Center for Law and Economic Studies
Center for Contract and Economic Organization
The proposal of the New York Stock Exchange to end its prohibition on listing the securities of companies with dual classes of common stock has focused public policy debate over this evolution in capital structure both too broadly and too narrowly.
The debate has been too broad because it has encompassed one situation – an initial public offering by a company with a capital structure containing dual class common stock – that should not be controversial at all. Whatever may have originally prompted the New York Stock Exchange's longstanding prohibition against listing non-voting common stock or common stock with voting rights not reasonably related to its equity participation, there is no longer a persuasive case to be made for restricting, whether by denying listing or otherwise, the initial offering of such securities. A stock's limited voting rights are reflected in a reduced price, so that the company's owners at the time it goes public, and not the purchasers, bear the cost. Shareholders are not fooled and there is no reason to expect that third parties will be adversely affected. Although a company that goes public with a class of stock with limited voting rights will be substantially sheltered from the market for corporate control, this is not a change in status. The company also was not subject to the market for corporate control before it went public. Thus, to the extent that the public policy debate extends to initial issuances of a limited voting or non-voting class of common stock, it is simply overbroad.
Ronald J. Gilson,
Evaluating Dual Class Common Stock: The Relevance of Substitutes,
Va. L. Rev.
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