Dual-class share structure – unfair or underused?
One share, one vote remains one of the bedrocks of UK stock ownership yet the debate on so-called dual-class listings could heat up once again in the wake of the US stock market debut of ride-hailing company Lyft last week.
San Francisco-based Lyft is a rival of Uber, the better known of the two gig economy start-up Unicorns that have grown into multi-billion dollar businesses.
Lyft raised $2.3bn of fresh funding from investors at a better-than-predicted $72 per share, valuing the loss-making business at $24.3bn. Yet the new shares will carry significantly less voting rights than the shares owned by co-founders Logan Green and John Zimmer.
NON-VOTING STOCK TREND
Lyft is not the first technology company to issue different classes of stock as part of a high profile IPO.
For example, Google’s parent company Alphabet, Facebook and digital payments business Square all have non-voting stock listed in the US.
The option for dual-class voting and non-voting shares is believed to be a major reason why Alibaba, the giant Chinese online marketplace, chose to float in New York rather than closer to home in Hong Kong or Singapore in 2014.
Dual-class shares have been popular outside of the technology sphere for even longer. Many family-run businesses in the US have embraced the structure in the battle to avoid opportunistic hostile takeovers, while newspaper barons have used it, they claim, to retain editorial independence.
AYES TO THE RIGHT, NOS TO THE LEFT
While a complex issue, the argument against dual-class shares largely boils down to too much power placed in the hands of too few, with little or no representation on policy or strategy for those that provided much of a company’s capital. Critics might claim that the practice shows utter disregard for corporate governance.
The counter claim is that a dual-class share structure allows entrepreneurial founders to concentrate on long-run strategy and performance without the interruption or worry of meeting near-term targets.
This is exactly the argument used by Warren Buffett’s Berkshire Hathaway investment vehicle, whose non-voting B stock trades at the relatively accessible $200 per share, versus the voting A shares which will set you back more than $300,000 each.
A STICKY WICKET
Perhaps in the UK we are predisposed to reject non-voting stock. Brits tend to have a deeply rooted sense of fair play and dual-class share structures may carry the whiff of being ‘not cricket’. But there may be a price to pay for this view.
First, dual-class structures could prevent the relatively early sale of many businesses to overseas rivals with deeper pockets, arguably a fundamental challenge to why the UK has not produced an equivalent Google or Amazon over the years.
One wonders if UK microchip designs champion ARM Holdings would have been sold to the Japanese if a controlling stake remained in the hands of founders rather than fund managers with one to three year performance targets to beat.
Outlawing the practice may also mean many significant UK and European IPOs end up in New York rather than on the London stock market (Sweden’s Spotify, for example), where the emerging digital economy is substantially under-represented by FTSE firms.
Writing in January 2018, Richard Burrows, a partner at corporate law firm Macfarlanes, said asset manager BlackRock had made interesting suggestions as to how the balance between shareholder rights and founder control could be achieved from a practical perspective. These included ‘ensuring one vote per share on critical issues, and giving all shareholders the chance to reaffirm the dual-control structure every five to 10 years’.
What is particularly interesting is that views remain split on the dual-class issue wherever there are investors. The system has been criticised in the US with companies such as Viacom coming under scrutiny in the past. In 2016 global asset manager T Rowe Price implemented a policy to vote against directors of companies proposing two-tier share structures.
Yet the Harvard Business Review believes a US ban on dual-class shares ‘would do more harm than good’ given the challenges from the digital revolution and the growing imperative for established firms to transform their business models.
At the same time stock markets in Hong Kong and Singapore are introducing lighter touch rules that, in some cases, will allow for dual-class stock structures.
The UK Government published a paper in 2017 called ‘Building our Industrial Strategy’ which raised the discussion of having dual-class share structures on the UK stock market in order to support high growth and innovative businesses.
At the moment companies can only have this structure if they have a ‘standard listing’ on the London Stock Exchange which has softer rules and makes a company ineligible for inclusion in the FTSE indices. Dual-class shares are not permitted for ‘premium listed’ companies.
The Government said: ‘Many institutional investors and shareholder representative groups have opposed dual-class shares, arguing that they would weaken the UK’s high standards of corporate governance and disadvantage minority shareholders.’