Are sunset clauses a solution to the controversies of a dual class structure?
On January 31st, the Osgoode student bodies had the opportunity to listen to Professor Jill Fisch discuss sunset clauses and securities regulation. Professor Fisch is widely published and the Saul A. Fox Distinguished Professor of Business Law and Co-Director of the Institute for Law and Economics at the University of Pennsylvania Law School.
Her lecture began by discussing the increasing percentage of corporations that are going public in the U.S. with a dual class structure, whereby shares that are owned by the founders or other corporate insiders have greater voting rights than shares sold to retail investors. The theory underlying a dual class structure is the ability to raise capital from public investors while maintaining control of the company.
Professor Fisch discussed the advantages and disadvantages of a dual class structure. The primary advantage of dual class structures is they give the founder(s) an opportunity to pursue their vision without pressure from short-term shareholders or market pressures. Conversely, shareholder voting exists to ensure accountability, and dual class structures substantially reduce that accountability. Studies on dual class structures are difficult to design and provide mixed findings, although the consensus is that the benefits of such structures decline with time.
Accordingly, rather than banning dual class structures, time based sunset clauses have been suggested as a solution. A sunset provision ensures that, after a specified period of time, the structure converts to a one-share-one-vote structure. Advocates of sunset clauses claim that they give investors a chance to determine whether a dual class structure works, and if it does not, it can be eliminated after a pre-determined time frame. Shareholders can also vote to maintain the dual class structure and extend or eliminate the sunset clause.
Professor Fisch argues that it is unclear whether sunset provisions are effective. The longer the time period, the more likely founders will die or pass their control over to others. She also argued that an appropriate time period for the sunset clause cannot be predicted at the time of an IPO, suggesting that it would depend on the company. Furthermore, she argues that sunset clauses can facilitate opportunistic behaviour; founders may start a new company when the dual structure is coming to an end. Professor Fisch argued that individuals should think about what events decrease the value of dual class structures and aim to counter these events rather than focus on sunset dates.
We thank the Hennick Centre for Business and Law and the Davies Fund for Business Law for this tremendous opportunity to interact with a leading corporate governance scholar.
WATCH full live lecture recording here:
About the Davies Business Law Lecture:
The Davies Fund for Business Law at the Jay and Barbara Hennick Centre for Business and Law supports innovative programs and projects related to the practice of business law. Created in 2006 by the firm of Davies Ward Phillips & Vineberg LLP, the fund seeks to inspire interest in business law among students and build ties with the broader legal and business communities in Toronto. –> Past Lecturers