Jul 18, 2017 - The Untenable Case for Perpetual Dual-Class Stock by Lucian Bebchuk and ... is a clear win for investors
Harvard Law School Forum on Corporate Governance and Financial Regulation
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CalPERS v. IAC: Clear Win for Investors Protecting Shareholder Voting Rights Posted by Blair Nicholas and Mark Lebovitch, Bernstein Litowitz Berger & Grossmann LLP, on Tuesday, July 18, 2017
Editor’snote: note:Blair BlairA. A.Nicholas Nicholasand andMark MarkLebovitch Lebovitch are arepartners partners at atBernstein Bernstein Litowitz Litowitz Berger & Editor's Grossmann LLP. This post is based on a BLB&G BLB&G publication publication Mr. Nicholas includes and Lebovitch. Related research from the Program on Corporate Governance includes The Untenable Case Case for for Perpetual Perpetual Dual-Class Dual-ClassStock Stock by by Lucian Lucian Bebchuk Bebchuk and and Kobi Kobi Kastiel (discussed (discussed on on the the Forum Forum here). Last Friday, Friday, litigation litigation by Last by the the California California Public Public Employees’ Employees' Retirement Retirement System System against against IAC/InterActiveCorp and and its its chairman, chairman, Barry Barry Diller, Diller, achieved achieved aasignificant significant victory victory for shareholder voting rights. rights. After After months months of of contentious contentious litigation, litigation,defendants defendantseffectively effectivelyconceded conceded the the case case by abandoning their their plan to entrench Diller’s control abandoning plan to entrench Diller's control of of the the company company by by issuing issuing aa new new class class of of nonnonvoting stock. clear win win for for investors investors and aa powerful powerful illustration illustration of how CalPERS v. IAC/InterActiveCorp is a clear institutional investors have been successfully using litigation to defend their right to vote on institutional investors have litigation to corporate affairs. decades, activist activist corporate founders and controllers have sought ways to entrench their For decades, positions atop and other other insiders insiders "supervoting “supervoting positions atop the corporate hierarchy by granting themselves and rights.” Such known as as"dual-class" “dual-class” or or "multi-class" “multi-class” stock stock structures, structures, diminish diminish the rights." Such arrangements, arrangements, known the voting power of institutional institutional and individual investors alike, and can distort managerial incentives and individual investors alike, and distort managerial by providing controllers controllers voting voting power power out of line with their their actual economic interests in public companies. This dynamic has worsened in in recent recent years, as several companies have authorized means to to allow allow controllers controllers to monetize their economic new classes of non-voting stock as a means interests without without reducing reducing their their voting voting control. control.Given Given these these harmful harmful corporate corporate governance practices, institutional investors investors are pursuing litigation litigation to to halt halt planned multi-class structures. The CalPERSsuit, suit,which whichresulted resulted in in Diller Diller and and IAC's IAC’swithdrawal withdrawalof of their their plan plan to to dilute dilute investors' investors’ The CaIPERS voting rights voting rights through throughaa proposed proposed multi-class multi-classarrangement, arrangement, arose arose from from one of the more egregious attempts in recent memory of insiders seeking to entrench themselves through non-voting shares. controlling shareholder Last year, Diller, the controlling shareholder and and Chairman Chairman of the Board of of IAC, attempted to new, non-voting non-voting class class of of stock stock that that would would solidify solidify his power and ensure his ability to pass create aa new, control of control of the the business business to to his his heirs. heirs. At Atthe the time, time, IAC IAC had Class A common shares that afforded and supervoting supervoting Class B shares that had ten votes per share. Through Through his one vote per share, and ownership of of the the company's company’s stock, stock, yet ownership of Class Class B B shares, shares, Diller Diller owned owned less less than than 8% 8% of yet wielded wielded a a disproportionate 44% used stock stock for disproportionate 44% of of the the company’s company's voting voting power. power. However, However, because because IAC IAC used executive compensation and and to to fund fund acquisitions, acquisitions, Diller’s would diminish diminish as executive compensation Diller's control control over over IAC IAC would as the the
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Company made such further issuances of voting stock. By devising a plan to create and distribute new, non-voting Class C stock instead, Diller created a mechanism to solidify his and his heirs’ control in perpetuity. In November 2016, IAC informed investors that the IAC Board of Directors had approved the plan to issue the Class C stock. Within weeks, CalPERS filed a class action suit in the Delaware Chancery Court alleging breaches of fiduciary duty and requesting an order preventing the company from issuing the non-voting stock. CalPERS’s complaint in the case highlighted that Diller achieved board approval of the issuance of IAC non-voting stock by threatening to use his voting power to prevent the company from making valuable and necessary acquisitions that used IAC stock as consideration. By shedding the light of litigation on IAC’s non-voting share plan, CalPERS achieved a significant victory for shareholders’ core right to vote. This result should make founders and controllers considering copying the trend of non-voting stock issuances think twice, as institutional investors will act decisively to defend and assert their right to vote when faced with these threats. Such protective actions will continue to promote open and responsive capital markets, and the longterm value creation that comes with them.
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