Harvard Law School ( email )

Cambridge, MA 02138
United States
617-495-3138 (Phone)
617-812-0554 (Fax)

HOME PAGE: http://www.law.harvard.edu/faculty/bebchuk/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)

Kobi Kastiel

Harvard Law School ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States
6174074442 (Phone)

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