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SEC commissioner calls for curb on dual-class ‘forever’ shares

SEC Commissioner Robert Jackson Jr.

U.S. exchanges should consider barring companies that offer lifetime dual-class shares or requiring them to include sunset provisions, SEC Commissioner Robert Jackson Jr. said in a speech Thursday.

"Should our public investors have to place eternal trust in corporate insiders?" Mr. Jackson asked the audience at the University of California Berkeley law school.

More and more companies choose to go public with dual-class today, said Mr. Jackson, a former law professor who was sworn in as commissioner on Jan. 11. They represented more than 14% of the 133 companies that listed on U.S. exchanges in 2015, up from 12% of firms listing in 2014 and just 1% in 2005, he said. Nearly half of the companies that went public with dual-class over the last 15 years gave corporate insiders outsized voting rights in perpetuity, and "those companies are asking shareholders to trust management's business judgment — not just for five years, or 10 years, or even 50 years. Forever," he said.

Mr. Jackson and his SEC staff looked at 157 dual-class initial public offerings occurring over the past 15 years, and "immediately noticed some pretty significant differences" between the 71 companies with sunset provisions and the 86 without, and found that over time their predicted valuations diverged. Seven or more years after their IPOs, firms without sunset provisions traded at a significant discount, and decisions by some firms to drop their dual-class structures later were associated with a significant increase in valuations, he said, noting that the analysis is preliminary but a subject "that deserves much further study."

Council of Institutional Investors Executive Director Ken Bertsch applauded Mr. Jackson for using his first major public speech to shed light on a corporate governance issue that he said is a growing problem. CII found that 19% of U.S. companies that went public on U.S. exchanges in 2017 had dual-class structures with unequal voting rights.

"We are encouraged by Commissioner Jackson's call for long-overdue improvements to stock exchange listing standards to place limits on the use of dual-class stock structures. We agree with Commissioner Jackson that those improvements should recognize the growing trend that dual-class companies have taken in recent years toward automatically sunsetting their superior class of stock."

Objections raised by CII and through the SEC's Investor Advisory Committee have resulted in three major providers moving to exclude dual-class companies from significant stock indexes, Mr. Jackson noted. FTSE Russell will exclude all companies whose free float constitutes less than 5% of total voting power; S&P Dow Jones Indices will exclude all dual-class firms in the S&P Composite 1500, composed of the S&P 500, S&P MidCap 400 and S&P SmallCap 600, and existing components are grandfathered; and MSCI will reduce the weight that dual-class firms occupy in its indexes.

Mr. Jackson's speech, "Perpetual Dual-Class Stock: The Case Against Corporate Royalty," is available on the SEC website.