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Do Dual-Class Stocks Make for Second Class Shareholders?

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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.

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Dual-class arrangements, while remaining relatively common in Europe, thus waned once again in the United States. That is, until Google's (NASDAQ:GOOG) gigantic IPO eight years ago ignited the current frenzy. The Internet search outfit went public with a format that allowed co-founders Sergey Brin and Larry Page to oversee two-thirds of total voting authority, an approach Buffett himself said made him "very pleased." Two years later, the firm survived a proposal by the Bricklayers & Trowel Trades International Pension Fund to do away with duals. At a contentious annual meeting, union member John McIntyre worried aloud about "the potential inbreeding of ideas that can be engendered by [such a system]."

Doubling down on its policy, this year Google announced that it would issue a third class of stock, "C" shares devoid of any voting rights whatsoever. Amid concerns that Moscow-born Brin was assembling the sort of centralized power of which President Putin would be proud, Forbes denounced its "paranoid structure," and the Financial Times labeled the latest stock offering "a new low in corporate governance."

The company whose motto is "Don't be evil" may have an inner sanctum that looks a lot like a Palo Alto politburo these days, but shares stand at their highest level since January 2008, so who's to argue? Anyone who took the trouble to read the pertinent line from Google's IPO filing -- "New investors will fully share in [our] economic future but will have little ability to influence...strategic decisions through their voting rights" -- can hardly claim to have been mislead on either count.

There have been instances of organizations choosing to abandon their dual-class format and opt instead for unification.
No positions in stocks mentioned.
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