Document Type
Article
Publication Date
2019
Abstract
A growing number of technology companies, including Google, Zillow, and Snap, have issued stock that does not allow investors to vote on corporate decisions. But there is fundamental disagreement among scholars and investors about whether nonvoting stock is beneficial or harmful. Critics argue that nonvoting shares perpetually insulate corporate insiders from influence and oversight, and therefore increase agency costs. By contrast, proponents contend that nonvoting shares may provide benefits that exceed these agency costs, such as enabling corporate insiders to pursue their long-term vision for the company without interference from outside shareholders.
This Article offers a novel perspective on this debate. It demonstrates an important and previously unrecognized benefit of nonvoting stock: that it can be used to make corporate governance more efficient. This is because nonvoting stock allows companies to divide voting power between informed shareholders who value their voting rights and uninformed, “weakly motivated” shareholders who do not. When this efficient sorting happens, a company will lower its cost of capital by reducing agency and transaction costs. Specifically, informed investors will pay more for voting stock that is not diluted by the votes of uninformed, weakly motivated investors; indeed, a company may even entice informed investors to invest by offering two classes of shares. Likewise, weakly motivated investors will gravitate toward shares that do not require them to incur the costs associated with voting, especially because nonvoting stock tends to trade at a discount relative to voting stock. In other words, the company that issues nonvoting shares for its uninformed shareholders will make itself more valuable.
This insight has several implications for the law. Most importantly, this Article contends that recent proposals to restrict or deter companies from issuing nonvoting shares should be rejected. Under certain circumstances, nonvoting stock has beneficial functions, and therefore, restricting its use may impede efficient corporate structuring.
Disciplines
Business Organizations Law | Law | Securities Law
Recommended Citation
Dorothy S. Lund,
Nonvoting Shares and Efficient Corporate Governance,
71
Stan. L. Rev.
687
(2019).
Available at:
https://scholarship.law.columbia.edu/faculty_scholarship/4007