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Aug 29, 2018

CII urges Eventbrite to set seven-year dual-class sunset

No time frame announced yet for removing separate classes

The Council of Institutional Investors (CII) has asked Eventbrite to set a seven-year time limit on its plans to give company insiders, including directors, greater stock voting power.

Eventbrite recently filed documents with the SEC as a prelude to its expected IPO. In going public, the company intends to have two classes of stock, with Class A shares carrying one vote and Class B shares carrying 10. The company states in its filing that all outstanding shares of Class A and Class B common stock will convert automatically into shares of a single class of common stock at a certain date, but leaves that date blank.

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

In a letter to Eventbrite, CII executive director Kenneth Bertsch notes that although the council traditionally has had a one-share, one-vote policy, its members have since approved a statement on expectations for newly public companies that calls for those using unequal voting structures to adopt sunset mechanisms that revert to one-share, one-vote within a ‘reasonably limited period.'

‘We therefore applaud Eventbrite for including provisions in its IPO prospectus that provide for a time-based sunset to its dual-class unequal voting structure,’ Bertsch writes.

CII encourages Eventbrite to fill the blank date in its IPO filing with seven years or less, which Bertsch describes as ‘a figure both commonly chosen by recent IPO companies and supported by empirical studies of dual-class company performance.’ He notes that companies have this year gone public with sunsets of three, five and seven years on their dual-class structures.

‘One study of dual-class company performance finds that even at innovative companies where unequal voting structures correlate to a value premium at the time of the IPO, that premium dissipates within six to nine years before turning negative,’ Bertsch writes. ‘Another recent study finds that dual-class structures correlate with more innovation and value creation in the period shortly after an IPO but, within six to 10 years, the costs of the unequal voting structures outweigh the benefits.’

Eventbrite did not respond immediately to a request for comment.

Earlier this year, SEC member Robert Jackson acknowledged that there are reasons to argue a dual-class structure can be beneficial – for a limited time – by allowing entrepreneurs to take a long-term approach to building a company without being subject to short-term market pressures.

But he also noted that almost half of the companies that went public with dual-class structures over the last 15 years gave corporate insiders powerful voting rights with no time constraints. ‘Those companies are asking shareholders to trust management’s business judgment – not just for five years or 10 years, or even 50 years. Forever,’ he said. The practice of companies imposing dual-class share ownership over an indefinite time frame goes against US values and is bad for investors, he argued.

Jackson urged securities exchanges to consider proposed listing standards designed to address the use of perpetual dual-class stock. ‘Companies would still be able to [carry out an] IPO with dual-class voting arrangements – but only if management is willing to someday give shareholders their say,’ he said.

Ben Maiden

Ben Maiden is the editor-at-large of Governance Intelligence, an IR Media publication, having joined the company in December 2016. He is based in New York. Ben was previously managing editor of Compliance Reporter, covering regulatory and compliance...