Lyft seeks to go public with a dual-class stock ownership structure that allows the co-founders to retain significant influence.

Amy Hamilton

2019-03-11 10:32:00 Mon ET

Lyft seeks to go public with a dual-class stock ownership structure that allows the co-founders to retain significant influence over the rideshare tech unicorn. Within the dual-class structure, Class A shares follow the one-share-one-vote rule for new investors, whereas, Class B shares empower the co-founders John Zimmer and Logan Green and their executive managers to have 20 votes per share. The co-founders may end up owning more than 27% of equity stakes with near-majority control. This dual-class stock ownership structure has become prevalent among U.S. public corporations such as CBS, Comcast, Facebook, Ford, Google, News Corp, Nike, Snap, and Viacom etc. The co-founders keep significant influence over most matters that require shareholder approval, such as director nominations and elections and major corporate transactions from M&A deals and capital investment projects to R&D expenditures and other asset sales.

Harvard law professor Lucian Bebchuk criticizes the dual-class capital structure. The average costs of a lifetime lock on control tend to be especially large when the co-founders are young at the time of the IPO. The costs of inferior leadership can substantially increase when the co-founders cannot address dynamic changes in the business environment. This concern further aggravates when the dual-class structure enables a transfer of founder control to an heir who might be unfit to lead the company. Many dual-class structures allow controllers to reduce their fraction of equity capital over time without relinquishing control, and controllers often do so to diversify their stock portfolios to fund other investment projects.

When the wedge between the interests of controllers and public minority investors grows over time, the agency costs of a dual-class structure are likely to increase. Corporate controllers with a thin fraction of equity capital have perverse incentives to keep an inefficient dual-class structure. The reason is that the controllers would capture only a fraction of corporate efficiency gains (which would be shared by all shareholders), but would fully bear the costs of forgoing private benefits of control that arise from the dual-class structure.

Bebchuk proposes a *sunset provision* that stipulates the eventual expiration of dual-class structures after a specific period of time such as 10 years or 15 years. This provision empowers co-founders to retain their lock on corporate control with minimal short-term market pressure in the early-IPO stage of their entrepreneurial efforts; meanwhile, the dual-class structure should eventually converge toward the more efficient first-class structure.

 


If any of our AYA Analytica financial health memos (FHM), blog posts, ebooks, newsletters, and notifications etc, or any other form of online content curation, involves potential copyright concerns, please feel free to contact us at service@ayafintech.network so that we can remove relevant content in response to any such request within a reasonable time frame.

Blog+More

Value investment strategies make investors wiser like water with core fundamental factor analysis.

Jacob Miramar

2018-04-17 12:38:00 Tuesday ET

Value investment strategies make investors wiser like water with core fundamental factor analysis.

Value investment strategies make investors wiser like water with core fundamental factor analysis. Value investors tend to buy stocks below their intrinsic

+See More

President Trump approves a phase one trade agreement with China.

Joseph Corr

2020-01-01 13:39:00 Wednesday ET

President Trump approves a phase one trade agreement with China.

President Trump approves a phase one trade agreement with China. This approval averts the introduction of new tariffs on Chinese imports. In return, China s

+See More

We assess non-bank financial institutions in the new world order of modern asset management.

Daisy Harvey

2028-01-31 11:29:00 Monday ET

We assess non-bank financial institutions in the new world order of modern asset management.

Today, the major passive index funds, private equity titans, hedge funds, and exchange funds etc combine to reshape Wall Street and several other global fin

+See More

Bank of England publishes its latest insights into the economic impact of Brexit on British real productivity, capital investment, and labor supply.

Olivia London

2018-12-03 10:40:00 Monday ET

Bank of England publishes its latest insights into the economic impact of Brexit on British real productivity, capital investment, and labor supply.

Bank of England publishes its latest insights into the economic impact of Brexit on British real productivity, capital investment, and labor supply as of 20

+See More

Our proprietary alpha investment model outperforms most stock market indexes from 2017 to 2025.

James Campbell

2025-02-02 11:28:00 Sunday ET

Our proprietary alpha investment model outperforms most stock market indexes from 2017 to 2025.

Our proprietary alpha investment model outperforms most stock market indexes from 2017 to 2025. Our proprietary alpha investment model outperforms the ma

+See More

British Prime Minister Theresa May faces her landslide defeat in the parliamentary vote 432-to-202 against her Brexit deal.

Charlene Vos

2019-01-27 12:39:00 Sunday ET

British Prime Minister Theresa May faces her landslide defeat in the parliamentary vote 432-to-202 against her Brexit deal.

British Prime Minister Theresa May faces her landslide defeat in the parliamentary vote 432-to-202 against her Brexit deal. British Parliament rejects the M

+See More