Dual Class Shares in the Age of Common Ownership

Mark Zuckerberg has virtually all his personal wealth invested in Meta Platforms (formerly Facebook). His incentives as controller of Meta are thus clear: maximize firm value and private benefits of control, irrespective of the effect that doing so might have on other firms. Meanwhile, BlackRock manages $10 trillion invested in thousands of corporations. Its incentives are equally clear: maximize the value of its portfolio, irrespective of what happens to any given firm therein. Modern day corporations are thus dominated by two kinds of shareholders with drastically different objectives. Firm value maximizing (FVM) shareholders à la Zuckerberg and portfolio value maximizing (PVM) shareholders à la BlackRock.

In a recent article forthcoming in the Journal of Corporation Law, we argue that this simple observation has important consequences for the debates on dual class shares and common ownership.

Common Ownership and Dual Class Shares

Due to the rise of diversified institutional investors, it has become increasingly common for horizontal competitors to share some of their major shareholders. Leading scholars believe that this phenomenon (a specific case of common ownership known as horizontal shareholding) leads to a lower level of competition in product markets.  The basic intuition is that because institutional investors are interested in maximizing the value of their portfolio, they have incentives to internalize inter-firm spillovers. As aggressive competition by one of their portfolio firms might produce negative spillovers for the other portfolio firms operating in that market, PVM shareholders might prefer a lower level of competition in product markets.

Parallel to the rise of common ownership, an ever-greater number of companies has adopted a dual class structure. Dual class shares provide disproportionate voting rights to founders and key insiders, who can then control the corporation even if they hold a minority of the firm’s cash flow rights. As legal scholars have shown, dual class shares enable insiders to pursue their idiosyncratic vision, while at the same time increasing the agency cost between management and shareholders.

The debates on the effects of common ownership and on whether companies should be allowed to adopt dual class shares have thus far moved on two parallel tracks. But we argue that in a world in which FVM and PVM shareholders coexist, there is a close relationship between the two. Other things being equal, it is more likely that a company with a dual class structure would cater to FVM rather than PVM shareholders’ interests. Therefore, dual class shares can act as a bulwark against negative anticompetitive side-effects of common ownership. The existing evidence supports this argument: to date, all studies showing the anticompetitive effects of horizontal shareholding have referred to sectors in which there are no companies with dual class structures among the leading competitors. This suggests that banning dual class shares, or even introducing a mandatory sunset, could negatively affect the level of competition in product markets.

Climate Change, Systemic Externalities and Dual Class Shares

The ongoing climate crisis shows that a relatively small number of major carbon emitters can impose gigantic externalities on the planet. The macroeconomics literature, in turn, has provided ample evidence that a subset of systemically important firms can affect the whole economy. Absent effective regulation, unlimited use of dual class shares at these firms allows FVM shareholders to inflict systemic harm on society. Limitations on the use of such shares would give relatively more voice to PVM shareholders, who internalize part of those externalities via their other portfolio holdings and thus should have a preference for strategies that mitigate such externalities.

Therefore, we suggest that there should be limits placed on the use of dual class shares by systemically relevant firms and show how such limitations ought to be tailored according to a firm’s specific ability to impose systemic externalities. We remark that the reason for these limitations are not the ones traditionally considered by the literature. Instead of focusing on intra-firm dynamics, and in particular on the agency costs between shareholders and controllers, we focus on firms’ ability to impose externalities. Because it is well-recognized that private ordering is bound to lead to suboptimal outcomes from a social welfare perspective in the presence of significant externalities, our regulatory proposal stands on much more solid ground than the bans and curbs on dual class shares, advocated by institutional investors, that would apply across the board.

Vittoria Battocletti is a Ph.D. in Law student at Bocconi University

Luca Enriques is the Professor of Corporate Law at the University of Oxford

Alessandro Romano is an Assistant Professor of Law at Bocconi University