Governance Explainer - Dual-class shares
What are dual-class shares?
Dual-class shares create a structure where some shareholders have superior voting rights. For example, so-called B shares grant the holder 10 or 100 votes, whereas A shares have only 1 vote.
These ‘super voting’ shares are often issued to founders and top executives during an IPO so they can retain control over the company.
Dual-class share structures are common in the US. At the car giant Ford, such shares permit the Ford family to control 40% of shareholder voting power with only 4% of the total equity in the company. Mark Zuckerberg controls 57% of the voting power at Meta despite only having an overall shareholding of 13.6%.
Historically, companies with dual-class shares have rarely been seen on the London Stock Exchange – primarily due to the opposition of UK institutional investors. But they are common in continental Europe, especially Sweden, and are increasingly becoming the norm at global technology companies.
Why is this important now?
Two things have brought this to the top of the agenda recently. In May 2023, the Financial Conduct Authority, the UK financial regulator, published a consultation paper that sets out plans to overhaul the UK listing regime.
The changes give companies more flexibility in using dual-class share structures on the London Stock Exchange – although certain safeguards are included.
Some of the proposals include:
- Permitting dual-class shares, but only if they incorporate a 10 year sunset clause, where the ‘super’ voting shares convert to ordinary shares (one share, one vote) after 10 years.
- Shares with ‘super’ voting rights can only be held by directors and cannot be transferred to beneficiaries.
- No limits on the size of the enhanced voting rights enjoyed by dual-class shares.
The proposals are seen as an attempt to attract more, particularly tech, companies to the London Stock Exchange, where the number of listed companies has fallen 40% since 2008.
Additionally, in April Standard & Poor’s decided to reopen the S&P 500 and other indices to companies with multiple share class structures.
The change reversed a five-year-old policy of barring new companies with dual-class shares from indices.
Are there any benefits to these shares?
Those who defend dual-class shares say they shield managers from the short-term mindset of some investors, who are often focused on the most recent quarterly figures.
Stock that provides extra voting rights ensure the company will have a set of loyal investors during rough patches. This can be particularly useful if the firm needs to pursue a long-term investment strategy.
Dual-class companies are not necessarily destined to perform poorly. Warren Buffett’s Berkshire Hathaway has delivered consistent shareholder value over a long period. A recent US study found that, between 1980 and 2022, returns were better for companies with dual-class share structures. This outperformance was particularly marked for technology companies.
What are the pitfalls?
Institutional investors dislike the dual structure because it creates an ‘inferior’ class of shareholders and hands considerable power to a select few.
Families and senior managers can entrench themselves into the company’s operations, regardless of their abilities and performance.
With fewer constraints and accountability placed upon them, founders and managers that hold ‘super’ stock can potentially take more reckless, eccentric or self-interested decisions.
Hollinger International, the media group, presents a cautionary tale. Former chief executive, Conrad Black, controlled all of the company’s class-B shares, which gave him 30% of the equity and 73% of the voting power.
Under Black’s control, Hollinger’s finances spiralled out of control. In 2007, Hollinger was declared bankrupt and Black was convicted of fraud.