Governance in Dual Class Share Firms

Abstract

In a typical public company, shareholders can elect the board, appoint the auditors, and approve fundamental changes. Firms with dual class share structures (DCS) alter this balance by inviting the subordinate shareholders to carry the financial risk of investing in the corporation without providing them with the corresponding power to elect the board or exercise other fundamental voting rights. This article fills a conspicuous gap in the scholarly literature by providing empirical data regarding the governance of DCS firms beyond the presence of sunrise and sunset provisions. The summary data suggest that the governance of DCS firms is not uniform and DCS firms tend not to adopt governance measures voluntarily. In particular, a large proportion of DCS firms have no majority of the minority voting provisions and no independent chair. By contrast, almost half of the DCS firms have a sunset clause and a majority of independent directors. Finally, just under one-third of DCS firms have change of control provisions over and above existing law. On the basis of this evidence, the article argues against complete private ordering in favor of modest reforms to protect shareholders in DCS firms including: mandatory sunset provisions followed by a shareholder vote if the DCS is going to continue, disclosure relating to shareholder votes, and buy-out protections that would address governance weaknesses inherent in DCS firms.