The Case for Dual Class Shares

In recent times, the simmering feud between the church of the one share-one-vote and the heretic believers in shares with unequal voting rights has boiled over, particularly in the U.S.

The arguments pro and con this type of capital structure are numerous and in some ways compelling. Thus, on the one hand, the increased activism of funds (including activist hedge funds) pushing and shoving boards and management of companies to boost share price or sell the business prematurely has reinforced the determination of entrepreneurs to insulate themselves against such pressures by adopting a dual class of shares at IPO time … Read more

Dual Class Companies Should Adopt a Coattail Provision

I would like to make two points in response to Professor Coffee’s piece on dual class common stock.

First, American dual class companies should be obliged to include a “coattail” provision, as is the case in Canada. This provision, imposed since 1987 by the Toronto Stock Exchange, ensures the controlling shareholder cannot sell control without all shareholders being offered the same price and conditions for their shares. This provision removes an important source of potential “private benefits” of control.

Second, In the coming years, a battle will rage about sunset clauses, particularly of the time-based sort. An organized effort is … Read more

Are Independent Board Members Necessarily Credible?

By the late 2000s, independent directors were in the majority on the boards of almost every type of U.S. organization. While this achievement may have improved corporate governance, it was not the panacea that some had anticipated, as subsequent events like the financial crisis of 2008 brought down even some of the best governed corporations.

The tragic fate of Lehman Brothers, which declared bankruptcy on September 15, 2008, the triggering event of the financial crisis, illustrates the limitations of independent board members. Lehman’s board of directors, typical for the time, was made up of independent people, many of whom were … Read more

Dow Jones Erred By Going Nuclear on Dual-Class Shares

In July 2017, Dow Jones, goaded by the reaction to Snapchat having gone public with a class of shares without voting rights, announced that, after extensive consultation, it had decided to henceforth eliminate companies with dual-class shares from its indices, in particular the S&P 500 Index.

Over the last 10 years, putting money in passive index funds has become a popular form of investment. An index fund is a pool of money invested in a way that is proportional to the composition of an overall index, the S&P 500 being the most popular. Already in 2016, index funds managed … Read more

Should Say-on-Pay Votes Be Binding?

The practice of allowing shareholders to cast non-binding say-on-pay votes has spread quickly and broadly throughout the world. It seemed that investors would finally get the opportunity to express their dissatisfaction with outrageous or ill-conceived compensation packages.

The practice was, at first, voluntary, with companies having the option of submitting their compensation policies to a vote. As the number of volunteers remained small, though, investors submitted proposals for requiring companies to carry out the non-binding votes.

In some jurisdictions like the United States, non-binding say-on-pay votes were made mandatory. In Canada, say-on-pay votes are not required, but 80 percent of … Read more

Who Should Pick Board Members?

There is a frenzied rush for shareholders to get a new ‘right”, the right to put up their own nominees for board membership. Boards of directors, so goes a dominant opinion, are not to be fully trusted to pick the right kind of people as directors or to shift the membership swiftly as circumstances change.

In 2014/2015, proposals from institutional investors (or even from management) to give shareholders access to the board nomination process have proliferated. No less than 74 U.S. corporations[1] have now inserted (or soon will) in their by-laws the “right” of shareholders to nominate members of … Read more

The Game of “Activist” Hedge Funds: Cui Bono?

Over the last few years, hedge fund activism has received a great deal of coverage in financial media (and in the mainstream press), has triggered heated debates and been the focus of much academic research. Saviour of capitalism for some, for others, activist hedge funds are but mongers of short-term tactics which eventually damage business corporations[1].

Academic research on the topic mostly focused on the short-term returns surrounding the intervention date, and the few ones that examined the longer-term relationship with performance were often marred by various methodological issues. Coffee and Palia (2014), among others, beseeched researchers on … Read more