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1 1 (December 8, 2021)

handle is hein.crs/goveeyj0001 and id is 1 raw text is: Congressional Research Service Inforrming the legislative debate since 1914 December 8, 2021 Dual Class Stock: Background and Policy Debate When investors acquire the common stock of publicly traded companies, that share ownership generally entitles a shareholder to two things: (1) a financial stake in the firm and (2) the right to vote at annual and special company meetings on such things as candidates for the board of directors, potential corporate acquisitions and mergers, management proposals, and non-binding shareholder proposals aimed at changing company policy. Overall, about three-quarters of publicly traded U.S. firms reportedly have shares with equal voting rights, popularly known as one share, one vote. The remainder have common stock that have shares with differential voting rights called multi-class stocks and dual class stock (DCS) in cases where there are two classes. Multi-class stocks and DCSs have raised concerns for some over the implications of the power disparity between founder-managers with superior voting shares and the majority shareholders with inferior ones. The most common form of DCS involves one class of shares with 10 times the voting power of the other. Some firms, however, have issued shares with 20 times the voting power of the other. Few firms have share classes wherein one class has voting rights and other shares are non-voting. One of the most controversial of this occurred in 2017 when an initial public offering (IPO) by Snap, the parent company of Snapchat, involved the issuance of three share classes, one with 10 votes per share, one with one vote per share, and one with no votes. While controversial since the 1920s, DCS has witnessed renewed attention and seen revived controversy in the past couple of decades due to its heightened use by technology firms. Such firms have included Google (the DCS tech pioneer in 2004, now Alphabet), Facebook, Snap, Dropbox, Lyft, Groupon, Fitbit, Kayak, Blue Apron, Zoom Video, Roku, Chewy, and TripAdvisor. According to some reporting, in a given recent year, nearly half of tech IPOs have involved multi-class shares. Non-tech firms with DCS include Coca-Cola, the Ford Motor Company, Nike, Levi Strauss and Company, and the Hyatt Hotels. A host of media firms have also employed DCS and include the New York Times, News Corp., CBS, Comcast, and Liberty Mutual. Proponents of DCS include NASDAQ, officials at various companies, and some academics. Key supportive arguments include (1) that it is a proper manifestation of private ordering, the idea that investors are free to invest in firms with various types of capital and governance structures and other attributes that meet their needs; and (2) that, particularly for tech firms, it allows entities who control a firm (such as its founders and funding venture capital firms) the latitude and time to pursue their often unique business visions unbothered by shorter-term pressures such as the vagaries of the stock market, unsolicited acquisition attempts, and the demands of activist shareholders. Critics include the Securities and Exchange Commission (SEC) Investor Advisory Commission and Investor Advocate, the Investor Stewardship Group (a group of U.S. and global institutional investors and asset managers), and various academics. Principal criticisms are that (1) DCS subverts the widely embraced notion of shareholder equity, the idea that shareholders are entitled to equal voting power with respect to the individual shares that they own; and (2) it can cause the rights, needs, and prerogatives of majority shareholders to be subsumed by minority shareholders with superior voting shares, also known as the principal-agent problem. The latter may manifest itself through insulated and entrenched owner-managers more prone to engage in wasteful or inefficient self-interested behavior, including awarding excessive compensation, and pursuing vanity research and development projects; and imprudent corporate acquisitions. History and Regulation The first American publicly traded firm to issue multi-class shares was reportedly the International Silver Company in 1898. Use of differential voting shares, however, did not really take off until the early 1920s. By the middle part of that decade, public outcry over DCS ensued after a stock issuance by the Dodge Brothers, an auto maker. Traded on the New York Stock Exchange (NYSE), the firm's minority stakeholders' 1.7% of the issued common stock gave them complete voting control over the majority shareholders' non-voting shares. Widely seen as an unseemly disparity, it resulted in an uproar that prompted the exchange to issue a de facto ban on DCS in 1926. Later, in 1940, the exchange adopted a rule that, with few exceptions, barred listed firms from issuing non-voting stock and prohibited superior- voting stock from constituting more than 18.5% of all outstanding common shares. According to various sources, these effectively limited most multi-class NYSE listings. In the early 1980s, the historically dominant NYSE faced growing competition from the American Stock Exchange (AMEX), which allowed DCS with some conditions, such as allowing classes of stocks with no more than a 10-to-1 voting ratio between them, and especially the NASDAQ, which had no DCS restrictions. Firms were also looking at DCS as a tool to help ward off unsolicited takeover attempts, which were on the increase. The NYSE had several firms that were threatening to delist from it if they could not recapitalize with DCS. Subsequently, in 1986, the exchange allowed recapitalization with multi-class stock. ittps://crsr

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