TheCorporateCounsel.net

Earlier this month, the CII released a report on what it refers to as “stealth” dual-class structures – alternatives to multi-class capital structures that allow insiders the control benefits associated with owning high-vote stock without the potential investor relations downsides. Here’s the intro:

Traditional dual-class or multi-class stock structures have received significant attention from market participants because of the disconnect they create between voting rights and economic ownership, thereby insulating company insiders from accountability to the company’s owners. However, it is important for investors to understand that companies can deliver substantially similar entrenchment mechanisms without creating multiple classes of common stock or adopting widely understood anti-takeover devices such as poison pills. In fact, there may be an incentive for insiders to achieve the same control enhancing outcomes without adopting a traditional dual-class structure.

By doing so, they may receive the private benefits of outsized decision-making power without receiving the negative attention and stock price discount accompanying dual-class stock. This paper reviews nine examples of arrangements that could constitute “stealth dual class”: identity-based voting power, side agreements with favored shareholders, stock pyramiding/cross-ownership, umbrella partnerships and C corporations (Up-Cs), employees granting irrevocable proxy voting rights transferred from employees to insiders, golden shares, situational super-class issuances, non-equity votes and vote caps.

The article goes on to explain how each of these alternatives replicates the benefits of a dual-class structure and offers some specific real-world examples. It also says that Delaware’s adoption of new Section 122(18) of the DGCL may facilitate their increased usage, which is a topic about which the CII has previously expressed concern.

– John Jenkins