Dual-Class Shares

It’s an investing principle: One share means one vote, right? Actually, not always. For companies including Ford Motor Co. and Google parent Alphabet Inc., the stock is split into different categories, known as dual-class shares, to give owners of one class greater voting rights than owners of the other. Crucially, that allows minority shareholders — typically a company’s founders or leaders — to retain control of a business. Investors have been grumbling about the undemocratic nature of it all for years, while still buying the shares. Stock exchanges, along with regulators, decide on the ground rules, and some bourses that forbid multiple-class shares are rethinking their position as competition intensifies. In particular, they covet listings by the huge technology firms that increasingly opt for such structures. The compilers of equity indexes, which often include the dual-class shares in their lists, are leading a backlash.

Photo-sharing app Snap Inc. took the notion to its extreme by handing zero voting rights to investors in its $3.4 billion initial public offering in 2017. Music streaming service Spotify skipped an IPO altogether and allowed its owners to maintain control after its share listing the following year. Facebook Inc.’s dual-class model gives company founder Mark Zuckerberg less than one percent of the social-media giant’s publicly traded stock and 60 percent of its voting power. But resistance is also taking shape. In 2017, Facebook scrapped a plan to create a new class of shares following legal action by shareholders. And earlier that year, the U.S.-based Council of Institutional Investors, whose members include public pension funds, called for multiple-class listings to be removed from equity indexes. Several of the biggest index compilers took note: S&P Dow Jones Indices and FTSE Russell decided to exclude some dual-class shares going forward. Snap, for example, is now ineligible for the S&P 500, meaning passive funds — whose investments track that index and are worth trillions of dollars — aren’t obliged to buy its stock. At the same time, exchanges that prohibit or limit dual-class shares are considering loosening restrictions, fearing for their status as financial hubs. Hong Kong's exchange operator, which lost out to New York for Alibaba Group Holding Ltd.’s world record $25 billion listing in 2014, approved dual-class shares last year, opening the way for Xiaomi Corp.’s $5.4 billion IPO. Singapore’s exchange also changed its rules to allow them, while the U.K. regulator has discussed relaxing its regulations.