Earlier this year, Intelligize published a deep dive into the initial public offerings of so-called unicorn companies, private companies with valuations of a billion dollars or more. As we noted at the time, management teams at some unicorns were struggling with the prospect of giving up control of their companies once they went public, prompting them to issue multi-class common stock shares.
Under those ownership structures, a small group of stockholders that usually consists of founders and executives maintain control over the companies by giving their shares more voting weight. Lyft Inc., Snap Inc. and Facebook are three other tech unicorns that have gone with multi-class shares. Needless to say, corporate watchdogs are not fond of the practice. As TheCorporateCounsel.net recently spotted, The Council of Institutional Investors, a public interest group that advocates for best practices in governance and strong shareholder rights, has recently taken to “naming and shaming” members of boards of directors who have perpetuated multi-class equity structures.
The scorn from governance gadflies doesn’t seem to bother some of the latest unicorns to go public. The We Co., the parent of WeWork, invited such scrutiny with its IPO filing last week. The company, which provides shared office space and carries a valuation of around $45 billion, will have three classes of common stock. Class A shares will receive one vote per share, while Class B and Class C stockholders will get 20 votes per share. Meanwhile, two other recently announced IPOs also plan to employ multi-class equity structure and an Up-C structure: Cloudflare, Inc. and SmileDirectClub, Inc.
A Reuters article on the IPO announcement went in-depth on the amount of control CEO and co-founder Adam Neumann will retain over the company via the equity structure once The We Co. goes public. Given the company’s size and visibility, its IPO may serve as a bellwether for the market’s overall level of apprehension about multi-class shares and complex structures. (Of course, concerns over the company’s profitability could play a role in any apprehension, too.)
But what if multi-class shares really aren’t so bad? In a recent post for the Harvard Law School Forum on Corporate Governance and Financial Regulation, David Berger, a partner with the law firm of Wilson Sonsini Goodrich & Rosati, argued that empirical evidence doesn’t back the claims made by the opponents of multi-class stock.
“Simply put, whether a company has a single-class structure or dual-class stock does not correlate with better governance, more ethical corporate behavior or even better corporate performance,” Berger wrote. “While there are certainly dual-class companies that are poorly governed and/or run, there are many single-class companies that suffer from similar issues.”
If The We Co. offering goes south, we can take that as an indication as to which way the market is leaning on the matter.