A Hybrid Approach to Sunsetting Dual-class Shares
20 Pages Posted: 19 Apr 2021
Date Written: April 15, 2021
Tech company leaders nowadays increasingly employ dual-class stock to retain absolute control when they bring their companies public. While theoretically dual-class shares can insulate an innovative founder’s idiosyncratic vision from public investors’ short-termist pressures, they can also lead to inefficient governance by preventing shareholders from selling corporate control to outsiders who can manage the company better than the incumbents. This way, dual-class shares harm a company’s long-term prospect, and ultimately may jeopardize the very innovative power that tech visionaries intend to protect. Forces of the capital market alone cannot ensure that only the most talented founder-managers adopt dual-class structures, because many passive investors cannot freely exit, and pricing of stocks cannot fully capture the effects of dual-class structures on corporate governance. Moreover, the greater bargaining power of Silicon Valley unicorns over venture capitalists and underwriters also enables their founders to gather excessive power, which their real leadership abilities sometimes do not match.
This Article proposes an approach that gradually phases out a company’s dual-class structure after it matures to the extent that it no longer needs special protection from short-termist activism. The approach combines two popular solutions to the dual-class problem: time-based sunset clause and tenure-based voting. It respects the founder-manager’s need for independence to fulfill her innovative vision, aligns the founder’s incentives with those of the long-term shareholders by strengthening shareholder oversight, and minimizes the impact of potentially value-destroying activism to the company’s long-term competitiveness.
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Keywords: dual-class stock, corporate governance, sunset, short-termism, dual-class shares, shareholder voting, shareholder activism
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