Del. Courts Must Rethink Approach if Dual-Class Stock Catches On

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By Yin Wilczek

Delaware courts will have to rethink how they assess whether corporate boards are discharging their duties if more companies adopt dual- or no-vote stock structures, the director of a University of Delaware corporate governance center said.

About 66 percent of all Fortune 500 companies are incorporated in the state, making its courts influential in corporate decision-making and litigation.

Delaware courts generally are very reluctant to overturn the business judgment of boards, because shareholders have the power to do so through an election, Charles Elson, director of the University of Delaware’s John L. Weinberg Center for Corporate Governance, told Bloomberg BNA. However, where elections become “meaningless” because shareholders have a limited vote or cannot vote at all, the courts “may have to take a more active role.”

And that’s “really problematic vis-à-vis Delaware law and how Delaware law is structured,” Elson said. “It might either call into question how Delaware approaches dual-class companies, or ultimately,” whether Delaware allows non-voting or dual-class stock.

Watch Elson’s interview here

The finance professor spoke to Bloomberg BNA on the sidelines of an April 25 University of Delaware/Association of Corporate Counsel conference on the Volkswagen AG emissions-rigging scandal. The conference was sponsored by Bloomberg Law.

Shareholder Lawsuits

In March, Snap Inc. became the first U.S. company to go public with non-voting stock. Several technology companies—including Alphabet Inc.'s Google, Facebook Inc. and Zynga Inc.—have adopted dual-class structures. Facebook and IAC/InterActiveCorp are being sued in Delaware Chancery Court over their decisions to create new classes of non-voting shares.

Delaware law will have to change should more corporations in the state adopt dual-class structures, Elson said. “I think Delaware law’s fundamental concept of the shareholders responding to business issues appropriately through the ballot box disappears in those kinds of companies, so you’re really taking away a fundamental underpinning of Delaware law.”

Elson also said VW’s dual-class stock structure was partially to blame in the company’s compliance shortfalls. The governance structure “gave enormous power to management,” which had a real incentive to build the largest car company in the world, he said. “That was the raison d’etre of the controlling shareholder.”

The scandal has been expensive for the German carmaker. A federal judge May 17 approved VW’s $1.225 billion settlement of lawsuits brought by drivers of premium Audis, VWs and Porsches over the company’s diesel emissions scandal. In April, VW agreed separately to pay a $4.3 billion penalty for misleading U.S. regulators and customers.

To contact the reporter on this story: Yin Wilczek in Washington at ywilczek@bna.com

To contact the editor responsible for this story: Susan Jenkins at sjenkins@bna.com

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