Dual-class companies – companies with two or more classes of common stock that differ in voting rights – are as popular as they are controversial. Among the dual class ranks are technology companies Facebook (Meta) and Google (Alphabet), food and beverage companies Coca-Cola and Tyson Foods, and media companies The New York Times and 21st Century Fox. In recent years, nearly a quarter of U.S. companies have gone public as dual-class companies.
The value of these structures is hotly contested. They allow founders and other insiders to control a majority of the voting power while holding relatively little equity. Some commentators have argued for prohibiting dual-class companies, while others advocate a middle-ground approach whereby dual-class companies have a “sunset” provision in their charters that automatically converts them to a single-class company after a predetermined amount of time or event.
However, commentators have largely overlooked the important “equal treatment” agreements in most dual-class charters. These agreements require that shareholders be treated equally by, for example, ensuring that they receive the same consideration per share in the sale of the company, thereby eliminating one of the most important benefits of holding high-vote shares. In a recent paper, I present new data on these equal treatment arrangements and their implications for founders and investors, practitioners, and courts.
Methodology
To examine equal treatment provisions, I constructed an original database of 312 dual-class companies in the United States, each with a market capitalization of at least $200 million, a minimum of two outstanding classes of common stock, and unequal voting rights. The database of these companies, along with their equal treatment arrangements, is the most comprehensive, accurate, and detailed database of such terms that currently exists.
As a threshold matter, I find that equal treatment agreements vary in scope, and I create a taxonomy of the various types. Broadly speaking, equal treatment provisions can be classified as general (requiring equal treatment in all matters) or specific to certain events or triggers (such as a merger). While some charters contain only one equal treatment provision, many contain a combination of general and specific provisions.
General Equal Treatment Provisions
General equal treatment provisions typically require that each class of shareholders have the same rights and privileges, rank equally, share ratably, and be treated identically in all respects and all matters. These provisions are not tied to a particular transaction or event. Instead, they serve as a catch-all provision for treating the classes of stockholders equally except as expressly provided in the charter or as required by law. Approximately 71 percent of the charters in the sample contain a general equal treatment provision.
Specific Equal Treatment Provisions
In contrast, a specific equal treatment provision is tied to a particular event. The three most common triggers are dividends or distributions, liquidation events, and transactions. For the purposes of this research, the focus was on transactions like mergers, acquisitions, or other sales of the company.
Transaction-related equal treatment provisions are present in approximately 63 percent of the charters in the sample. They often cover a variety of transaction types, including mergers and acquisitions (100 percent); consolidations (99 percent); other business combinations or transactions (not further defined) (53 percent); asset sales or transfers (43 percent); changes of control (29 percent); exchange offers (25 percent); restructurings or reorganizations (20 percent); tender offers (14 percent); and recapitalizations or reclassifications (13 percent). There is great variation in the degree of equality required as well. For example, these provisions require consideration distributed ratably or proportionately (56 percent); identical consideration (28 percent); equal consideration (23 percent); same form, kind, or type of consideration (21 percent); same amount or value of consideration (21 percent); and “same consideration” (not further specified) (9 percent).
Exceptions & the Delphi Effect
Specific equal treatment provisions are also subject to a number of common exceptions. For transaction-related provisions, these exceptions include voting differences in the charter (66 percent); approval by each class or by the low-vote class of shareholders (59 percent); conversion rights in the charter (29 percent); employment, consulting, severance, or similar agreements (28 percent); all differences in the charter (27 percent); and shareholder elections (8 percent).
The prevalence of these exceptions is also on the rise. Most striking are exceptions for minority shareholder approval. In perhaps the most famous case on the topic, In re Delphi Financial Group Shareholder Litigation, dual-class company Delphi had an equal treatment provision in its charter that required each class of shareholders be treated equally in the sale of the company. When faced with an interested buyer, Delphi founder Robert Rosenkranz threatened to block the deal unless the other shareholders agreed to remove the equal treatment provision. The Delaware Court of Chancery was critical of Rosenkranz, and the parties eventually settled. Prior to Delphi, I find that only 15 percent of transaction-related equal treatment provisions included an exception for minority shareholder approval. After Delphi, the proportion with this exception rose to 76 percent.
Unequal Treatment Agreements
Some arrangements in dual-class charters (which I term “unequal treatment agreements”) expressly provide for disparate treatment of the classes. For example, a charter may provide that the low-vote class receives the same form of consideration and 1/5 the amount of consideration as the high-vote class on a per share basis in mergers and similar transactions. Or unequal treatment may favor the low-vote class and provide that it receives $1.00 per share prior to any distribution to the high-vote class. These unequal treatment provisions are far less common than their equal treatment counterparts.
Implications
These findings have meaningful implications for founders and investors, practitioners, and courts. For founders and investors, my paper uncovers the importance, features, and power of equal (and unequal) treatment agreements. It also examines the economic efficiency of equal treatment agreements and the impact of the current doctrinal landscape on their utility. For practitioners, the paper examines the interaction of multiple equal treatment agreements within the same charter. It also identifies nuances in the scope and degree of equality afforded under various formulations of purportedly “equal” treatment. Practitioners must grapple with the risks of both under- and over-inclusivity in these provisions. For courts, many equal treatment agreements may fail to fully protect low-vote stockholders from disparate treatment. Courts should carefully evaluate post-Delphi efforts that seek to remove or circumvent equal treatment protections. Otherwise, factors unrelated to the merits of a proposal can distort the low-vote stockholders’ choice and pressure (or even coerce) them into agreeing to waive their contractual right to equal treatment.
Given these and other implications, I propose normative recommendations for approaching equal treatment agreements and contend that unequal treatment agreements may have a broader role to play in dual-class charters.
This post comes to us from Professor Caley Petrucci at the University of San Diego School of Law. It is based on her recent paper, “Equal Treatment Agreements: Theory, Evidence & Policy,” available here.