Five Unique Risks of Dual Class Shares
Late last month, the SEC Investor Advisory Committee unanimously approved a recommendation calling for the SEC to require more disclosure from companies with dual-class shares.
Noting significant increases in the number of public companies employing dual-class or other ‘entrenching governance structures,’ the Committee calls on the SEC’s division of corporate finance “to respond to the increase in dual-class and other entrenching governance structures by continuing to scrutinize disclosure documents filed by companies with such structures.”
According to the Committee, Dual class and other entrenching governance structures create five unique risks. Such risks include;
(1) the inability or greater difficulty of influencing management,
(2) the increased risk of divergent views over strategy or business combinations,
(3) increased risk of conflict or litigation caused by such divergent views,
(4) risks that those who hold relatively small ownership interests can use voting control to approve further changes in governance to the detriment of non-controlling investors, which can result in delistings under major stock exchange listing requirements, resulting in reduced liquidity and loss of value for investors, and
(5) risks that major classes of investors will not be available to purchase shares in the secondary market, either because of policies adopted by specific investors or because shares are excluded from major indices. In addition, holders of nonvoting
shares may be entitled to less information than holders of voting shares in some
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