The Importance of Inferior Voting Rights in Dual-Class Firms

Over the past several years, corporate law scholarship has carefully analyzed the effects of dual-class capital structures, which allocate superior voting rights to insiders and inferior voting rights to public shareholders. This Article adds to the literature by focusing on a unique and novel type of dual-class structure—one in which the public shares have no voting rights at all. It notes that this structure is fundamentally different because in the absence of even highly diluted voting rights in public hands, the firm does not have to abide by certain types of disclosure rules and corporate governance standards. Nonvoting shareholders are deprived of these significant components of investor protection. After carefully identifying the serious consequences of nonvoting common stock for investor protection, the Article suggests two ways to address them. First, the Securities and Exchange Commission should act to protect nonvoting shareholders by requiring the same level of disclosure when nonvoting stock is issued as is required when voting stock is issued. Towards implementing this proposal, the Article distinguishes between the situation of no voting rights and the long-standing federal court decision asserting that the regulation of voting rights is beyond the delegated authority of the Commission. Second, stock exchange rules should impose requirements for listed firms aimed at protecting holders of nonvoting stock. These rules would grant nonvoting shareholders certain disclosure and governance rights they do not otherwise have under federal or state law. The Article’s proposals directly address the implications of nonvoting stock for disclosure and corporate governance, and therefore are preferable to the current incidental reaction of major index providers to dual-class capital structures