Multiple-voting shares: good or evil?

by Mathew on April 28, 2008 · 4 comments

Marc Andreessen has an excellent rundown on his blog of the issues and possible outcomes in the Microsoft-Yahoo takeover battle — something that virtually any newspaper I can think of would be pleased to run as an analysis piece. With the help of a couple of corporate M&A lawyers, he outlines the various strategies that Microsoft could use, and the defenses that Yahoo has available, including a series of “poison pills.” But one thing jumped out at me in Marc’s analysis — a reference to how Yahoo would have been better off if it had multiple-voting shares:

Would a dual-class share structure have been a good idea for Yahoo? Yes. If Yahoo did have a dual-class share structure, Yahoo’s cofounders would have been much better situated to block Microsoft from attempting a takeover. You can bet that this is being noticed by the founders of every technology company that might go public from here on out.

Marc points out that Google has a dual-class share structure, which gives the founders multiple votes (Larry Page, Sergey Brin and Eric Schmidt have shares with 10 votes each), the implication being that this is the way other technology companies should go as well. As much as I respect Marc’s point of view, however, I’m going to disagree. I think having multiple-voting shares — or any class of special voting shares that gives a small group of insiders control over the fate of the company — is a bad idea. And not just for investors, but for the company itself.

I think Marc is looking at this issue as a founder and CEO, which is fair enough — and from a founder’s perspective, multiple or special-voting shares seem like the Holy Grail: they allow you to raise money, but don’t require you to give up control. Unfortunately, they also cement control within a small group and make that group virtually impervious to hostile takeovers or any other form of shareholder activism. It’s a little like a dictatorship: a benevolent dictatorship is one of the best forms of government — but also very rare.

For every founder who uses his voting powers wisely, there is another who plunders the company and distorts the business in virtually every way imaginable. Canada has had a love affair of sorts with multiple-voting stock — in part because of a desire to protect broadcasting and media companies, but also because much of the foundation of corporate Canada consists of family-owned entities that pass control on from generation to generation (don’t get me started on Frank Stronach and Magna Corp.). For every example of a company that has been successful with such a share structure, there are a dozen of contrary examples.

For me, dual-class shares are an attempt to get around Darwin’s Law as it applies to the marketplace. Multiple-voting shares protect incompetent, complacent or simply unsuccessful companies that should be taken over and either remade or dismantled. If your company is agile enough and creative enough, it shouldn’t need them.

  • http://www.davidrdgratton.com Ddonat

    I absolutely 100% agree with you, Mathew. Once you are in the public market dual class voting shares are ripe with danger. To support them, I think you are implying that you believe in Benevolent and slight Omniscient Founder(s)/Management – that simply is naive. Control in the market system, means delivering 'the returns', not having preferred voting shares. If you are doing well, no one is going to be able to wrestle control from you.

    But, if a take over comes along that is offering a 40% premium to where your stock presently is trading that is a reflection on present management which is performing poorly. Why would you ever want to put MORE votes in the hand of founders and managers that are performing poorly? Who's interests does that serve? It certainly is not the public investor.

  • http://www.mathewingram.com/work mathewi

    Totally agree, David.

  • http://www.davidrdgratton.com Ddonat

    I absolutely 100% agree with you, Mathew. Once you are in the public market dual class voting shares are ripe with danger. To support them, I think you are implying that you believe in Benevolent and slight Omniscient Founder(s)/Management – that simply is naive. Control in the market system, means delivering 'the returns', not having preferred voting shares. If you are doing well, no one is going to be able to wrestle control from you.

    But, if a take over comes along that is offering a 40% premium to where your stock presently is trading that is a reflection on present management which is performing poorly. Why would you ever want to put MORE votes in the hand of founders and managers that are performing poorly? Who's interests does that serve? It certainly is not the public investor.

  • http://www.mathewingram.com/work mathewi

    Totally agree, David.

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