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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.

Critics call them an increasingly dangerous form of corporate governance, resulting in crony capitalism where control-freak CEOs are only too happy to accept capital, but remain unwilling to relinquish any authority. Thwarted by boards stacked with yes-men, shareholders in this scenario find it almost impossible to hold management adequately accountable for failure. Academic research is available to support both contentions, but recent studies have demonstrated that duals tend to underperform their single class peers, often also being burdened by greater levels of debt.

Ending as we began with the Wall Street Journal, the newspaper's lead item on Monday announced "Groupon Investors Give Up." Among those rushing to offload the slumping stock, the article referenced Silicon Valley icon and Netscape founder Mark Andreessen, whose venture capital company jettisoned some 5.1 million shares at the earliest opportunity. The same Mr. Andreessen who attested not long ago: "It is unsafe to go public today without a dual-class share structure," adding, "I feel better if another investor can't topple [a company founder]."

On Wall Street, as elsewhere, it often quite literally pays not to listen to what people say, but instead watch what they do.

No positions in stocks mentioned.
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