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Nonvoting Shares and Efficient Corporate Governance

40 Pages Posted: 29 Aug 2017 Last revised: 13 Dec 2017

Dorothy Shapiro Lund

University of Chicago Law School

Date Written: September 22, 2017

Abstract

Nonvoting stock is on the rise, especially among founders of successful technology startups. But the surge in nonvoting stock offerings has generated public outcry and calls for regulation. Critics argue that nonvoting shares perpetually insulate corporate insiders from influence and oversight and increase management agency costs. By contrast, proponents contend that nonvoting shares enable corporate insiders to pursue their long term vision for the company without interference from shareholders with short-term interests.

This paper offers a new perspective on this debate. It demonstrates an unrecognized benefit of nonvoting stock: it can be used to lessen agency and transaction costs in a corporation by dividing voting power between shareholders who are informed about the company and its performance and those who are not. Put differently, the paper contends that a company may lower its cost of capital by issuing nonvoting shares. Doing so would make the company more attractive to informed investors, who get more influence at a lower cost, and also to uninformed investors, who will save on costs associated with voting. Moreover, market forces can be expected to push uninformed shareholders toward purchasing nonvoting shares, obviating the need for legal intervention. For these reasons, the paper contends that proposals to restrict companies from issuing nonvoting shares may impede efficient corporate structuring.

Keywords: corporate governance, corporate law, shareholder democracy, corporate finance, agency costs, securities Law, institutional investors, hedge fund activism, shareholder activism, passive investing, index funds, ETFs, mutual funds

JEL Classification: K22, G3, G23, G28, G20

Suggested Citation

Lund, Dorothy Shapiro, Nonvoting Shares and Efficient Corporate Governance (September 22, 2017). University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No. 828. Available at SSRN: https://ssrn.com/abstract=3028173

Dorothy Lund (Contact Author)

University of Chicago Law School ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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