Professional networking giant LinkedIn is courting investors in advance of its IPO, but its dual-class share structure gives cause for consideration.  No stranger to media heavyweights, including Facebook, Google, the Washington Post and the New York Times, a dual-class share structure is touted by some for its benefits, including the ability of controlling shareholders to:

•    protect corporate culture;

•    avoid the short-sightedness of quarterly performance expectations; and

•    thwart hostile takeovers.

But shareholders have cried foul in the past.  After a federal court struck down the SEC’s attempt to prohibit dual-class share structures in the late 1980s, the stock exchanges took matters into their own hands with rules forbidding exchange-listed companies from adopting a dual-class share structure.  The glaring loophole, however, remains: a company with an existing dual-class share structure can list its shares.

Despite recent attention, the dual-class share structure is not a popular choice. On the Standard & Poor’s 500-stock index, only about 6% of companies have a dual-class share structure.  Dual-class shares are designed to give one class of stock control of the company regardless of whether that class has the largest ownership stake.  Vesting control in one class may perpetuate a management team that works to the disadvantage of the company and its shareholders.  Non-controlling shareholders are left with little or no leverage with the value of their shares in the hands of controlling shareholders, which have a greater voting power than economic interest.

In the case of LinkedIn, investors purchasing shares participating in the company’s IPO will receive Class A shares with one vote per share.  In contrast, the Class B shares, currently owned by co-founder and chairman Reid Hoffman and venture capitalists Sequoia Capital, Greylock Partners and Bessemer Venture Partners, have 10 votes per share.  After the IPO, Hoffman will own approximately 20% of LinkedIn and enjoy control of the company with the existing venture capitalists.  Public shareholders will hold less than 1% of the voting power.

Although LinkedIn’s dual class structure does contain some protections for Class A shareholders, including severely restricted transferability of Class B shares and the inability of Class B shareholders to use their control to garner additional consideration for themselves in an acquisition,  LinkedIn’s corporate governance structure also is taking fire for other features, including a staggered board and onerous advance-notice bylaws  provisions.    

OUR TAKE:  Companies contemplating a public offering – and existing public companies – must balance the pros and cons of aggressive corporate governance maneuvers, like a dual-class share structure.  Resistance or outright opposition from shareholders and watch dog groups like ISS, and possibly stock exchanges, is likely.  Prospective shareholders of companies using the dual-class share structure should pay heed to historical criticism and the potential difficulties they will face in taking an active hand in shaping the direction of the company.  These shareholders might just be along for the ride.

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