Written by: Gary Shorter, Specialist in Financial Economics

When investors acquire the common stock of publicly
traded companies, that share ownership generally entitles a
shareholder to two things: (1) a financial stake in the firm
and (2) the right to vote at annual and special company
meetings on such things as candidates for the board of
directors, potential corporate acquisitions and mergers,
management proposals, and non-binding shareholder
proposals aimed at changing company policy. Overall,
about three-quarters of publicly traded U.S. firms
reportedly have shares with equal voting rights, popularly
known as “one share, one vote.” The remainder have
common stock that have shares with differential voting
rights called multi-class stocks and dual class stock (DCS)
in cases where there are two classes. Multi-class stocks and
DCSs have raised concerns for some over the implications
of the power disparity between founder-managers with
superior voting shares and the majority shareholders with
inferior ones. The most common form of DCS involves one
class of shares with 10 times the voting power of the other.
Some firms, however, have issued shares with 20 times the
voting power of the other.

Few firms have share classes wherein one class has voting
rights and other shares are non-voting. One of the most
controversial of this occurred in 2017 when an initial public
offering (IPO) by Snap, the parent company of Snapchat,
involved the issuance of three share classes, one with 10
votes per share, one with one vote per share, and one with
no votes.

While controversial since the 1920s, DCS has witnessed
renewed attention and seen revived controversy in the past
couple of decades due to its heightened use by technology
firms. Such firms have included Google (the DCS tech
pioneer in 2004, now Alphabet), Facebook, Snap, Dropbox,
Lyft, Groupon, Fitbit, Kayak, Blue Apron, Zoom Video,
Roku, Chewy, and TripAdvisor. According to some
reporting, in a given recent year, nearly half of tech IPOs
have involved multi-class shares. Non-tech firms with DCS
include Coca-Cola, the Ford Motor Company, Nike, Levi
Strauss and Company, and the Hyatt Hotels. A host of
media firms have also employed DCS and include the New
York Times, News Corp., CBS, Comcast, and Liberty

Proponents of DCS include NASDAQ, officials at various
companies, and some academics. Key supportive arguments
include (1) that it is a proper manifestation of private
ordering, the idea that investors are free to invest in firms
with various types of capital and governance structures and
other attributes that meet their needs; and (2) that,
particularly for tech firms, it allows entities who control a
firm (such as its founders and funding venture capital firms)
the latitude and time to pursue their often unique business.

Critics include the Securities and Exchange Commission
(SEC) Investor Advisory Commission and Investor
Advocate, the Investor Stewardship Group (a group of U.S.
and global institutional investors and asset managers), and
various academics. Principal criticisms are that (1) DCS
subverts the widely embraced notion of shareholder equity,
the idea that shareholders are entitled to equal voting power
with respect to the individual shares that they own; and (2)
it can cause the rights, needs, and prerogatives of majority
shareholders to be subsumed by minority shareholders with
superior voting shares, also known as the principal-agent
problem. The latter may manifest itself through insulated
and entrenched owner-managers more prone to engage in
wasteful or inefficient self-interested behavior, including
awarding excessive compensation, and pursuing vanity
research and development projects; and imprudent
corporate acquisitions.

History and Regulation

The first American publicly traded firm to issue multi-class
shares was reportedly the International Silver Company in 1898.

Use of differential voting shares, however, did not
really take off until the early 1920s. By the middle part of
that decade, public outcry over DCS ensued after a stock
issuance by the Dodge Brothers, an auto maker. Traded on
the New York Stock Exchange (NYSE), the firm’s minority
stakeholders’ 1.7% of the issued common stock gave them
complete voting control over the majority shareholders’
non-voting shares. Widely seen as an unseemly disparity, it
resulted in an uproar that prompted the exchange to issue a
de facto ban on DCS in 1926.

In the early 1980s, the historically dominant NYSE faced
growing competition from the American Stock Exchange
(AMEX), which allowed DCS with some conditions, such
as allowing classes of stocks with no more than a 10-to-1
voting ratio between them, and especially the NASDAQ,
which had no DCS restrictions. Firms were also looking at
DCS as a tool to help ward off unsolicited takeover
attempts, which were on the increase. The NYSE had
several firms that were threatening to delist from it if they
could not recapitalize with DCS. Subsequently, in 1986, the
exchange allowed recapitalization with multi-class stock.

Soon afterwards, the Business Roundtable, a group of large
public company corporate executives, challenged the SEC
rulemaking, arguing that shareholder voting rights was a
matter of state corporate law. Later, in Business Roundtable
v. SEC, 905 F.2d 406 (D.C. Cir. 1990), in 1990, the Court
of Appeals for the District of Columbia nullified the SEC
reform, ruling that the agency had exceeded its authority
under the Securities and Exchanges Act of 1934.

Subsequently, in 1994, the NYSE, NASDAQ, and the
AMEX adopted similar policies that permitted their listed
firms initially to issue multi-class shares but does not allow
them to subsequently reduce the stock’s voting rights
during recapitalizations. That regulatory regime still stands.
In 2017, the aforementioned Snap IPO’s unorthodox
issuance of non-voting public stock was widely criticized.

As part of the backlash from this, several entities, including
the SEC’s Investor Advisory Committee and the Council of
Institutional Investors, petitioned owners of major stock
indexes to exclude firms that issue DCS from the indexes.
That same year, S&P Dow Jones announced that firms with
new dual class share offerings would be excluded from its
S&P Composite 1500 and its various indices, including the
S&P 500.

At the same time, FTSE Russell, a subsidiary of
the London Stock Exchange, announced that firms with
dual class stock would be excluded from its stock indexes,
including the Russell 3000, if their majority-held shares had
less than 5% of the voting power of their superior shares.
A Look at the Value of Multi-Class Shares
A fundamental question in the debate on multi-class
structures is what their value is to their firms. This is the
subject of considerable research. In 2021, Guerra-Martinez
examined much of that work and observed that the
preponderance of research indicates that the value of firms
with multi-class shares diminishes over time. Saying that
more research is needed, the study noted that some research
has found that such firms can earn higher valuations at the
IPO stage and have a beneficial effect on innovation and the
promotion of local industry. It also found that since 2014,
the percentage of newly public tech firms with DCS has
been higher than non-tech DCS firms. It then questioned
whether the historical research on multi-class stocks has
fully reflected what some describe as “the higher
idiosyncratic value [the value an entrepreneur places on her
ability to execute a business idea] probably created by
founders of tech firms.”

Sunset Provisions
Various firms with multi-class shares have “sunset”
measures in their charters that provide for triggers that
result in all company common shares being converted into a
single voting share class. The major kinds of triggers are
An event-based sunset in which the uniform stock
conversion is precipitated by the occurrence of a
designated event such as the founder’s disability, death,
or attainment of a retirement age. The underlying rationale is that firms benefit from the presence of healthy founders whose ability to lead is bolstered by
their ownership of superior voting stock.

A fixed-time-based sunset in which the conversion of
multi-class stock to uniform voting shares occurs at a
specified future date. An underlying premise
(supported by some research) is that while initially
beneficial for a firm after an IPO, over time dual class
structures lose their value to the company. Time-based
sunsets range from three to 20 years, with 10 and then
seven years reportedly being the most common.
Sunset provisions appear to be growing in popularity.
While they remain relatively limited—the Council of
Institutional Investors (CII, a coalition of institutional
investors) reported 41 by 2020—they have grown over
time. For example, in 2018 then-SEC Commissioner Robert
Jackson spoke about the absence of sunset provisions,
observing that over the past 15 years, almost half of the
companies whose IPOs involved DCSs awarded corporate
insiders superior voting shares in perpetuity. CII, however,
reports growing use of time-based sunsets. It found that
while 26% of newly public dual class firms had such a
provision in 2017, 51% adopted it in the first half of 2021.
The CII petitioned the NYSE and NASDAQ in 2018 to
require newly listed dual class firms to adopt a time-based
sunset provision. A critic of dual class firms, the CII argued
that “evolving market practice and academic research
suggest[s] that multi-class structures become problematic
within five to nine years.” (According to the CII, the mean
time-based sunset in 2020 was 12 years.) It then said that a
seven-year sunset was a good compromise vis-à-vis an
outright ban.

Draft Sunset Legislation and Debate
There is currently draft legislation under committee
consideration aimed at encouraging DCS to include sunset
provisions. The draft bill would prohibit the listing of any
security of an issuer with unequal voting classes of stock
for more than seven years without shareholder approval.
Research on the effects of sunset provisions is mixed. In
2018, the staff of then-SEC Commissioner Jackson
examined IPOs during the previous 15 years. They found
that seven or more years away from an IPO, firms with
perpetual DCS traded at significant discounts compared to
those with sunset provisions. Related research (Bebchuk
and Kastiel, 2017) found that controllers of firms with DCS
have perverse incentives to retain them even after they
result in inefficient firms. Alternatively, 2019 research by
Fisch and Solomon observed that (1) academic research on
the implications of time-based sunsets is insufficiently
developed and (2) fixed-time sunsets are too arbitrary to
reasonably accommodate the variability among dual class
firms and their life cycles. Gurrea-Martínez (2021) has
cautioned that a mandatory time-based sunset could
dissuade some firms from going public. India is reportedly
the only nation with a mandatory time-based DCS sunset.