Super-voting stock allows a company’s management or founders to freely control the company and not worry about hostile takeovers or influence exerted by large shareholders that may be focused on quick profits. The use of super-voting stock, or high-vote stock, is by no means new, but it has created more buzz recently as some of the world’s biggest companies ensure those in control remain in control while offering valuable equity rights in initial public offerings to those not looking to usurp voting power.
Google created a new class of stock with 10 votes per share so its founders could retain control of the corporation. Facebook's founder also used super-voting stock with 10 votes per share to retain control. Of course, those that don’t need high-vote stock, like Uber, are resisting the trend by not using super-voting stock.
On the other hand, Lyft upped the ante of super-voting stock in 2019 by issuing a class of stock with 20 votes per share. Lyft's filings with the Securities and Exchange Commission provided: “Holders of our Class A common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and holders of our Class B common stock are entitled to 20 votes for each share held on all matters submitted to a vote of stockholders.” While this move could be viewed as aggressive, I view this as the beginning of a new trend. And Pinterest has now followed suit. In Pinterest’s case, the holders of the Class B common stock will initially hold approximately 99.2 percent of the voting power, according to its SEC filings. In my view, Lyft's and Pinterest’s decisions to buck the 10-to-1 trend for higher voting stock are perfectly sound, and I expect the number of votes in shares to continue to increase.
While the IRS has historically indicated that super-voting stock could call into question the substance of the voting power when the ratios exceed 10 to 1, the New York State Bar Association’s Tax Section pointed out that lawmakers could enact rules on the determination of an “acceptable vote-to-value ratio” if they want to change the mechanical control thresholds. Since that 2013 NYSBA report, various control thresholds have been changed, but none have included a limitation on super-voting stock ratios.
The SEC has at times expressed concern about dual-class structures with high-vote stock, particularly when the stock lives on in perpetuity through proxies and so-called forever shares that get passed from founders to their children, grandchildren, and so on. But ultimately the SEC has seemed reluctant to make any changes. That’s probably because the acceptance and purchase of public shares with relatively low voting rights supports the public’s acceptance of diversity in legal and economic rights inherent in stock.
It’s important for companies that want a high-vote class of stock to appreciate that the value of all stock rights must be taken into account when determining stock value. While low-vote shares with a preference to earnings may be worth more than the super-voting stock, the value attributed to a control premium through super-voting stock could alter that and should be taken into account in appraisals and valuations so the correct number of shares are issued to achieve the desired goals.
If super-voting stock is taken into account in those contexts, it’s hard to see why a corporation couldn’t have what I've coined super-duper voting stock with votes in excess of 20 votes per share. A ratio of 10 to 1 used to be my threshold for super-duper voting stock, but Lyft raised the bar. Interestingly, Uber stock (in other words, standard voting stock) isn’t very special at all. But everyone has different goals, and Uber-like stock or super-duper voting stock should help achieve them.
The public deals lifting the votes per share add validity to the economic reality of super-duper voting stock. The public is willing to place control in the hands of a few and pay an arms-length price to do it. The public also stands to benefit from stock value increases, free of the worry that a government agency will infringe on the right to organize capital as a corporation sees fit. That corporate boards have fiduciary duties to their shareholders makes it unlikely shareholders will worry about those structures and a decreased focus on profits.
For these reasons, I don’t see the trend of expanding super-voting rights reversing anytime soon. So long as the voting rights continue to be supported by arm’s-length economic deals, I see no reason why corporations seeking controlling classes of stock won’t surpass the new 20-to-1 bar set by Lyft and venture into super-duper voting stock territory. After all, if you controlled your company and wanted to offer stock rights to raise capital and allow willing purchasers to benefit from the upside, do you think an agency should restrict your arrangement?