Author: Sam Miller | UC Berkeley School of Law | J.D. Candidate | Posted: September 9, 2019 | Download PDF.
When WeWork’s draft S-1 became publicly available on August 14, the company’s multi-class stock structure reignited debate around what constitutes effective corporate governance when it comes to stockholder voting rights. “One-share, one-vote is a bedrock tenet of good corporate governance as far as most long-term shareholders are concerned,” asserted a spokesperson for the Council of Institutional Investors, a shareholder rights nonprofit.[1] Technology companies, in particular, have taken a different approach in recent years, however, with businesses like Alphabet, Facebook, Dropbox, Snap, Lyft, and now WeWork going public with dual- or multi-class stock structures to allow founders to lock in control—Snap’s 2017 IPO, for example, gave public investors zero voting power.[2] These companies argue that giving founders and other insiders disproportionate voting power enables management to focus on long-term strategy and sustainability rather than short-term financial performance,[3] but institutional investors have condemned the practice as exacerbating “classical principal-agent risks.”[4]
An alternative voting structure to enable incentives for sustainable management, without disenfranchising non-insider investors, that is increasingly being discussed is tenure-based voting: allowing investors to accrue voting control the longer they hold a stock.[5] Accordingly, founders would remain insulated from activist investors, public market investors would have voting power that would increase over time, and all stakeholders could then collectively focus on long-term profitable growth while taking sustainability and other ESG initiatives into account—at least, in theory.[6]
Advocates such as Scott Kupor, managing partner of Andreesen Horowitz, argue tenure voting would better align the long-term interests of shareholders and management while avoiding the harsh control disparities associated with dual- or multi-class stock structures.[7] Others point out that the structure can still enable unappealing concentration of control—“people with the most interesting things to say in terms of governance aren’t necessarily the people who have held the shares the longest,” noted Jenn-Hui Tan, Fidelity International (Singapore) director of corporate finance.[8] From an ESG perspective, however, tenure voting may offer an attractive middle-ground by protecting management from short-term financial pressures while granting other stockholders increased influence in accordance with a longer-term perspective on the company’s performance.
Corporate law experts highlight two key barriers to a company implementing tenured voting: complying with exchange listing standards and overcoming investors’ inertia and preference for the status quo.[9] First, a company will have to show that the voting plan doesn’t violate the exchanges’ listing rules prohibiting disparate voting standards—a policy that was implemented in 1994 after the SEC’s Rule 19c-4, enacted specifically in response to dual-class and tenure voting proposals in the 1980s, was overturned by the U.S. Court of Appeals for the D.C. Circuit.[10] Though dual-class voting has clearly been permitted in recent tech IPOs, the policy explicitly prohibits “time-phased voting plans” and has thus far excluded tenure voting from the capital markets.[11] However, in May, the SEC approved an application for the “Long-Term Stock Exchange (LTSE)”—a new exchange with rules permitting tenure-based voting for stockholders.[12] Further, given that the SEC and existing exchanges have indicated their interpretations under the disparate voting policy will be “flexible,” evolving corporate governance standards could mean the existing exchanges will permit tenure voting in response to a company’s concern over short-termism.[13]
And second, a company implementing tenure voting will need to convince underwriters and institutional investors of its value over the default one-share one-vote standard. Given reticence toward innovation in the capital markets—“anything new—any strings attached—makes things harder to sell”—the best candidate for introducing tenure voting may be another long-awaited and hotly anticipated tech IPO.[14] An early adopter like Airbnb, Palantir Technologies, or Robinhood willing to embrace tenure voting could help encourage other companies to rapidly follow their lead, making the voting structure an appealing new option for companies committed to investing for the long-term and accounting for sustainability issues.[15]
[1] https://fortune.com/2019/08/20/wework-ipo-s-and-p-500/
[2] https://www.thestreet.com/investing/stocks/lyft-ipo-debate-over-dual-class-shares-14910741
[4] https://www.cii.org/dualclass_stock
[6] Berger, David J., Davidoff Solomon, Steven, and Benjamin, Aaron J. Tenure Voting and the U.S. Public Company, 72 The Business Lawyer. 295, 297 (2017).
[7] https://techcrunch.com/2017/03/10/wanted-founders-in-favor-of-tenured-voting/
[9] Berger et al. supra n.6 at 320.
[10] Id.
[11] https://a16z.com/2019/08/14/tenure-voting-vs-dual-class-corporate-governance/
[12] Id.
[13] Berger et al. supra n.6 at 321.
[14] Techcrunch supra n.7.