The Contractual Limits of Control

Abstract

For centuries, the law has allowed a separation of ownership and voting power. When founders take a private company public — and benefit from access to more capital as a result — they can preserve control despite selling a majority of the company. How does this work? The mechanism involves a curious model of governance: multiple classes of common stock with the founder’s class having far more voting power per share. These governance structures are fraught with concerns of increased agency costs, managerial entrenchment, and economic inefficiency. As a result, they have generated a robust debate among scholars and practitioners alike. Prior commentators have examined a handful of mechanisms to limit control in isolation. But doing so necessarily creates an incomplete picture, failing to consider many other limits and overlooking a deceptively simple principle in contract law: the corporate charter as a “contract” must be considered in its entirety.

 

This Article makes three primary contributions to the literature on multiclass governance. First, it complicates the prevailing understanding by constructing an original database of 325 corporate charters to identify the emergence of a network of contractual limits of control. Using this database, the Article creates a comprehensive taxonomy of control limits. Second, it reframes the existing debate from a focus on particular limits to treating the charter as an entire contract. As result, it is not a siloed provision but rather the accumulation of control limits and interaction among terms that is the more meaningful measure. Lastly, it leverages economic and contractual theory to examine various implications for policymakers, practitioners, and other corporate players. Ultimately, the Article concludes by arguing that the concerns associated with multiclass governance may be overstated as a result.

Keywords: corporate, dual class, dual-class, sunset, equal treatment, corporate governance, shareholder, stockholder, multi class, voting, shareholder voting, founder, controller, controlling shareholder, contract, charter, certificate of incorporation, multiclass, control

JEL Classification: D21, G32, G34, G38, K12, K22