Dual Class Shares in the Age of Common Ownership

Mark Zuckerberg has virtually all his personal wealth invested in Meta Platforms (formerly Facebook). His incentives as controller of Meta are thus clear: Maximize firm value and private benefits of control, irrespective of the effect that might have on other firms. Meanwhile, BlackRock manages $10 trillion invested in thousands of corporations. Its incentives are equally clear: Maximize the value of its portfolio, irrespective of what happens to any given firm therein. Modern day corporations are thus dominated by two kinds of shareholders with drastically different objectives: Firm value maximizing (FVM) shareholders à la Zuckerberg and portfolio value maximizing (PVM) shareholders à la BlackRock.

In a recent article, we argue that this simple observation has important consequences for the debates on common ownership and dual class shares.

Common Ownership and Dual Class Shares

Due to the rise of diversified institutional investors, it has become increasingly common for horizontal competitors to share some of their major shareholders. Leading scholars believe that this phenomenon (a specific case of common ownership known as horizontal shareholding) leads to a lower level of competition in product markets.  The basic intuition is that, because institutional investors are interested in maximizing the value of their portfolios, they have incentives to internalize inter-firm spillovers. As aggressive competition by one of their portfolio firms might produce negative spillovers for the other portfolio firms operating in that market, PVM shareholders might prefer a lower level of competition in product markets.

Parallel to the rise of common ownership, an ever-greater number of companies have adopted a dual class structure. Dual class shares provide disproportionate voting rights to founders and key insiders, who can then control the corporation even if they hold a minority of the firm’s cash-flow rights. As legal scholars have shown, dual class shares enable insiders to pursue their idiosyncratic vision, while at the same time increasing the agency cost between management and shareholders.

The debates on the effects of common ownership and on whether companies should be allowed to adopt dual class shares have thus far moved on two parallel tracks. But we argue that in a world in which FVM and PVM shareholders coexist, there is a close relationship between the two. Other things being equal, it is more likely that a company with a dual class structure would cater to FVM rather than PVM shareholders’ interests. Therefore, dual class shares can act as a bulwark against negative anticompetitive side-effects of common ownership. The existing evidence supports this argument: To date, all studies showing the anticompetitive effects of horizontal shareholding have referred to sectors in which there are no companies with dual class structures among the leading competitors. This suggests that banning dual class shares, or even introducing a mandatory sunset, could negatively affect the level of competition in product markets.

Climate Change, Systemic Externalities, and Dual Class Shares

The climate crisis shows that a relatively small number of major carbon emitters can impose gigantic externalities on the planet. The macroeconomics literature, in turn, has provided ample evidence that a subset of systemically important firms can affect the whole economy. Absent effective regulation, unlimited use of dual class shares at these firms allows FVM shareholders to inflict systemic harm on society. Limitations on the use of such shares would give relatively more voice to PVM shareholders, who internalize part of those externalities via their other portfolio holdings and thus should prefer strategies that mitigate such externalities.

Therefore, we suggest that there should be limits on the use of dual class shares by systemically relevant firms and show how such limitations ought to be tailored to a firm’s specific ability to impose systemic externalities. We note that the reason for these limitations are not the ones traditionally considered by the literature. Instead of focusing on intra-firm dynamics, and in particular on the agency costs between shareholders and controllers, we focus on firms’ ability to impose externalities. Because it is well-recognized that private ordering is bound to lead to suboptimal outcomes from a social welfare perspective in the presence of significant externalities, our regulatory proposal stands on much more solid ground than the bans and curbs on dual class shares, advocated by institutional investors, that would apply across the board.

This post comes to us from Vittoria Battocletti, a PhD student in law at Bocconi University; Luca Enriques, a professor of corporate law in the Faculty of Law at Oxford University; and Alessandro Romano, an assistant professor of law at Bocconi University. It is based on their recent article, “Dual Class Shares in the Age of Common Ownership,” forthcoming in the Journal of Corporation Law and available here. A version of this post appeared in the Oxford Business Law Blog.

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