Dual-class companies are the Rodney Dangerfield of corporate governance – “No respect… I’m tellin’ ya, I don’t get no respect at all!” It’s hard to find any love for them among investor advocates, who’ve made “one share, one vote” a central underpinning of their good governance creed, but does their zeal for this revealed truth result in the undervaluation of dual-class companies? That’s the conclusion of a recent study by a Cambridge University law prof. Here’s the abstract:
Dual-class stock enables a company’s controller to retain voting control of a corporation while holding a disproportionately lower level of the corporation’s cash-flow rights. Dual-class stock has led a tortured life in the US. Between institutional investor derision and the exclusion or restriction of dual-class stock from certain indices, one may assume that dual-class structure must be harmful to outside stockholders.
However, in this article, the existing empirical evidence on US dual-class stock will be reassessed by contrasting studies that use different measures of performance. It will be shown that although dual-class firms are generally valued less than similar one-share, one-vote firms, they perform as well as, and, in many cases, outperform, such firms from the perspective of operating performance and stock returns. When it comes to dual-class stock, more than meets the eye, and a presumption that dual-class stock is harmful for outside stockholders should not guide policy formulation.
The study argues that the market discounts dual-class stock to protect itself against the potential that the downsides of the structure will outweigh the benefits, but that those downsides seldom emerge. As a result, outside stockholders are not harmed by dual-class stock. Instead, they invest in dual-class stock at a discounted price which organically protects them against the potential for future abuses, and that, if anything, discounts dual-class stock too much.
-John Jenkins, TheCorporateCounsel.net May 8, 2020
