The Different Forms of Dual-Class

Rawit Assamongkol

 

Summary

Companies that issue common stock with equal economic rights but different voting rights are called “dual-class” companies. Typically, Class A stock confers one vote per share, and Class B stock confers 10 votes per share. This type of voting structure, where the different classes of shares confer a different number of votes, is by far the most common type of dual-class. Much of the academic literature on this topic has made the implicit assumption that this is the only type of dual-class present in public companies (and maybe rightly, since it is so prevalent). 

However, not all dual-class structures are created equal. This blog post identifies three other types of alternative voting rights allocations among publicly traded companies that have been generalized away by the current discourse.

Introduction

A bedrock principle of democratic political institutions is “one person, one vote.” However, in the context of corporations, such a voting structure is rarely, if ever, observed.[1] Rather, corporations largely follow a “one share, one vote” rule. In Delaware, under whose state laws many large businesses are incorporated, the General Corporation Law provides that “one share, one vote” is the default rule.[2]

Companies with alternative voting structures, namely dual-class, are becoming increasingly common. Since 2019, over 180 companies have made initial public offerings with dual-class share structures, representing over a quarter of the total IPOs in that period.[3] Furthermore, dual-class companies are, at least by market capitalization, becoming increasingly important in the economy, having a combined value of $6 trillion and making up seven of the ten largest IPOs of 2019.[4]

Different Types of Dual-Class

A survey of the 360 or so publicly traded companies with voting structures that deviate from “one share, one vote” reveals four different types of alternative voting rights allocations. These voting schemes are collectively called “dual-class,” though not necessarily because the company has issued more than one class of stock. Rather, as we shall see, it is because they create more than one class of voting rights.

1. Different Votes

These are by far the most common type of dual-class, and they consist of two (or more) classes of stock. Most commonly, the voting power disparity is 10:1, but this varies by company. Google, Chewy, and Snap are among the companies with this scheme. Some companies within this group restrict the matters on which their classes of shares vote with disparate voting power. For example, Visa gives its Class B and C shareholders no power to vote on the election of directors but gives them the same voting power as the Class A shareholders in the event of a merger or dissolution.

2. Portions of the Board

This voting scheme also involves two classes of stock. Class A shares, the ones held by corporate outsiders, vote to elect a minority of the directors, whereas the Class B shares held by insiders vote to elect the remaining majority. The New York Times Company, The Boston Beer Company, and Nike are among the companies with this scheme.

3. Time-Phased Voting

The “loyalty shares” used in time-phased voting plans accrue votes as they are held. Sometimes, this voting scheme is also called “tenure-based” voting. In this scheme, there is only one class of shares, but the two classes of voting rights are divided between those whose shares have accrued their “supervoting” power and those whose shares have not. Currently, only three companies have time-phased voting plans in place: insurance company Aflac, maker of delicious jams and jellies, and soon Twinkies, J.M. Smucker Company, and manufacturing company Carlisle Companies.

4. Capped Voting

Here, shareholders may not exercise the full voting rights associated with their shares above a certain cap. For example, the kitchen herb and spice company McCormick gives its common shareholders 1 vote per share, but no person may vote more than 10% of the total number of outstanding shares.[5] In a slightly moderated form of capped voting, United Parcel Service permits shareholders to vote up to and past its cap of 25% of the outstanding shares, but every additional stock past the cap threshold will only count for 1/1000 of a vote.[6] Capped voting schemes create more than one class of shareholders, since for those who hold shares above the cap, the effective voting power of each share is reduced. In addition to McCormick and UPS, the Federal Agricultural Mortgage Corporation, Farmer Mac, also has a capped voting plan.

Uses of this Taxonomy

There are at least two ways that this identification of different dual-class structures may contribute to the broader discourse surrounding dual-class.

First, it may serve as a response to a common objection. Many opponents argue that because supervoting Class B shares are often held by insiders, the directors of dual-class companies are insulated from the market for corporate control.[7] These entrenched boards can lead to increased agency costs and suboptimal outcomes for shareholders. However, this line of reasoning assumes a “different votes” scheme, where the supervoting stock influences (and dictates) the election of all directors. Other dual-class schemes are not necessarily subject to this objection. For example, in a company with “portions of the board” voting, it is entirely possible that activist shareholders may acquire a majority of the minority-of-the-board shares and install their own directors. Similarly, for a company with tenured-based voting, the board is not immune to turnover. After all, the company’s long-term shareholders (in other words those whose shares have accrued extra votes) may become dissatisfied with its board’s performance and vote them out.

Second, there is little mention in the current discourse regarding the signaling effects of certain dual-class structures, which may be due to their lack of recognition. Having identified some alternative voting schemes, we may see how a company can signal its commitment to a certain stated value through its allocation of voting rights.

Consider, for example, the New York Times Company, which has “portions of the board” voting. The Times’s stated purpose of its dual-class structure is (1) to enable its founding family and insiders to resist outside pressures which might compromise the journalistic integrity of its newspaper, but also (2) to not completely disenfranchise its outside shareholders.[8] Though the Times might easily accomplish its first aim with a “different votes” scheme, it signals its commitment to mission (2) with its “portions of the board” structure: outsiders are able to find a voice in the minority-of-the-board director seats.  

 

--------------------------------------------------------

[1] David Ratner, The Government of Business Corporations: Critical Reflection on the Rule of “One Share, One Vote”, 56 Cornell L. Rev. 1 8-9 (1970).

[2] Del. Code Ann. tit. 8, § 212 (2023) (“Unless otherwise provided in the certificate of incorporation … each stockholder shall be entitled to 1 vote for each share of capital stock held by such stockholder.”).

[3] Jay R. Ritter, Initial Public Offerings: Dual Class Structure of IPOs Through 2023 (Jan. 12, 2024), https://site.warrington.ufl.edu/ritter/files/IPOs-Dual-Class.pdf.  

[4] Kosmas Papadopoulos, Institutional Shareholder Services, Dual Class Shares: Governance Risks and Company Performance, Harv. L. Sch. F. on Corp. Governance, (June 28, 2019), https://corpgov.law.harvard.edu/2019/06/28/dual-class-shares-governance-risks-and-company-performance.

[5] McCormick & Co., Annual Report (Form 10-K) (Jan. 26, 2023).

[6] United Parcel Service, Inc., Annual Report (Form 10-K) (Feb. 21, 2023).

[7] Aurelio Gurrea-Martínez, Towards a Credible System of Independent Directors in Controlled Firms, 35 Austl. J. Corp. L. 31 (2012). See also Lucien A. Bebchuck & Kobi Kastiel, The Untenable Case for Perpetual Dual-Class Stock, 103 Va. L. Rev. 585 (2017).  

[8] The New York Times Co., Notice of 2024 Annual Meeting and Proxy Statement (Schedule 14A) (Mar. 8, 2024).