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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.

Citing its desire to reduce "the appearance of being a closely-held company, [and] the expenses and confusion associated with maintaining two separate classes," the board of GameStop (NYSE:GME) swapped each class "B" share for .32 of an "A" in 2007.

Readers Digest, which has subsequently slid into bankruptcy, belatedly abandoned family control a decade ago while JM Smucker (NYSE:SJM) has had a happier time of it since unifying in 2000; its shares are trading to a new historic peak just this week. And despite the almost utter dominance of the New York Times' Sulzberger Trust – which parlays a scant 0.6% equity ownership into over 90% of voting rights -- even the venerable Gray Lady has occasionally demonstrated an ability to change her ways.

In 2008, the newspaper agreed under duress to allow outside funds a modicum of decision-making representation. Even so, shareholders who have seen approximately 80% of their value vanish over the past decade continue to have little recourse, with the current configuration only overturnable in the extremely unlikely event that six of its eight board members acquiesce.

Supporters of dual-stock structures attest that the format allows a firm's founders, who did after all often build the empire in question from scratch, to focus on the long term, free from the institutional interference and day-to-day distractions of the stock market.
No positions in stocks mentioned.
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