One Share, One Vote?

Abstract

In light of renewed interest in the relation between shareholder protection and control arrangements, we thoroughly review the optimality of one-share one-vote (1S1V). The issue is what set of rules the entrepreneur will put in place, re take-overs, so as to maximize the IPO value of the firm. The structural changes we admit relative to the original setting of Grossman and Hart (1988) and Harris and Raviv (1989) are that both incumbent and rival management can have private benefits rather than just one of them, and that bids are unconditional offers for all shares. We first explore the set-up where the entrepreneur-founder knows the characteristics of the incumbent and rival management team and extend the analysis further to the imperfect-foresight problem where the entrepreneur-founder only knows the distribution from which the rival will be drawn. We find that, from the founder's perspective, 1S1V is never optimal with imperfect foresight, and its optimality is surprisingly rare even with perfect foresight. We also explain why governments rarely step in: from simulations we find that the social impact of the charter choice seems to be far smaller than the private impact (on IPO value or post-take-over value). Lastly, we go beyond the dual-class case, explaining the role and usefulness of multiple-class structures.