The Undesirability of Mandatory Time-Based Sunsets in Dual Class Share Structures: A Reply to Bebchuk and Kastiel

Abstract

In a 2017 Virginia Law Review article, "The Untenable Case for Perpetual Dual-Class Stock," Lucian Bebchuk and Kobi Kastiel made the argument that time-based sunset provisions (a forced unification of shares into one share structure with equal voting rights after a certain period of time) should be a mandatory feature of dual class share structures (classes of common stock with unequal voting rights). Their article has recently been used as authority by the Council of Institutional Investors' ("CII") in its petitions to the NASDAQ Stock Market ("NASDAQ") and the New York Stock Exchange ("NYSE") to amend their listing standards. The requested amendments would require companies seeking to go public with dual class shares to include in their certificates of incorporation a time-based sunset provision that must go into effect no more than seven years after the initial public offering (IPO) unless minority shareholders vote to extend up to an additional seven years. This delayed unification based on a shareholder vote is incorporated in Bebchuk and Kastiel's argument.

This Article, which is based on comment letters I sent in response to the CII's petitions, argues that such a mandatory provision would be extremely unwise and harmful to our most important public companies and their shareholders, current as well as future. As a creation of private ordering, the absence of time-based sunset provisions in dual class share structures serves a significant value enhancing purpose. It prevents the risk that a premature and therefore sub-optimal unification of shares may occur. This risk has so far been ignored by those advocating for the implementation of a mandatory time-based sunset provision. As subsequently discussed, this risk has been ignored because of an oversight in their analysis. This oversight being a lack of appreciation for how the positive skewness in stock market returns negatively impacts the value of mandatory time-based sunset provisions.

Keywords: dual class shares, time-based sunsets, listing standards, positive skewness, stock market returns, private ordering, corporate governance

JEL Classification: K22, G18, G30, G32