Dual-Class Stock IPOs

Mayer Brown Free Writings + Perspectives

Mayer Brown Free Writings + Perspectives

[author: Nicole Veru]

In their dataset and working paper, titled The Rise of Dual-Class Stock IPOs, Dhruv Aggarwal, Ofer Eldar, Yael Hochberg, and Lubomir P. Litov, find that the rise in the number of dual-class IPOs is tied to the increase in bargaining power of founders. In recent years, before 2019, the public markets saw a decrease in public companies but an increase in the number of companies electing to go public using a dual-class stock structure, especially companies in the technology sector, including, for example, Google, Facebook, and Snap. Additionally, almost half of IPOs in recent years raised financing through VC investment. To analyze the changing public markets, the authors review a full sample of IPOs completed from 1994-2019, for a total of 5,760 IPOs, 614 of which are dual-class IPOs. Notably, they identify a range of dual-class structures: those controlled by founders, parent and holding companies, directors and officers (non-founders), and VC firms. They compute the wedge, or the difference between voting and economic rights, for different controllers in these structures in order to explore different motivations for dual-class structures.

They identify possible trends that may have contributed to the rise of dual-class firms in recent years: VC firms being more tolerant of founders control, cloud industries allowing firms to require less capital, and the increase in the number of foreign issuer IPOs that tend to be founder-controlled. The results of their model show that the greater the bargaining power of the founder, the more likely the IPO will be dual-class. The availability of VC financing increases founders’ bargaining power—one standard deviation increase in VC individual financing (total investment) of $5.62 billion is associated with a 3.1% higher probability of founder control and a one standard deviation increase in individual dry powder (capital available) of $30.4 billion is associated with a 2.9% increase in the probability of founder control. Therefore, founders having more bargaining power may contribute to VC firms becoming more tolerant of their control. In reviewing trends over time, there were increases in foreign- and US founder-controlled dual-class stock structures, but this increase was stronger for foreign issuers. Meanwhile, cloud industries have also seen a dramatic increase in founder-controlled IPOs during these time periods. Through examining the costs of doing business, their results point to a decreased need for capital as a result of cloud computing contributing to the weaker bargaining position of VC investors.

In summary, these findings demonstrate the rise of dual-class structures is primarily due to founder-controlled firms in software and service industries and in foreign issuers. The most salient factor in predicting whether an issuer will choose a dual-class structure is the amount of private financing available.

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