Over the past year, proxy advisory firms, major index providers, and the SEC’s Investor Advisory Committee have weighed in on the growing number of companies with dual-share classes.  Today, 9% of the S&P 100 and 8% of the Russell 300 are comprised of companies with dual-class structures.  The Council of Institutional Investors has assembled and published a list of public companies with dual-class structures. During a recent program hosted at the Weinberg Center, titled “Snap Judgment: The Legal and Investment Issues Associated with Non-Voting Stock,” participants debated whether courts should step in and consider dual-class structures.

Traditionally, courts will defer to the business decisions of a company with independent directors that act in good faith having undertaken reasonable care.  However, some participants noted that the business judgment rule has been premised on the notion that stockholders could remove a board with which they disagreed.  In instances in which stockholders cannot hold boards of directors accountable by exercising voting rights, participants argued that it might be appropriate for courts to take on greater responsibility for shareholder protection through more active intervention.  Of course, it could be argued that stockholders could simply sell their securities.

The SEC’s Investor Advisory Committee made a number of recommendations to the Division of Corporation Finance, principally aimed at enhanced disclosure requirements, related to dual class structures.  Specifically, Committee recommends that the Division:

  • Require public companies that have dual class or other entrenching governance structures to prominently and clearly disclose: the numerical relationship between the amount of common equity or its equivalent economic beneficial ownership interest held by any person entitled to control or direct the voting of five percent or more of shares entitled to voting rights in the election of directors or the equivalent body (“ownership interests”), and the amount of voting rights held or controlled by such a person (“voting rights”), which the Committee refers to as “wedge” disclosure risks arising from the dual class structure and the inherent conflicts of interest; and risks arising from the exclusion of the stocks of companies with dual class structures from certain broad-based indices;
  • Monitor shareholder disputes arising out of non-traditional governance structures to identify trends, especially those arising from conflicts of interest; and
  • For issuers of non-voting stock, consider adding disclosure requirements to Form 10-K that would provide all information equivalent to that ordinarily included in a Schedule 14A, to the extent of the Commission’s authority.

In the meantime, the FTSE Russell is once again reviewing the inclusion of non-voting or minority voting shares in its indices.  Voting-based bans from index inclusion have generated some controversy with some, including SEC representatives, suggesting that governance by index rules may itself be problematic.