The Handbook of Board Governance, 2nd Edition

47Dual-Class Share Firms in Developed Market Economies*

Anita I. Anand

J. R. Kimber Chair in Investor Protection and Corporate Governance and Academic Director, Centre for the Legal Profession and Program on Ethics in Law and Business, Faculty of Law, University of Toronto

Introduction

To what extent should firms be allowed to pursue the private ordering of their business affairs at the expense of accountability to shareholders? In a typical public company, shareholders can elect the board, appoint the auditors, and approve fundamental changes. In other words, they can participate in the governance of the firm. Firms with dual-class share (DCS) structures alter this balance by inviting the subordinate shareholders to carry the financial risk of investing in the firm without providing them with the corresponding power to elect the board or exercise other fundamental voting rights. As Hu and Black explain, DCSs “decouple” voting rights and economic ownership.¹

The rationale underlying DCSs is that they preserve family or founder control while allowing the firm to gain access to capital in public equity markets.² By localizing control on the founders, DCS structures prevent the firm from being easily acquired without the founders' cooperation.³ Indeed, DCSs protect the founders from the demands of ordinary shareholders, in turn allowing them more freedom to grow the corporation.⁴ In the process, DCSs dissuade potential suitors who would be willing to pay a premium for shares (a ...