Designing Dual Class Sunsets: The Case for a Transfer-Centered Approach

Forthcoming, 12 William & Mary Business Law Review __ (2020).

Faculty of Laws University College London Law Research Paper No.9/2019

38 Pages Posted: 3 Dec 2019 Last revised: 8 Mar 2020

See all articles by Marc T. Moore

Marc T. Moore

University College London, Faculty of Laws

Date Written: October 31, 2019

Abstract

Dual class stock (DCS) structures, and their implications for managerial accountability and corporate governance more broadly, have become prevalent concerns for corporate lawyers and policymakers. Recent academic and practitioner debates on DCS have tended to focus less on the general merits and drawbacks of DCS versus one share/one vote structures, and more on the specific common-ground concern as to whether and how such structures are subjected to contingent reversal or “sunset”. This Article compares the relative advantages and disadvantages of time-, ownership- and transfer-centered models of DCS sunset provision. It argues in favor of the transfer-centered model on the grounds that: (a) its specific event-based trigger renders it less arbitrary in application than the time-centered model, and protects against the possibility of founders being prevented prematurely from realizing their long-term strategic vision (as is a risk with the time-centered sunset model); (b) it avoids the moral hazard and other perverse controller incentives that are prone to ensue from time-centered sunsets; and (c) unlike both the time- and ownership-centered models (which are motivated primarily by agency cost concerns), the transfer-centered model is sensitive to the powerful non-financial incentives that controllers typically have to safeguard and promote firm value, even where their corporate control rights significantly outweigh their corresponding cash flow rights. Accordingly, it suggests that the SEC and principal US exchanges should resist recent calls from influential investor-related bodies to mandate time-based sunsets. Instead, domestic policymakers should look overseas to Hong Kong and Singapore, whose respective listing authorities have recently introduced transfer-based sunset requirements for DCS issuers, in considering the most appropriate blueprint for any future regulatory initiatives in this regard.

Keywords: corporate governance, capital structures, dual class stock, securities regulation, sunsets

JEL Classification: G30, G32, G34, G38, K10, K20, K22, L20, L21, M10, M13, M14

Suggested Citation

Moore, Marc T., Designing Dual Class Sunsets: The Case for a Transfer-Centered Approach (October 31, 2019). Faculty of Laws University College London Law Research Paper No.9/2019. Available at SSRN: https://ssrn.com/abstract=3478572 or http://dx.doi.org/10.2139/ssrn.3478572

Marc T. Moore (Contact Author)

University College London, Faculty of Laws ( email )

Gower St
London WC1E OEG, WC1E 6BT
United Kingdom

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