Securities Law Blog

In a speech at Berkeley School of Law on February 15, new SEC Commissioner and Columbia University law professor Robert J. Jackson Jr. passionately expressed what he sees as an age-old class struggle between corporate founders and Main Street investors in the context of perpetual dual-class capitalization structures among newly public companies.¹ While Commissioner Jackson acknowledged that “dual-class [structures] can help America’s most innovative companies create the sustainable long-term value we need to grow our economy,” he asserted that the “forever-ness” of perpetual dual-class structures plants the seed for creating “corporate royalty.” The structure, he stated, “raises the prospect that control over public companies, and ultimately of Main Street’s retirement savings, will be forever held by a small, elite group of corporate insiders – who will pass that power down to their heirs.” The result of this, Commissioner Jackson said, is an unacceptable situation in which “investors [are] forced to choose being long American innovation and signing up for corporate royalty.”

Commissioner Jackson’s first objection to perpetual dual-class stock is that it is un-American. He even quoted Thomas Jefferson harking back to what Commissioner Jackson seems to compare to America’s fight against British royalty in the Revolutionary War to bolster his point. In his second, and more persuasive argument, Commissioner Jackson observed that perpetual majority voting shares serve to remove entrenched managers from the discipline of the market forever. Third, he asserted that perpetual dual-class stock is troubling in practice based on a preliminary study he and his staff conducted of dual-class companies with differing voting classes that are limited to a number of years (or that “sunset”) and dual-class companies that have given insiders control forever. He reported: “Seven or more years out from their IPOs, firms with perpetual dual-class stock trade at a significant discount to those with sunset provisions. We also found that, among the small subset of firms that decided to drop their dual-class structures later in their life cycles, those decisions were associated with a significant increase in valuation.”

Based on his analysis, Commissioner Jackson prods the New York Stock Exchange and Nasdaq to consider amending their initial listing requirements to mandate “sunset” provisions for dual-class stock triggered upon certain events such as the founder’s resignation from the company or at least upon some fixed future date.

Interestingly, Commissioner Jackson’s reaction to dual-class stock is to seek additional forms of regulation of a long-standing practice (in some instances with an arguably justifiable business purpose such as when used in the media and publishing industries), instead of appealing to the patriotic and business sense of those companies freely seeking to adopt legal dual-class stock structures.

It is worth noting that, in our experience, SEC commissioners are not normally permitted to speak about matters currently pending before the SEC and, therefore, it can be assumed the SEC is not currently considering taking steps to discourage adoption of perpetual dual-class stock with unequal class voting powers. Additionally, exchanges are not compelled, despite being regulated by the SEC, to amend their listing rules based on an SEC commissioner’s speech.

Given the criticism that has already been published by the SEC’s Investor Advisory Committee and the Council of Institutional Investors, as well as actions taken by stock indexes such as FTSE Russell and S&P Dow Jones to exclude dual-class companies, Commissioner Jackson adds another important voice to the continuing debate about perpetual dual-class stock.

1. For more information about dual-class stock, see S. Feldman, Bloomberg BNA Securities Regulation & Law Report, “BNA Insights: IPOs in 2016 Increasingly Include Dual-Class Shareholder Voting Rights” (2016).