Dual Class Capital Structures Flashcards
What is a Dual-Class Stock Structure?
“A share structure that gives certain shareholders voting rights disproportionate to their shareholding.”
Singapore Stock Exchange, Mainboard Rules, 2018
Why would one regard a Dual-Class Structure as desirable?
By concentrating founders’ power and consolidating it at the Board level, DCSs protect their vision for the firm and inoculate it, and them, against acquisition or displacement.
What are the Major Arguments favoring Dual-Class Stock Structures?
- Free market determinism of capital structures is more efficient.
- IPOs are rendered a viable early-stage entry strategy for start-ups.
- Exchanges and investors will profit from the higher market caps.
- Firms will be better able to tailor capital structure bespokely.
What are the Major Arguments disfavoring Dual-Class Stock Structures?
- Strong exacerbation of agency costs by intensifying moral hazard.
- Nullification of takeovers’ disciplinary effect on bad management.
- Disempowerment of all non-super-voting shareholders.
- Difficult to accurately price due to:
- Perverse blockholder incentives maintain power.
- Investor CAPs and information asymmetries.
In a word, why do Founders and Institutional Investors love and hate, respectively, the concept of a Dual-Class Capital Structure?
- For the former, it neutralizes the greatest costs of equity financing without harming the ability to raise capital.
- For the latter, it amplifies the greatest risks of equity financing by disabling their primary risk-mitigating mechansim, i.e. oversight.
Why have DCSs proven particularly popular in the United States?
Due to the amount of shareholding power institutional investors have concentrated and centralized, DCSs protect management from owners’ short-termist pressures and principal costs.
M. Moore – Designing Dual-Class Sunsets | The Case for a Transfer-Centered Approach [116-120]
What is the Ideal Sunset Clause?
One long enough to inoculate management against short-termism, but short enough to uphold their long-term accountability to shareholders.
For the Sunset Clause, whare the three main models?
- The Time-Centered model.
- The Ownership-Centered model.
- The Transfer-Centered model.
What is the Time-Centered Model of Sunset Clauses?
Absent shareholder disapproval, all Class B stock will convert to common stock after a given period of time.
What is the Central Appeal of the Time-Centered Model?
It guarantees the unlocking of a firm’s potential in future whilst locking founders’ control over the project in its most decisive stages.
What is the Ownership-Based Model of Sunset Clauses?
Absent shareholder disapproval, upon a firm’s market capitalization falling below a given threshold, all Class B stock will convert to common stock.
What is the Central Appeal of the Ownership-Centered Model?
The cashflow-dependant nature of continued Class B stock ownership:
- Aligns blockholder and shareholder interests;
- Mitigates agency costs; and
- Guarantees liberalization in case of underperformance.
What is the Transfer-Centered Model of Sunset Clauses?
Absent shareholder disapproval, Class B stock will convert to common stock upon its transference on its current blockholder’s death or retirement.
What is the Central Appeal of the Transfer-Centered Model?
According to Moore, compared to its peers, it is the least arbitrary, morally hazardous, and non-financial in its motivations.
Why are Time-Centered and Ownership-Centered Models comparatively Arbitrary?
No length of time or cashflow threshold will fit every single firm. In addition, pegging such a significant event to an arguably uncontrollable variable is counterproductive to the ideal.
