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Oct 25, 2018

CII petitions exchanges for dual-class sunsets

Council wants seven-year limit on different voting rights

The Council of Institutional Investors (CII) is asking US exchanges to limit the amount of time listed companies can maintain dual-class share structures.

In separate petitions filed with the NYSE and Nasdaq, CII asks the exchanges to amend their listing standards to require that companies seeking to list with multiple share classes having differential voting rights include in their governing documents provisions that convert the share structure to one share, one vote within seven years of the IPO.

CII members in 2016 approved a policy suggesting that, although companies should go public with one-share, one-vote structures, those that do so with unequal voting rights should sunset those structures within three to five years. But the petition authors write: ‘In recognition both of evolving market practice and academic research suggesting that multi-class structures become problematic five to nine years after IPO, we request… a sunset of seven years or less.’

Dual-class share structures have become more commonly used by technology companies in recent years but have attracted criticism that they deny company outsiders a say in the running of firms.

‘While some companies that are controlled by virtue of special voting rights function as benevolent dictatorships, we have seen others stumble because of self-dealing, lack of strategic planning and ineffective boards,’ says Ash Williams, CII chair and executive director and CIO of the Florida State Board of Administration, in a statement.

‘When problems emerge, external shareowners have little recourse. Now, a consensus is emerging – among investors, companies and the law firms and other IPO gatekeepers – that time-based sunsets are a sensible solution to the growing problem of unequal voting rights, which poses danger to long-term resilience of an increasing number of companies.’

In its petition to the NYSE, CII says a variety of factors are contributing to such a consensus, including what it argues is:

  • Academic evidence of the declining performance over time of multi-class stock companies
  • Successful use of time-based sunsets on multi-class structures by a limited but growing number of companies
  • Negative investor reaction to certain IPOs where the companies have zero-vote share classes.

‘We believe the academic research and developing market practice suggest a logical compromise: to put in place a simple, effective sunset mechanism on common stock structures with unequal voting rights, so that markets do not suffer long-term damage from perpetual or long-lasting multi-class stock structures,’ the authors of the petitions write.

Nelson Griggs, president of Nasdaq Stock Exchange, says in a statement: ‘Nasdaq is a firm believer in the flexibility of share structure, in order to provide all investors access to growth companies. That said, we consider the input of all stakeholders when establishing and modifying listing standards and have an independent body that includes investor representation, which makes recommendations to our board about changes to those standards. We will continue to review our listing standards to make sure they protect investors, while also allowing those investors access to innovative companies.’

A spokesperson for the NYSE did not respond immediately to requests for comment.