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Do Dual-Class Stocks Make for Second Class Shareholders?


Twenty dual-class IPOs occurred in the US last year, up from only a dozen in 2010. In the S&P 500 (INDEXSP:.INX), forty companies employ this structure.

Investors can't claim they were caught unawares on the dual-stock provision. Indeed, when originally adopting the set-up in November 2009, Facebook explicitly said it was doing so "because existing shareholders wanted to maintain control over voting on certain issues."

By creating a second class of Class "B" stock, each carrying ten votes, founder Mark Zuckerberg manages to command almost 60% of the company's voting power while owning well under 30% of its equity. In fact, his authority is so absolute that it even extends to the afterlife, likely a long way off for someone born only in 1984. (1984 author George Orwell could have been addressing dual-stock formats when he warned that, while everyone is ostensibly equal, some are clearly "more equal than others.")

In high tech, imitation is often the sincerest form of flattery and others in the space that employ duals include Yelp Inc. (NYSE:YELP) -- down 16.8% last week -- and Groupon (NASDAQ:GRPN), off 36% to its lowest level ever in the same period. Groupon's founders, who cashed out nearly $1 billion in stock before the company's IPO, own 100% of the Class "B" shares and thus a clear majority of voting rights. Again, its intentions were made crystal clear at the outset. "This concentrated control will limit your ability to influence corporate matters and, as a result, we may take actions that our stockholders do not view as beneficial," the company wrote in its annual SEC report. Still, disgruntled investors unable to evict a CEO seen swilling beer while accounting restatements were raging on his watch will likely find this heads-up cold comfort.

Other peers with similar structures are LinkedIn (NYSE:LNKD) and Zynga (NASDAQ:ZNGA), which went one better with its three-tier configuration in which CEO Mark Pincus owns all Class "C" common shares carrying 70 votes apiece.
No positions in stocks mentioned.
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