Introduction of Dual Class Stock Structures

        In financial markets, companies issue shares to raise share capital. A share represents an association among the company and its shareholders . Traditionally, stock was one share, one vote [2]. However, in dual class, one has one vote, while the other class, usually held by the founder, has many, many votes and it's disproportionate to their economic interest. A dual class share is the issuance of several share types by a single entity. Dual class stock has existed for a long time. It basically consists of two share classes with unequal voting rights. In dual class structure, financial gains are equally divided but the voting power is divided in classes where in A class member’s vote is counted as 10 or more as compared to B class member one Vote. It keeps voting power in hands of founders, CEO’s and family members and they can work in betterment of company insulating it from short term uncertainties/risks. The risks involve the potential fluctuation in share prices and the volatility of the company in terms of its market worth. There are other risks involved such as legislations and exchange rate but these are external [3].

        The dual class stocks handles such shareholders which either do not have experience or intention to contribute in decision making but want their share of economic interests. Such shares can be different based on the voting rights of shareholders and payment of dividends. In general, single class shares outperform dual class shares as the single class has more privileges the double class shares. due to the fact that it’s one share class is available for company executives, founders and their families who have more power of voting than the general public and provides more control of the company [4]. The dual class stock structure was set up so that a selling founder of a family company or whatnot could retain control of a company despite taking the company public and selling their stock to others. Retaining stock with super voting is a way to preserve control, even though your economic interest may decline[5].

        Early in the last century, dual class structure existed in the United States, but was considered such a real problem that it was outlawed by the Stock Exchange in the 1920s. The exchange called for every stock traded there to be one share, one vote. But in the 1950s, when the Ford Motor company went public, the Stock Exchange, fearful that they would lose the listing of one of the great American icons, allowed an exception. The Ford family had this structure where the Ford family maintained controlling interest despite the fact their economic interest was too small to justify control. The Ford family controls 40% of the voting power as compared to 4% of company’s total equity [6]. Then, the dual class stock structure makes its way into media companies such as the Washington Post, New York Times, etc[7]. A few family businesses retained this structure as well. Estee Lauder is a good example. Lauder family owns 40% of the stocks. The sunset provision of the company makes it best among dual stock companies [8]. This enables the Lauder family to take on riskier ventures than sunset. But starting about 10 years ago, introduced by Google in 2004, dual structure has become increasingly popular. When Google went public it made explicit, in its letter to stockholders, that it wanted to have the flexibility to focus on long-term plans and not be influenced by short-term stockholder value, and for that reason it was adopting a dual-class structure.  It was considered by some in the investment community to be highly troubling that they adopted such a structure[9]. After Google, Facebook came out with it[10] — but the difference in the modern companies adopting this structure is the virtual complete control exercised by the managers, despite the fact their economic interest is significantly less than their voting interest.

        Dual stock structures vary and can range from simple to complex, yet such stock structures have become increasingly unpopular among many investors in public companies because they make it more difficult to replace management and approve unsolicited acquisition offers. They are usually not a problem for early stage friends and family investors because they know the founders and usually understand the underlying reasons for the structure. According to Ann Yerger[11], dual stock structure might look attractive for a young company with charismatic leadership; however the idea is sound to be not good for the investors in the long term as this allows management to be less accountable to stakeholders. It is easy to dislike a dual-class share structure as it seems unfair to the general public. However, founders of companies often have a longer term vision in mind compared to investors who tend to be more focused on short-term gains[12]. The structure hence, protects the founders against short-term pressure for returns, while allowing public equity market to provide financing.

        Andrew Hill, Financial Times columnist, argued that dual class stock structure protects entrepreneurial management from the demands of ordinary shareholders. On the other hand, the bad thing about this structure is it protects entrepreneurial management from the demands of ordinary shareholders[13]. There is no question that a dual stock structure can be an effective means of addressing various sets of issues that impact many private companies. However, like many other aspects of starting and running a business, choosing and implementing a dual stock structure requires careful thought and experienced legal counsel. A proper check and balance to mitigate the risks associated with dual class stock structures is required for ongoing disclosure of the relationships between management members and directors.

        The dual class stock structures have both motivation and importance to the stockholders in a company. For the motivation, the dual class stock has rare instances of underpricing in the market and provides various alternatives for the hypothesis that give details of the phenomena. The dual stock is a motivator because it gives high institutional ownership regarding post-IPO (Sharfman, 2017)[14]. Also, the dual class stock rarely experiences control events, which supports its motivation. Another motivating factor is the dual class stock usually trade at lower prices as compared to sales and earnings (Matveev, 2014)[15]. The managers of companies with dual class stock structures earn higher compensations, which is a motivation factor. The dual class stock structure is known to protect the benefits of privacy controls. The benefits are controlled through the pricing difference from the proper pricing of shares and high compensation for the managers (Winden, 2017)[16]. Also, the dual class stock structure is known to share stock with other firms in the entertainment and other media related service industries, which helps in the protection of benefits of privacy controls.

        The use of dual class stock structure has much importance to the firm. First, dual class stock structure insulates the firm managers from the short-term mindset of Wall Street. The founders of the firm using dual class stock structure usually have long-term goals as compared to the investors (Yang & Zhang, 2016)[17]. The dual class stock structure is also important to the firm as it gives the firm a set of loyal investors for all seasons because the stocks with extra voting rights are not usually available for trading in the market (Govindarajan & Srivastava, 2018)[18]. Lastly, the dual class stock structure is important because it benefits the firm regarding its financial performance.

References of Dual Class Stock Structures

 Winden, A. (2017). Sunrise, Sunset: An Empirical and Theoretical Assessment of Dual-Class Stock Structures. SSRN Electronic Journal. doi: 10.2139/ssrn.3001574

 Yang, L., & Zhang, C. (2016). Can Stock Index Future Really Stabilize Stock Market? The Evidence from Chinese Stock Market. Journal of Stock & Forex Trading, 05(01). doi: 10.4172/2168-9458.1000162

 Govindarajan, V., & Srivastava, A. (2018). Reexamining dual-class stock. Business Horizons, 61(3), 461-466. doi: 10.1016/j.bushor.2018.01.012