The Anatomy of Dual Class Share Structures: A Comparative Perspective

Abstract

To delineate the merits and demerits of dual class share structures, we should compare them to dispersed ownership structures with control contestability, concentrated ownership structures and other control-enhancing mechanisms. Dual class structures facilitate long-term business strategies, firm-specific investments, equity financing and risk-taking, and they are simple, transparent and stable; but they insulate corporate controllers from shareholder monitoring, proxy contests and hostile takeovers, exacerbate tunnelling and shirking problems and enable corporate controllers to achieve an extreme voting-cash flow rights divergence and to infringe existing shareholders’ voting rights. The law can deal with most disadvantages of dual class structures, except shirking problems. Policymakers should ensure that the law provides shareholders with sufficient protection and then make a choice between dual class structures’ benefits and constraints on shirking derived from concentrated corporate ownership.