SNAP Judgment: Unequal Voting and the Business Judgment Rule

Abstract

Increasingly, company founders have been opting to shore up control with voting structures that undercut shareholder voting power, where only a decade ago almost all chose the standard and accepted one-share, one-vote structure. Now, with Snap's new no-vote structure, a controller can reduce her stake to only a penny and still hold onto control. These low- and no-vote stock ownership structures drastically undercut shareholder influence, undermine corporate governance, and will shift the burden of investment grievances to the courts. In reviewing board action, courts have historically taken comfort in the fact that, even at controlled companies, markets and corporate democracy will usually do a good enough job constraining management. Dual-class controlled companies, however, are fundamentally different. Unlike at a single-class controlled company, for a dual-class controlled company, there may be neither market incentives nor board oversight. Without board direction and market forces protecting shareholder interests, there is little justification for judicial restraint under the business judgment rule, so the burden of monitoring investments will end up in the courts. The judiciary must determine whether to add heightened review of operational decisions at dual-class controlled companies to the already heightened review of interested transactions. The alternative is promoting a new class of unaccountable and unmotivated corporations.