Investors Beware When Buying "Dual Class" Companies Like Swift Transportation And Google

Public companies are generally not controlled by few shareholders; however, as more companies adopt "dual class" structures the numbers will continue to rise. In dual class companies, economic rights are separated from voting rights, and voting control is concentrated in the hands of a few, by giving select people a class of shares that carry more than one vote each. For example, the April 15th IPO of

raised $135 million from the public while giving the public only 3% of the votes. Company founder Kenneth D. Moelis retained 97% of the votes by

of the Class B shares, which were worth 10 votes each. Similarly, the Chinese company

its local stock exchange--in Hong Kong--for the NYSE because Hong Kong won't list companies with dual class structures. Jon Lukomnik, Executive Director of the

told Benzinga that "For someone investing in a dual class company they are anchored at the hip with the major shareholder. You had better be sure they are a benevolent dictator and that he or she will share the economic benefits of the company." As a practical matter, Lukomnik advised that before buying, investors needed to take an "extra step; not only research the company but also the dominant shareholder."

Lukomnik knows whereof he speaks. In October 2012 IRRC and ISS published http://irrcinstitute.org/pdf/FINAL-Controlled-Company-ISS-Report.pdf">a study

of "controlled" companies and their performance. The report found that dual class companies performed worse over 3-, 5- and 10-year horizons that uncontrolled single class, one share-one vote companies and worse than single class companies with a controlling shareholder--someone who had placed enough capital at risk to amass 30 percent or more of the outstanding shares. In addition, dual class companies had more related-party transactions and other problematic corporate governance features. Nor is the 2012 study the only one to find that dual class structures hurt share price. This

did as well. The problem with dual class structures is the separation of economic and voting rights; the controlling shareholder(s) can enrich themselves through their control of the company even if their control depresses the stock price. This kind of self-dealing is happening at

, according to the Teamsters Union, which is a long-term shareholder of Swift. Swift CEO Jerry Moyes is a minority shareholder, but controls the company because his Class B shares come with two votes each compared to Class A's one. In a

to the company's Chairman, Ken Hall, the Teamsters' General Secretary-Treasurer, detailed the union's concerns with Moyes' management of Swift: "excessive pledging of stock by CEO Moyes" and "hundreds of millions of dollars in related-party transactions with Moyes-controlled businesses". Hall concludes: "…the problem at Swift is its dual class stock structure, which gives disproportionate voting power and control to a single holder of a minority of the outstanding shares.” (Excessive pledging of stock can lead to the forced sale of a large number of shares, hurting stock price as happened to

and

)

shows both the trend to concentrate voting power without requiring the controlling shareholders to risk a commensurate amount of capital, and the common stockholders' inability to do anything about it. At IPO, Google used two classes of stock; Class A, sold to the public, which came with one vote per share, and Class B, held by insiders like founders Sergey Brin and Larry Page, and Chairman Eric Schmidt, which comes with 10 votes. That structure frustrated Google's Class A stockholders enough that

to switch to a one share-one vote approach at the 2013 annual meeting. But instead of taking the hint, Google doubled down on concentrating power away from the public shareholders. Google issued Class C shares that come with no votes at all.

Google shareholders will get a chance to weigh in on this issue again at Google's 2014 annual meeting, on May 14. However, given the voting structure, there is no chance the shareholder proposal to recapitalize with one vote per share will succeed. :b>Facebook

and several other tech companies use this approach. As the