IPOs: are dual-class share structures required to make a financial centre attractive?

Abstract

The last few years have seen a resurgence of dual-class share structures. Many financial centres have recently changed their listing rules and, to date, nine of the world's ten largest stock exchanges allow companies to tap the market by issuing securities that do not comply with the "one share-one vote" principle. In the United States, in 2021, nearly a third of companies going public were using multiple-vote shares. This article summarises the work carried out to inform the choices made by entrepreneurs and stock markets. Securities with superior voting rights ensure that visionary entrepreneurs retain control of the companies they found with a view to implementing their long-term strategy. Minority shareholders settle for less power in return for the expectation of significant value creation. As time passes, the value of the founder's specific vision erodes and such ownership structures risk distorting the incentives of founders who are more interested in extracting private benefits than in maximising the value of the company's shares. For this reason, sunset clauses protecting the rights of minority shareholders can be a valuable feature of multiple-voting share classes. The recent enthusiasm for multiple-voting shares seems to reflect a shift in the balance of power in favour of entrepreneurs in a context of abundant capital and competition between stock exchanges. A market downturn could lead to a decline in these shareholding arrangements.

Keywords: dual-class shares, IPOs, Sunset provisions, Literature review