The provenance of the FCA’s distrust of dual-class stock is the concern that a controller with control over the board of a listed company may use its unadulterated power to cause the company to act in a manner that creates ‘private benefits of control’ (or ‘controller benefits’ as labelled in this book) for the controller to the detriment of public shareholder value.That distrust is demonstrated by the plethora of regulations that notionally blunt the powers of controlling shareholders.However, one share, one vote controlling shareholder firms, such as Fraser Group and Antofagasta, are permitted on the premium tier, and the empirical evidence is inconclusive that they harm public shareholders.With one share, one vote, the controller necessarily has to own a significant portion of the equity to maintain control, constraining the financial incentives to extract controller benefits, and, as a tradeoff against public shareholder expropriation, incentivising monitoring which reduces managerial agency costs.The harsher treatment of dual-class stock stems from a diminishing equity-constraint, with the incentives to extract controller benefits increasing at an accelerating rate as the controller’s equity ownership declines.It is not, though, a fait accompli that controllers will, in fact, use dual-class stock in an invidious manner.

Dual-class stock is not the only method by which a founder can create a divergence between control and cash-flow rights in a company.Other solutions, known as ‘control-enhancing mechanisms’, such as board appointment rights, pyramid structures, cross-ownership structures, shareholders’ agreements, derivative instruments, preference shares and loyalty shares, could, on their face, create similar dynamics to dual-class stock.However, those control-enhancing mechanisms entail compromises that make them unpalatable to a founder specifically seeking to list his or her firm, divest of equity and retain control.Additionally, many of those control-enhancing mechanisms would arguably not be permitted for a premium tier company.Dual-class stock presents numerous benefits to a founder over other control-enhancing mechanisms, making them, even if they are permitted on the premium-tier, inadequate substitutes.Furthermore, if dual-class stocks were permitted on the premium tier, it is unlikely that this would result in an influx of other control-enhancing structures, since founders are unlikely to choose them over dual-class stock given the practicalities in using them to create the necessary divergence between control and cash-flow rights.In any case, certain control-enhancing mechanisms are more opaque than dual-class stock structure, and, therefore, the regulators should take a stricter approach to their utilisation than dual-class stock.

Chapter 2 details the history of dual-class stock.Although dual-class stock was commonplace in the United Kingdom in the 1950s-1960s, they had all but died a death by the early 1990s.The underlying influence of institutional shareholders, the principal players on the market, has been apposite, culminating in the FCA’s eventual formal premium tier prohibition of dual-class stock.In contrast, the NYSE, in the 1980s, when institutional investors had less of an influence in the United States, with substantial pressure from large issuers and competing local exchanges, ushered in a largely permissive environment for dual-class stock, after an erstwhile prohibition of the structure. The United Kingdom and the United States have been influenced by the dominant players on the market at the time.In recent years, Hong Kong, Singapore, Tokyo, Shanghai and India, in response to increased global competition, all opened-up to dual-class stock, but with prescriptive mandatory conditions attached to protect public shareholders.Mainland Europe, on the other hand, presents a diverse array of approaches to dual-class stock.The dual-class stock story around the world has not yet been concluded, and as the United Kingdom begins to consider dual-class stock once again, a detailed assessment of the merits of dual-class structure is long overdue.