April 1, 2019

Pensions & Investments – Investors Intensify Fight Against Dual-Class Shares

By Hazel Bradford

Institutional shareholders are considering all possible options in an increasingly active campaign to discourage companies from adopting dual-class share structures, from one-on-one engagement to a longer-term push to give regulators more power to curb them.

“It all starts with one share, one vote. If shareholders don’t have that, it’s hard for them to push for improved governance and performance,” said Jim Allen, head of Americas capital markets policy at CFA Institute in Washington. Newly launched companies “are leaving money on the table” if lower governance standards translate into lower multiples. “That’s money you’ll never have to invest, and you are starting out at a disadvantage. When you mess with the governance, investors are going to notice.”

Particularly for founders of new companies, choosing a share structure can seem like a choice between offering a single class of common stock, with directors chosen by the most active investors, or dual-class share, which gives them more control over the company’s goals and operations.

Dual-class shares have become an almost-daily topic for investors and asset managers, spurred by recent initial public offering announcements from technology companies such as Lyft Inc. and the expectation of others later this year including Uber Technologies Inc., Pinterest Inc., Airbnb Inc., Slack Technologies Inc., and The We Co. And it’s not only technology companies. Levi Strauss & Co. announced that its re-entry to public markets, set to begin March 28, under a 10-to-1 voting structure will keep control in family hands, not public shareholders.

For some investors, that means engaging those companies one by one. A group of institutional investors with $3.2 trillion in assets told ride-hailing company Lyft in a March 14 letter that its plan to give two founders 20 votes per share for every publicly held share, amounting to more than 60% of voting power, “imposes a significant gap between those who exercise control over the company and those who have significant exposure to the consequences of that control.” Trading for Lyft is scheduled to begin March 29.

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