By Rodney F. Tonkovic, J.D.
The Council of Institutional Investors and the California State Teachers' Retirement System have written in support of a discussion draft of a House bill on multi-class stock companies. The bill would establish standards for exchanges listing new companies having multiple classes of stock with unequal voting rights and would include a sunset provision for that structure. Both organizations have long opposed multi-class structures without sunsets.
The discussion draft. The as-yet unnumbered bill was distributed during a hearing of the House Committee on Financial Services on March 30, 2022: "Oversight of America's Stock Exchanges: Examining Their Role in Our Economy." The discussion draft, entitled "H.R.___, To amend the Securities Exchange Act of 1934 to improve the governance of multi-class stock companies," includes amendments to the Exchange Act requiring the SEC to issue rules intended to improve the governance of multi-class stock companies. To that end, Section 19A would be added permitting an issuer to register multiple classes of shares with unequal voting rights; such newly-listed companies would have to include a seven-year sunset provision for that multi-class stock structure. New Section 23(e) grants the Commission authority to issue rules and regulations to promote fair corporate suffrage. The discussion draft would not apply to any existing public companies.
CII. The Council of Institutional Investors has long supported the one share, one vote principle and wrote to reiterate its strong support for the Committee to pursue a mark-up of the bill. CII believes that the bill is consistent with U.S. corporate governance principles and reflect the policy recommendations of the SEC's Office of the Investor Advocate. The bill also reallocates the division of authority between the SEC and the exchanges for adopting future corporate governance listing standards, the letter says, in light of the exchanges' "acute conflict of interest between their commercial business interests and regulatory obligations."
According to CII, the bill provides a simple, flexible solution to ensure that investors have a voice. A multi-class structure may stay in place in perpetuity, so long as investors vote on a one share, one vote basis every seven years to keep that structure in place. CII agrees here with former SEC Commissioner Robert Jackson, a witness at the hearing, whose written remarks stated that the bill provides a balance between accountability and the freedom needed to grow young companies.
Finally, CII notes that foreign exchanges, particularly in Hong Kong, Singapore, and mainland China, have significant limitations on the use of multi-class structures. The multi-class bill would create a simpler and more flexible regulatory regime than those in many foreign markets, the letter says.
CalSTRS. The California State Teachers' Retirement System wrote to support for provisions aligning with its one-share, one-vote principle within CalSTRS' Corporate Governance Principles. As the largest educator-only pension fund in the world, CalSTRS has in interest in the rules affecting shareholders and urges the establishment of improved listing standards for multi-class stock companies with unequal voting rights.
CalSTRS believes that one share, one vote is foundational to good corporate governance and notes that the lack of accountability resulting from dual-class share structures can harm corporate culture and the community at large. Disproportionate founder control can be an impediment to strategic or managerial changes where change can be critical to long-term performance, the letter says.
In CalSTRS's view, the performance of multi-class companies is "decidedly mixed" in the medium- to long-term. But, a growing number incorporate time-based sunsets into their structures, and CalSTRS believes that this is a logical compromise: "We believe that time-based ‘sunsets’ are the way forward, requiring multi-class structures with unequal voting rights to collapse to one-share, one-vote within a reasonable and specified period after the IPO." Seven years is an appropriate period, CalSTRS says, and the proposed provisions offer flexibility and adaptability for companies.