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8 - The Existing Constraints

from Part III - Formulating a Policy on Dual-Class Stock

Published online by Cambridge University Press:  29 October 2021

Bobby V. Reddy
Affiliation:
University of Cambridge
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Summary

If dual-class stock does not harm public shareholders, the rationale for excluding dual-class stock from the premium tier crumbles.However, if evidence from other jurisdictions shows that the share price of dual-class firms is excessively discounted, the cost of capital for such firms, if they were permitted on the premium tier, would be high, potentially prejudicing benign controllers, and even deterring flotations or incentivising premature unifications of dual-class stock into one share, one vote.Therefore, any relaxation of the premium-tier rules should be accompanied by public shareholder protections to smooth the introduction of dual-class firms and to reduce their costs of capital.Existing one share, one vote constraints, though, may also effectively constrain dual-class firm controllers.Existing legal and regulatory constraints, such as directors’ duties, related-party transaction regulations, Takeover Code mandatory offer and equality-of-treatment provisions, independent director requirements and conditions around post-IPO recapitalisations, together with psychological constraints could, in some circumstances, protect public shareholders in dual-class, as well as one share, one vote, firms.However, various flaws subsist in such protections, especially in the context of dual-class firms, which cannot be masked by market constraints, such as through the equity, debt and product markets, which are less robust in dual-class firms.

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Chapter
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Founders without Limits
Dual-Class Stock and the Premium Tier of the London Stock Exchange
, pp. 311 - 338
Publisher: Cambridge University Press
Print publication year: 2021

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