On multi-class shareholder structures

The successful IPO of Alibaba (for the company/insiders/initial holders of shares/underwriting banks) reminded me of an enigma in today’s stock market: multi-class shareholder structures, and what that means for shareholder rights.

In a Finance 101 world, a company issues some number of shares to be purchased by outsiders in an IPO.  Each share represents an equal right to the decision making of the company (i.e. 1 share = 1 vote), as well as an equal right to the residual profits of the firm.  So far, so good.  Perhaps few buy the shares thinking of using the voting rights (I think most people don’t vote their shares, and I think it’s mainly just the activist hedge funds out there that force change through buying shares), but the knowledge that it’s there should be of some comfort: if management really stinks, the shareholder can express an opinion which may enact change.

Enter these multi-class structures, whereby insiders/founders keep most the voting rights, then offer the public shares in either some or all of the economic gains of the company.  The Economist has a good article on this recently: the structure isn’t new, nor is it allowed in many stock exchanges around the world.  US exchanges seem to be about the most OK with it – hence a reason for Alibaba’s IPO on the NYSE last week.  These structures also exist with other big tech names, such as Google.

I guess my issue with these structures is that most of the public will never read the T’s & C’s of their IPO offering documents when placing orders for new shares.  They won’t know/care that they’re buying a flawed good.  Alibaba’s example is only the most recent, egregious example.  Folks buying these shares aren’t actually investing in Alibaba at all: they are buying shares in a Cayman-domiciled company, which has a financial interest in Alibaba’s profits.  Furthermore, the agreement between the Cayman company and Alibaba is still under review by Chinese courts; if the agreement is nullified, there may not be any economic value of these shares.  A head-scratcher…

In 2010, Netflix seemed to be gaining 1% or so every day.  Coworkers would ask me whether I’m buying shares.  My answer?  Absolutely not.  Not only were the shares trading at a ridiculous price/earnings multiple; the shares themselves had few rights corporate governance-wise, with a massive share overhang from the private equity companies holding shares and insiders.  I slept better without the gains, knowing the shares could be a powder keg.


One thought on “On multi-class shareholder structures

  1. Brian Stevenson says:

    Those who buy Multi Class Structures are just fine when all is going well. As Momma once said “everybody is having fun until someone gets their eye poked out”. When that happens, the T and Cs really matter. Investing should not be left to a plan of finding a “Greater Fool” to bail one out of problem investments. B.


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