Give me chastity, but not yet. That is the cry of founder bosses of private tech groups. After the S&P 500 banned new entrants with dual class voting rights, companies going public know they need to embrace democracy — eventually. Since newly public companies are not eligible to join the blue-chip index for at least a year, that still leaves time to enjoy the protection of super voting rights.
Expect provisions that acknowledge this reality in the next batch of initial public offerings, a group that could include Dropbox, Pinterest or Airbnb. Some advisers recommend boards be given the power to cancel extra rights at any time. This would allow a company to first meet the other criteria of the S&P 500, which include four quarters of positive net income.
The glitch is that this diminishes protection for the founder. Even without exposure to the public markets, Uber’s Travis Kalanick was pushed out as chief executive by a previously compliant board.
Instead, the sunset clause will probably be deployed widely. It would end outsize votes after a certain time or when a founder’s ownership fell below a fixed threshold due to dilution or share sales.
Using the second method, shares in Yelp went from dual class to single class last year after the proportion of special class B shares fell below 10 per cent, a trigger included at the review website’s 2012 IPO. This did not help secure Yelp’s admission to the index because its market worth was too low.
A time-based trigger is better. Harvard’s Lucian Bebchuk and Kobi Kastiel argue convincingly that dual class structures become more negative over time. Allowing Sumner Redstone to have super voting rights at Viacom was less problematic in the 1990s when he was constructing a media empire than in 2016 when his faculties had faded and public shareholders with 90 per cent ownership were unable to intervene in a damaging fight for control. If dual share classes are demanded by founders, investors should demand an end date.
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