Investor Advisory Committee asks for detailed disclosures about multiclass share structures

The SEC’s Investor Advisory Committee (IAC) unanimously recommended that the commission set strict disclosure requirements for public companies with multiclass share structures at a March 8, 2018, meeting.

The advisory panel asked the SEC to require public companies with multiple classes of shares to clearly disclose the numerical relationship between an insider’s shares and voting rights if they hold more than 5 percent of the voting shares. The panel also asked for a disclosure rule concerning the power that holders of shares with extra voting rights could change a company’s bylaws and grant themselves additional voting power. In addition, the disclosures should cite the minimum number of shares an insider would need to outvote other shareholders.

Other disclosures would address the risk that a stock exchange or stock market index provider could punish a company with excessive voting rights for insiders by delisting its shares or excluding it from the index.

The panel also wants the SEC to define the term “common stock” in a way that distinguishes between shares that are part of a one-share, one-vote structure that treats all shares equally and shares that have diminished voting rights because the company that issued them has assigned extra power to its insiders. Other rule changes should require public companies that issue shares without voting rights to file 10-K reports with the same information about their shares and voting rights as can be found in the Schedule 14A, which deals with information required in proxy statement.

“Disclosures reduce the information asymmetry between corporate insiders and current and potential investors and creditors,” the IAC’s recommendation says. “A rich information environment and low information asymmetry facilitate the efficient allocation of resources, capital market development, market liquidity and tend to reduce firms’ cost of capital.”

SEC Chairman Jay Clayton welcomed the committee’s work on the issue.

“We should be striving to address any material gaps in governance disclosures and address investor confusion,” Clayton said. “This disclosure regarding the operation of dual-class voting structures is a question that should be discussed. More broadly, I would like to see more analysis of this topic that considers other related issues of significance, including concerns about short-termism and concerns about the attractiveness of the U.S. public capital markets compared to foreign public markets and global private markets.”

In the meantime, the advisory committee also voted to study SEC Commissioner Robert Jackson’s recent suggestion in a speech that stock exchanges should consider limits on perpetual dual-class structures without sunset provisions. The Investor as Owner Subcommittee would come back to the full committee with a potential recommendation.

Investors have been concerned about the growing number of companies with multiclass share structures, which are controversial because they permit a few insiders to control a company’s decisions and ignore the wishes of public shareholders.

Supporters of dual-class shares say the unequal distribution of voting rights allows visionary founders of innovative companies to access investor funds and build their companies for long-term growth without the short-term pressures of stock prices.

However, investors and other critics worry that the multiclass structures make it difficult to hold companies accountable for ignoring investor objectives. Between 2005 and 2015, the number of companies with multiclass structures increased by 44 percent, according to the IAC, and the growth has added to investor concerns.

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