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The Dual-Class Spectrum

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The debate over dual-class companies is longstanding and ongoing. However, scholars and regulators generally treat the question of whether a company is dual class as a binary one. If a company grants certain shareholders a separate class of stock with disproportionate voting rights, then the company is treated as a dual-class company. A company with only a single class of stock is never treated as dual class because it is assumed that the shareholders in a single-class company are treated equally. This Article uses an original dataset to provide a new perspective on the dual-class debate by showing that treating the distinction between dual-class and single-class as binary has caused scholars and regulators to miss the myriad ways in which insiders receive rights that are not available to public shareholders.

The dataset shows the wide spectrum of control rights that purportedly single-class corporations grant to insider shareholders by contract rather than through high-vote stock. In fact, companies grant special rights to insiders through contractual mechanisms much more commonly than they do through traditional dual-class structures. Based on these findings, this Article argues that single-class companies that grant disproportionate control rights to insider shareholders by contract are single class in form, but dual class in substance, which, problematically, allows them to avoid the scrutiny and restrictions that protect public shareholders in traditional dual-class companies.

These insights have important implications for policymakers, scholars, and investors. For example, the Securities and Exchange Commission (SEC) has engaged in various attempts to regulate high-vote dual-class structures, and many institutional investors and indices have placed trading restrictions on their shares. However, these attempts to reduce investment in companies that grant insiders disproportionate control rights apply exclusively to high-vote dual-class companies and therefore have lacked the nuance necessary to match insiders’ sophistication. This Article provides a framework that will make it possible to account for the full complexity of ways in which insiders use dual-class structures, either explicitly or implicitly.

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