Dual-Class Shares: Risks and Advantages

Description

Dual-class share structures offer stakeholders real advantages, but more firms need to follow best practices in deployment to mitigate the risk of abuse. This article highlights four different ways that Canadian firms, including Rogers and Shaw, implement dual-class share structures. It also discusses the related advantages and risks. Advantages include how dual-class shares facilitate the execution of strategy; encourage founders to publicly list stock; insulate the firm and management from short-termism; protect founders from activist shareholders; and protect firms making capital expenditures with long pay-off horizons. Disadvantages include how dual-class shares create agency issues and conflicts of interest, especially when controlling shareholders have minimal economic interest; create an inferior class of shareholders; allow entrenchment of management with directors often elected by controlling shareholders; increase the likelihood of related-party transactions; and reduce the likelihood of independent/non-executive board leadership. The article finishes with some governance considerations, including how the Canadian Coalition for Good Governance developed a dual-class share policy that encourages best practices for companies with dual-class shares. Some of the key principles include subordinated rather than non-voting shares, meaningful equity ownership, and mandatory sunset provisions.

Learning Objective

This case can be used in an undergraduate- or graduate-level course on international business, international management, or international entrepreneurship. With Sunton Manufacturing being a relatively small business, students are able to understand its operations. The case would fit well in introducing the internationalization process. The case has three primary teaching objectives: (1) investigate the motivations of foreign investments in emerging economies; (2) discuss the formulation of internationalization strategies, which are identified from three perspectives: resource-based, institution-based, and industry-based; and (3) consider the comfort–competency evaluation system in the partner selection process of an international joint venture. After working through the case and assignment questions, students will be able to do the following: ·Understand how to align market, mode, and timing with the frameworks/models/theories common in business courses. ·Decide whether or not it makes sense to locate one’s first international investment in a country which is arguably difficult to do business in, especially when there are nearby countries which may have more advantages. ·Discuss when a contract supplier is appropriate and feasible.

Keywords

Corporate governance best practices