The Unknown Professor over at Financial Rounds points us today to a piece on Market Watch on dual-class shareholder structures in the public equity markets. Penned by Russ Britt, the "Los Angeles bureau chief for MarketWatch," the piece casts dual-class structures as some sort of control-tax dodge, pitting victimized shareholders against the highly unattractive demon of nepotistic media dynasties in what amounts to a thinly veiled call to arms against the practice.
"Management wants the best of both worlds," said Nell Minow, founder of the watchdog group Corporate Library. "They want the access to capital of the public markets and they want the control of the private markets, and dual-class allows them to get that."
Let's ignore for a moment that it is in fact the shareholders themselves, who willingly buy into the dual class system in the first place, and not some sort of lawyerly slight of hand which "allows [management] to get that."
The reality is that dual-class structures can serve important roles. Their traditional purpose in the media context, the Market Watch piece grudgingly admits, has been to insulate media control from the short-term whims of the market. Clearly, any anti-takeover provision which entrenches management will have this effect to some degree. Stock price, however, is still a strong motivator and to the extent control is important to investors castrated shares will trade at a discount to uncut issues. This point, apparently, needs to be highlighted for almost everyone who makes "fairness" arguments about these sorts of practices:
Either:
Investors have already managed to pick up the assets at a discount because the lack of control has already been priced in, or;
Control in the company issuing the shares is so unimportant that it hasn't impacted the shares. One might wonder in this eventuality why there would be any need of adjustment.
In fact, to now, through legislation, regulation or fiat, force a change in that structure would unjustly enrich shareholders who knowingly paid non-control prices and have been granted a subsidy by regulators and at the expense of the company and management once control is handed to them.
Consider the S-1 of one of my least favorite companies:
Corporate Structure: We are creating a corporate structure that is designed for stability over long time horizons. By investing in Google, you are placing an unusual long-term bet on the team, especially Sergey and me, and on our innovative approach. We want Google to become an important and significant institution. That takes time, stability and independence.
We bridge the media and technology industries, both of which have experienced considerable consolidation and attempted hostile takeovers. In the transition to public ownership, we have set up a corporate structure that will make it harder for outside parties to take over or influence Google. This structure will also make it easier for our management team to follow the long term, innovative approach emphasized earlier. This structure, called a dual class voting structure, is described elsewhere in this prospectus.
The main effect of this structure is likely to leave our team, especially Sergey and me, with significant control over the company’s decisions and fate, as Google shares change hands. New investors will fully share in Google’s long term growth but will have less influence over its strategic decisions than they would at most public companies.
While this structure is unusual for technology companies, it is common in the media business and has had a profound importance there. The New York Times Company, the Washington Post Company and Dow Jones, the publisher of The Wall Street Journal, all have similar dual class ownership structures. Media observers frequently point out that dual class ownership has allowed these companies to concentrate on their core, long-term interest in serious news coverage, despite fluctuations in quarterly results.
The Berkshire Hathaway company has applied the same structure, with similar beneficial effects. From the point of view of long-term success in advancing a company’s core values, the structure has clearly been an advantage. Academic studies have shown that from a purely economic point of view, dual class structures have not harmed the share price of companies.
The shares of each of our classes have identical economic rights and differ only as to voting rights. Google has prospered as a private company. As a public company, we believe a dual class voting structure will enable us to retain many of the positive aspects of being private.
We understand some investors do not favor dual class structures. We have considered this point of view carefully, and we have not made our decision lightly. We are convinced that everyone associated with Google—including new investors—will benefit from this structure.
This brings me back to the original "have it both ways" quote:
"They want the access to capital of the public markets and they want the control of the private markets, and dual-class allows them to get that."
Yes, exactly. Have we come to the point where a long-term corporate strategy is so antithetical to capital markets that we must abolish anything that encourages it? It strikes me reading this again that Nell Minow is trying to strip one of the last real defenses against short-term public market forces in public equities and what I have started calling "the tyranny of the quarterlies," away. Once again, markets are beginning to look like the laws of thermodynamics. Don't let companies win. Don't let them break even. Don't let them get out of the game.
Adding in the changes Herb Greenberg advocates and we'll end up with a second rate capital market s system in no time. What will we do then? Why, drive out all the liquidity and collar private equity to prevent public shareholders from being "cheated" by unlocking value that the public markets have all but destroyed.
Moving to London looks much more appealing today.
