A Hybrid Approach to Sunsetting Dual-class Shares

20 Pages Posted: 19 Apr 2021

See all articles by Yiming Sun

Yiming Sun

University of Chicago Law School

Date Written: April 15, 2021

Abstract

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.

[This is a working draft; any advice would be greatly appreciated. Please contact me at: yimingsun1997@gmail.com]

Keywords: dual-class stock, corporate governance, sunset, short-termism, dual-class shares, shareholder voting, shareholder activism

Suggested Citation

Sun, Yiming, A Hybrid Approach to Sunsetting Dual-class Shares (April 15, 2021). Available at SSRN: https://ssrn.com/abstract=3827364 or http://dx.doi.org/10.2139/ssrn.3827364

Yiming Sun (Contact Author)

University of Chicago Law School ( email )

1111 E 60th St
Chicago, IL 60637
United States

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