By Cydney Posner
Thecorporatecounsel.net blog reports on more evidence of hostility by corporate governance activists toward dual-class common voting structures. (See News Brief dated 7-21-11.) In correspondence (here and here), the Council of Institutional Investors has urged the NYSE and Nasdaq to designate as ineligible for listing any new companies that have two or more classes of common stock with unequal voting rights. According to CII, both the London and Hong Kong exchanges bar companies with multi-class common structures.
In its press release, CII observes that 20 of 170 IPOs that went effective between January 2010 and March 2012 were by companies with multi-class, unequal voting stock structures. CII argues that this growing trend is unfair to public shareholders because it gives majority voting rights to founders or other insiders holding the superior class even when they hold minority ownership and minority risk. Moreover, CII rejected the principal rationale offered by companies for multi-class structures "– that it allows management to concentrate on the long-term growth of the company without worrying about short-term performance or other interference…" Rather, CII contends, the evidence shows that dual-class stock companies do not perform as well as one-share, one-vote companies and are more prone to governance abuses: CII cites a 10-year performance study conducted by the Investor Responsibility Research Center Institute (IRRCI) and ISS, which found that the stock prices for most companies with multi-class structures had not increased since those companies' IPOs, that their shares exhibited more volatility, and that multi-class and other control companies had more related-party transactions and more weaknesses in internal controls.