Equity Markets, Valuation, and Analysis. H. Kent Baker
a dual-class structure, the firm ascribes superior voting rights to one class and inferior voting rights to another. Generally, the share classes have equal rights in all other aspects, such as liquidation. Some corporations may offer other tangible benefits to holders of inferior voting shares, such as preferential dividends rights or the right to vote as a class to nominate a certain number of directors. Burkart and Lee (2008) present a comprehensive survey analyzing the impacts of deviations from the one-share-equals-one-vote structure.
In the past decade through 2019, the increase in the incidence of dual-class structures fueled immense criticism because such structures intrinsically violate one-share-equals-one-vote, disenfranchising certain shareholders. Over this period, several technology companies, such as Facebook, Snap Inc., Uber, and Lyft, in their initial public offerings (IPOs) raised equity capital in the public markets while concentrating control of the corporation with founders and other insiders. Although recent furor and press coverage generally discuss the use of dual-class stock by technology and media companies, the Council of Institutional Investors (CII), an influential association of investment firms focused on corporate governance, maintains a comprehensive list of over 250 U.S. incorporated companies with disparate voting rights (Council of Institutional Investors 2019). In 2018, the CII petitioned the NYSE and NASDAQ to prevent companies seeking new listings from going public with dual-class shares (Williams, Mahoney, and Bertsch 2018a, 2018b). Advocates against dual-class shares decry super-voting structures as anathema to shareholder democracy, the one-share-equals-one-vote principle recommending that influence and control be proportionate to economic interest. This shareholder structure has seen renewed interest to be more common as many closely held, founder-led technology companies seek to retain control while also raising equity capital in the public markets (Condon 2018).
Without an outright prohibition of dual-class shares, several opponents of dual-class stock suggest sunset clauses as potential remedies in cases of perpetual dual-class stock. Bebchuk and Kastiel (2017) agree that dual-class stock may be efficient for companies going public, but believe that efficiency declines over time, and therefore that sunset clauses empower shareholders to revisit and eliminate, if necessary, the dual-class structure. In response to the CII's petitions, Berger (2019) contends that does not only empirical evidence fail to support compulsory sunset provisions, but also, without dual-class stock, ownership of common stock for many companies has become concentrated in a few large institutional investors. Moreover, according to Burkart and Lee (2008), linking economic ownership with control is not optimal for widely held firms. Proponents of dual-class stock point to several economic benefits provided by this ownership structure. Dual-class shares permit management to focus on long-term value creation without preoccupation with short-term profits or demands of activist investors (Govindarajan and Srivastava 2018). For young founder-led dual-class firms, the economic wealth and reputation of the founders is highly correlated with the firm's value and performance, aligning incentives with inferior voting shareholders (Kim and Michaely 2019).
Discovery Inc.: A Case Study
Discovery, Inc. is a global media company incorporated in the United States whose share capital is divided into three series of common stock – Series A, B, and C – and two series of convertible preferred stock – Series A-1 and C-1. With Discovery's three classes of common stock, the economic interest varies substantially from the respective voting interest of the class. Discovery's Form 10-K filing with the SEC indicates that these three classes “have equal rights, powers and privileges, except as otherwise noted” (Discovery, Inc. 2019, p. 120), continuing to explain that the only material difference between the share classes is voting power attributed to each series of stock. Besides the three series of common stock, Discovery's share capital also includes two series of convertible preferred stock, Series A-1 and Series C-1, which are convertible into Series A and Series C common shares, respectively. Table 2.1 presents Discovery, Inc.'s common share structure, exemplifying the wedge between economic and voting interests among the share classes.
TABLE 2.1 Discovery, Inc. Common Equity Share Class Structure
Source: FactSet (2019).
| Class | Ticker | Price | Shares Out. | Market Cap. | Economic Interest | Voting Rights | Aggregate Vote | Voting Power |
| Series A | DISCA | $27.43 | 157.8 | $4,327.6 | 23.0% | 1.0 | 157.8 | 53.7% |
| Series B | DISCB | 31.00 | 6.5 | 201.9 | 1.1 | 10.0 | 65.1 | 22.2 |
| Series C | DISCK | 25.90 | 360.5 | 9,337.9 | 49.6 | 0.0 | 0.0 | 0.0 |
| Series A-1 | 27.43 | 70.7 | 1,938.6 | 10.3 | 1.0 | 70.7 | 24.1 | |
| Series C-1 | 25.90 | 116.5 | 3,018.1 | 16.0 | 0.0 | 0.0 | 0.0 | |
| Total Discovery, Inc. (As converted basis) | 18,823.9 | 100.0 | 293.6 | 100.0 | ||||
This table illustrates Discovery, Inc.'s share class structure, with three classes of common stock. Discovery is a global media company domiciled in the United States. The only material difference between the share classes is voting power attributed to each series of stock. Besides the three series of common stock, Discovery's share capital also includes two series of convertible preferred stock, Series A-1 and Series C-1, which are convertible into Series A and Series C common shares, respectively.
Price per share and shares outstanding as of March 15, 2019.
Shares outstanding, market capitalization, and aggregate vote are in millions.
The numbers are rounded.
Discovery's wedge enables certain shareholders to exert outsized influence and control, despite minority economic interests in the enterprise. Table 2.2 lists Discovery's 10 largest beneficial shareholders, depicting the substantial voting power ascribed to certain shareholders without a corresponding economic interest.
TABLE 2.2 Discovery, Inc.'s