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You Can’t Sell Your Firm and Own It Too: Disallowing Dual-Class Stock Companies from Listing on the Securities Exchanges

In 2004, Google’s initial public offering (IPO) revealed that the company would go public with a dual-class capitalization structure. A dual-class stock company has a capital structure whereby insiders hold common stock with multiple votes per share (typically ten), while the public holds common stock with just one vote per share. This structure was popular in the 1980s as a defensive measure to ensure that a company was protected against hostile takeovers, management would adopt and keep high vote share classes. The NASDAQ Stock Market (NASDAQ) and NYSE MKT LLC have consistently allowed corporations with such structures to list on their exchanges, while the New York Stock Exchange (NYSE) has had different rules over time. In 1988, the Securities and Exchange Commission (SEC) came into the picture and attempted to regulate companies with dual-class stock (and other structures with shareholder voting restrictions) by prohibiting such companies from listing on the stock exchange. However, the Court of Appeals for the District of Columbia subsequently vacated this SEC rule. Today, corporations can list on the NYSE, NASDAQ, or AMEX as long as the dual-class structure was in place at the time of the initial public offering.

Since Google’s 2004 IPO, an increasing number of companies have begun to go public with similar capitalization structures. In light of dual-class stock’s resurgence, Congress and the stock exchanges should revisit the use of such capitalization structures in the United States. In this Comment, I argue that decoupling voting rights from economic ownership is detrimental to shareholders because it allows companies to avoid the threat of market mechanisms that have traditionally served to keep management in check. In the long term, this decoupling is incompatible with principles of corporate governance, and thus stock exchanges should reevaluate their policy of accepting companies with dual-class stock structures. Part I discusses how the dual-class structure allows management to entrench itself and effectively prevent shareholders from exercising any sort of control over a company they technically own. Part II explains how dual-class stock companies have led to both stock unifications that are detrimental to the general public and controllers extracting benefits for themselves in acquisitions. Finally, Part III discusses how such reforms can be achieved.