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39 Yale J. on Reg. 1343 (2022)
The Dual-Class Spectrum

handle is hein.journals/yjor39 and id is 1352 raw text is: The Dual-Class Spectrum Gladriel Shobet & Jarrod Shobett The debate over dual-class companies is longstanding and ongoing. However, scholars and regulators generally treat the question of whether a company is dual class as a binary one. If a company grants certain shareholders a separate class of stock with disproportionate voting rights, then the company is treated as a dual-class company. A company with only a single class of stock is never treated as dual class because it is assumed that the shareholders in a single-class company are treated equally. This Article uses an original dataset to provide a new perspective on the dual-class debate by showing that treating the distinction between dual-class and single-class as binary has caused scholars and regulators to miss the myriad ways in which insiders receive rights that are not available to public shareholders. The dataset shows the wide spectrum of control rights that purportedly single-class corporations grant to insider shareholders by contract rather than through high-vote stock. In fact, companies grant special rights to insiders through contractual mechanisms much more commonly than they do through traditional dual-class structures. Based on these findings, this Article argues that single-class companies that grant disproportionate control rights to insider shareholders by contract are single class in form, but dual class in substance, which, problematically, allows them to avoid the scrutiny and restrictions that protect public shareholders in traditional dual-class companies. These insights have important implications for policymakers, scholars, and investors. For example, the Securities and Exchange Commission (SEC) has engaged in various attempts to regulate high-vote dual-class structures, and many institutional investors and indices have placed trading restrictions on their shares. However, these attempts to reduce investment in companies that grant insiders disproportionate control rights apply exclusively to high-vote dual-class companies and therefore have lacked the nuance necessary to match insiders' sophistication. This Article provides a framework that will make it possible to t Gladriel Shobe is a Professor of Law at Brigham Young University (BYU) Law School. tt Jarrod Shobe is a Professor of Law at BYU Law School. For helpful suggestions on earlier drafts, the authors would like to thank Jordan Barry, Will Clayton, Elisabeth de Fontenay, Jill Fisch, Fred Gedicks, Max Huffman, Matt Jennejohn, Ann Lipton, Aaron Nielson, Elizabeth Pollman, Michael Simkovic, Vice Chancellor Joseph Slights III, Dov Solomon, Andrew Winden, and participants at the 2022 BYU Winter Deals Conference, the 2021 National Business Law Scholars Conference, and the BYU Faculty Work-in-Progress. The authors would also like to thank Rebekah Bingham, Adam Callister, Mikaela Cook, Travis Corbin, Duncan Hamilton, Matthew Johnson, Blake Lawrence, and Miah Scanlan for valuable research assistance. 1343