If you’ve been reading my blogs for a while, then you know that the institutional investor-led crusade against dual-class IPO structures has long been one of my favorite hobby horses. I didn’t think there was any way that I could have been less sympathetic to institutional investors’ “buy first, whine later” approach to dual-class IPOs — that is, until I saw the disastrous Deliveroo IPO unfold across the pond.
An article from FT.com indicates that one of the reasons that the offering tanked is that investors balked at its dual-class structure. Of course, a dual-class structure is novel in London, and it was also far from the only bit of hair on that deal, but some of the city’s biggest investors nevertheless cited it as one of the reasons they refused to sign-on. I say good for them — and what’s stopping U.S. institutions from doing the same?
In responding to a question like this, institutions frequently point to supposedly insurmountable “collective action problems” around this issue, or they cite the plight of the poor index funds, which have no choice but to buy stocks included in the relevant indices. But I think there’s evidence to suggest that if an IPO truly raises significant governance concerns, institutions are willing to walk away from it. I also think that whatever its merits when it comes to aftermarket purchases, the point about index funds doesn’t carry much weight when it comes to pushing back against dual-class IPOs, because index funds don’t buy IPOs.
All that leads me to believe that complaints about dual-class IPOs aren’t about “good governance” — whatever that means. Instead, they’re tactical. They’re designed to ensure that investors who provide fresh capital at the time of the IPO or afterward ultimately have the upper hand at public companies.
There’s nothing wrong with that objective, but I don’t believe there’s anything wrong with founders using their leverage to push back against it. There’s no reason for the exchanges, the SEC, Congress or the Delaware legislature to intervene. Institutions have all the tools they need to fight this fight on their own. In fact, they have trillions of them.
-John Jenkins, TheCorporateCounsel.net June 8, 2021