The ongoing row over dual-class shares has reignited in the US after a decision to welcome companies with the differential share structures back into S&P Global Indices.
S&P revealed its decision in April but it has emerged that representatives of US pension funds have pushed back, expressing dissatisfaction over the decision and how it was made.
Media reports this week say the Council of Institutional Investors (CII), a club for public-sector, corporate and union pensions, has written to S&P, saying it was “disappointed both by the decision and the opaque process used by S&P Dow Jones in reaching its decision”.
The International Corporate Governance Network, another club for institutional investors, restated its own scepticism about dual-class shares.
Chief executive Kerrie Waring says: “ICGN advocates a ‘one share, one vote’ standard as the optimal long-term structure for both companies and investors and would encourage all companies listed on public markets to adhere to this model or to add sunset provisions in cases of existing dual-class shares.”
In 2017, S&P barred new companies with dual-class shares from joining its indices, following the listing of Snap with not a single voting share. Snap raised $3.4bn but the event served to heighten controversy over dual-class shares. Companies with existing dual-class structures prior to Snap remained on S&P indices.
Despite opposition, particularly from institutional shareholders, dual-class shares have gained ground in many jurisdictions.
Strings attached
Dual-class shares were allowed for London Stock Exchange Premium listed companies in 2020 after receiving the go-ahead from the UK’s Financial Conduct Authority (FCA). But there are conditions. Companies can only have dual-class shares with a maximum voting “premium” of 20-1. A sunset clause of no more than seven years is also required. Companies must also have a separate board committee supervising the share structure arrangements.
There were dissenters. During the FCA consultation, opponents argued that dual-class shares can undermine shareholder democracy and give too much power to “founders” and early investors.
In recent years, many stock exchanges grew concerned they were losing flotations, in particular of big tech companies, to the US because it allowed differential share structures. Hong Kong permitted dual-class shares in 2018, as did Singapore. Shanghai allowed them in 2019 and Tokyo opened its doors in 2020.
At the moment, CII remains opposed to dual-class shares that do not come accompanied by a sunset clause. In the autumn of 2021, the institute proposed new legislature that would “prohibit the US listing of companies with multi-class stock with unequal voting rights absent a sunset provision that takes effect within seven years of IPO, unless share owners of all classes approved keeping the unequal structure.”
CII argues any premium gained from a dual-class share listing has largely turned into a “discount” within six to nine years, making the differential structure redundant.
ICGN offers a number of other arguments: ‘one share, one vote’ gives equal treatment of shareholders; increases board accountability to minority shareholders and balances their interests with large stock owners. The network also says it improves transparency of share structures, “supports” liquidity and “prevents insulation of companies from market forces”.
The argument over dual-class shares will no doubt continue. For now, however, the imperative of stock markets and their need for fresh listings, especially from the tech sector, means differential voting rights are unlikely to go away.