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Investors take another route to stop dual-share issuances

George S. Dallas said investors now are looking to engage with stock exchanges directly in an effort to put an end to dual-share stock issuances.

Even as they campaign and call on the securities industry to eliminate unequal and non-voting shares, the investment community is working on an alternative solution to the problem.

"In the wake of the MSCI decision there is a renewed emphasis on engaging with stock exchanges on this issue, and a good example of this is an investor petition in the U.S. to call for sunset clauses on dual-share issuances after a seven-year period," said George S. Dallas, London-based policy director at the International Corporate Governance Network.

Last month, the Council of Institutional Investors filed petitions with the New York Stock Exchange and Nasdaq calling on them to limit listings of companies with dual-class share structures.

It wants these exchanges to amend listing standards so that any company with multiple share classes with unequal voting rights would have to convert its share structure within seven years of an initial public offering. These shares would be altered to become one share, one vote.

"Certainly, CII and investors have been speaking out about the value of time-based sunsets for some time now, but there's also recent academic research (that) supports this. Studies show that while dual-class companies on average have a valuation premium at the time they go public, that advantage depreciates six years after IPO and then disappears," said Amy Borrus, deputy director at the CII in Washington.

"We believe hanging on to differential voting shares after seven years looks like management entrenchment."

Last year, Snap Inc. launched its initial public offering with zero-vote shares. "This latest approach (by MSCI) would allow for the issue of Snap in its benchmark index ... which is not something FTSE Russell or Standard & Poor's would allow," said Mike McCauley, senior officer, investment program and governance at the $194.1 billion Florida State Board of Administration, Tallahassee, and chairman of the International Corporate Governance Network. "I would point out that Snap's stock price has lost approximately 59% of its value since going public in early 2017."

The difficulty for stock exchanges to provide a better solution to the issue of unequal voting rights — such as implementing a sunset clause — is that they compete on listings, Ms. Borrus said.

"And this year the Hong Kong and Singapore exchanges (allowed) first-time dual-class listings, pointing to NYSE and Nasdaq as key reasons why they felt they needed to do it. It's really up to U.S. exchanges to show some leadership," Ms. Borrus said.