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The Problem with Dual-Class Shares

Many of the biggest names in the market have already done it. But dual-class shares are never a good idea - for the company or its shareholders.

Today, I want to write about the recent glut of dual-class shares in the stock market today. But first, I want to talk politics ... sort of.

Sometimes it seems that everyone wants you to write your congressional representatives, your senators, your city councilpersons, the Chamber of Commerce and the U.N. about everything. After all, there are issues that need to be addressed and only the people at the top have a hope in hell of doing what needs to be done.

I don’t mean to be cynical, but I think it’s unlikely that your letter to the Person in Power in question will have much effect unless it’s accompanied by a campaign contribution that is proportional to your desire for a particular outcome. It’s like what Al Capone said: “You accomplish more with a smile, a handshake and a gun than you do with just a smile and a handshake.” Substitute “money” for “gun” and you get the idea.

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But there is a new wrinkle on the part of certain companies that has me strongly considering writing to someone. I just decided that it would be you, the reader.

Dual-Class Shares Explained

The wrinkle is toward dual-class (or even triple-class) structures that issues shares that don’t have voting power. The idea is that investors can buy these dual-class shares, receive dividends and benefit from stock splits and other moves, but can’t vote on company decisions like appointments to the board of directors or other corporate decisions.

The usual reason for the creation of non-voting shares is that this allows company founders and leaders to maintain control of the company even if they don’t own a majority of the stock. And if you think of examples like Apple (AAPL) firing Steve Jobs back in 1985, you can see why. And fearful founders can also point to Jerry Yang and Yahoo (YHOO), Jack Dorsey and Twitter (TWTR), Mike Lazaridis and Blackberry (BBRY) and (most recently) Travis Kalanick and Uber as reasons to be concerned.

Some very high-profile companies have adopted dual-class structures, including Alphabet, Facebook, Berkshire Hathaway, Visa, Comcast and MasterCard. And most of those companies are good examples of either founders or families wanting to keep control.

But while I don’t blame these founders and families, taking steps to retain voting control even with minority ownership isn’t a good choice for most businesses. Sometimes the founder has gone off the rails (yes, I’m looking at you Kalanick) and the company is better off under someone appointed by the board of directors whose ultimate responsibility is to shareholders.

Stock exchanges are always eager to gain new listings and may be willing to grant permission for dual-class shares as a way to attract them. But apparently the companies that calculate major stock indexes—the FTSE Russell and S&P Dow Jones—have banned them from inclusion.

A few years back, when Alibaba (BABA) was negotiating with the Hong Kong stock exchange for a listing there, the exchange’s rules against dual-class listings was the big sticking point. The result was that Jack Ma took Alibaba public in New York instead, which was beneficial for U.S. investors.

I doubt that writing to someone asking them to ban listings that include non-voting shares will do much good. These decisions are fought out on battlefields where letters lack much effect.

But I’m opposed to moves by the rich and powerful to remove one more little bit of control from ordinary investors. I don’t go to annual meetings and I don’t challenge boards of directors over corporate policies. But I hate losing the right to do so. So should you.


Paul Goodwin is a news writer for Cabot’s free e-newsletter, Wall Street’s Best Daily.