The Case for Dual-Class of Shares
There are now 69 dual-class companies listed on the Toronto Stock Exchange, down from 100 in 2005. Only 23 Canadian companies went public since 2005 with a dual-class of shares while 16 of the 100 have since converted to a single-class and another 38 have disappeared since 2006 for other reasons (acquisitions, mergers, bankruptcies and so on).
The arguments pro and con these types of capital structures are numerous and in some ways compelling. Thus, on the one hand, the increased activism of funds (including the so-called “activist” hedge funds) pushing and shoving boards and management of companies to boost share price and/or sell prematurely the business has reinforced the determination of entrepreneurs to insulate themselves against such pressures by adopting a dual-class of shares at IPO time (more so in the USA than in Canada).
On the other hand, index funds and ETFs, now large and growing «investors»2 which are obliged to closely track the market value composition of a particular stock index, thus may not manifest their discontent about a corporation by simply selling its shares. They must wield influence on corporate management through their voting power (which is restricted in dual-class companies) and by loudly voicing their frustration and disagreement. Not surprisingly, these latter investors are ferociously hostile to dual-class of shares and have been strident lately in their opposition, urging, successfully, the index providers (i.e., Dow-Jones, etc.) to exclude from their indices in the future any company with unequal voting rights.
They are also lobbying, not yet successfully, the SEC to prohibit this type of capital structure. Their latest gambit, promoted by The Council of Institutional Investors, would impose a mandatory timebased sunset clause of seven years. Of course this term could be renewed by a majority vote of all classes of shareholders!
The issue of “sunset clauses” has thus gained salience as institutional shareholders and various agencies try to curtail, rein in, and put a time limit on the relative freedom that a dual-class of shares provides to entrepreneurs and family corporations.
As a consequence, in recent times, the simmering feud between the church of the “one share-onevote” and the heretic believers in shares with unequal voting rights has boiled over particularly in the USA.