Introduction
The FinTech company Robinhood – developer of the homonymous stock trading App – claims to be “on a mission to democratize finance for all.” It went public on July 29, 2021, listing on the Nasdaq exchange. The shares were offered at an initial price of $38, as it was in the case of the IPO of Facebook on May 18, 2012, one of the largest of all time. These two IPOs were also similar in another respect: both companies raised capital with a dual class shares structure, allocating Class B shares – with 10 votes each – to their founders.
The interest of the Silicon Valley for dual class shares is well documented. After Google’s IPO in 2004, the founders of technology (“Tech”) companies have frequently adopted this method to go public while simultaneously retaining the control of the general meeting. The list includes LinkedIn, Snapchat, and Pinterest. Subsequently, one after another, stock exchanges that previously mandated “one-share, one-vote” listings – such as Hong Kong and Singapore – allowed dual class shares in order to retain the national Tech companies that were fleeing to New York. Today, a remaining space for shareholder democracy is represented by the Premium Listing Segment of the London Stock Exchange’s Main Market, where the “one-share, one-vote” pillar of corporate governance is still standing, albeit it could soon capitulate under the pressures of the international competition, including that of Euronext Amsterdam.
Shareholder Democracy
In 2019, the Financial Times rightly commented on Lyft’s Class B shares – that grant 20 votes each – with an Orwellian “some shareholders are more equal than others.” Indeed, dual class shares are incompatible with a democratic shareownership: the disproportionate distribution of voting rights implies considering the shares as passive and merely monetary investments for some shareholders, and as participative governance instruments for others.
In this sense, dual class shares can be considered coherent with the U.S. model of corporate governance, where shareholders play only a marginal role in the governance, while being relegated to the role of mere capital providers. However, needless to say, this goes to the detriment of an active role of minority shareholders that would put their money at stake without being able to affectively voice their opinions, unless it’s through the “exit” option. This is reflected in the institutional investors’ critique of disproportionate voting rights structures. Moreover, dual class shares make directors accountable only to the “visionary” founders, not to the capitalproviders, thus, exacerbating the agency problem. Further, the case of Class B shares is worse because they are emitted without a time-based sunset clause, meaning without an “expiring date”. In this respect, it has been outlined how “dual-class ownership – forever shares – don’t just ask investors to trust a visionary founder. It asks them to trust that founder’s kids. And their kids’ kids. And their grandkid’s kids.”
Conclusion
The Financial Times noted how the founders of Robinhood have implemented a shareholder power imbalance that is incoherent with their alleged mission to democratize finance. Although in the U.S. the “traditional” structure is certainly not a relic of a distant past, as it was adopted in 85% of IPOs in 2020 – excluding Special Purpose Acquisition Companies from the count – Robinhood’s listing confirms the attractiveness of dual class shares to Tech Companies. Indeed, dual class shares are attractive, but for founders, not for institutional investors. The argument that goes: “if you don’t like our shares, don’t buy them” crumbles in front of the consideration that institutional investors need to buy shares, as pointed out during the European Corporate Governance Institute’s conference on the topic. Investors will invest, but dual class shares weaken their position.
In any case, what is clear is that the debate over dual class shares is one of the timelier in the corporate governance field. The founders of Tech companies, deciding to go public with such structures, are playing a crucial role in the global competition for IPOs, and this is leading to a race to the bottom – from the perspective of shareholder democracy – among the regulators of stock exchanges.
