«Tenure Voting and the U.S. Public Company March 1, 2016 David J. Berger1 Steven Davidoff Solomon2 Aaron Jedidiah Benjamin3 Partner, Wilson Sonsini ...»
Tenure Voting and the U.S. Public Company
March 1, 2016
David J. Berger1
Steven Davidoff Solomon2
Aaron Jedidiah Benjamin3
Partner, Wilson Sonsini Goodrich & Rosati
Professor, University of California, Berkeley School of Law
Associate, Wilson Sonsini Goodrich & Rosati
This paper was coauthored by David J. Berger, Steven Davidoff Solomon, and Aaron Jedidiah
Benjamin. It was prepared with the help of an advisory group sponsored by the University of
California, Berkeley School of Law and Wilson Sonsini Goodrich & Rosati (the “Advisory
Group”) comprised of:
Jordan M. Barry, Herzog Endowed Scholar and Professor of Law, University of San Diego School of Law;4 Lydia Beebe, Senior Of Counsel, Wilson Sonsini Goodrich & Rosati, former Corporate Secretary and Chief Governance Officer, Chevron Corporation;
John Carey, Senior Director, NYSE Regulation, Intercontinental Exchange Group;
Abe M. Friedman, Managing Partner, CamberView Partners;
Jeremiah Gordon, General Counsel, Google Capital;
Scott Kupor, Managing Partner, Andreessen Horowitz;
Erika Rottenberg, Board of Directors, Wix.com, former Vice President, Secretary and General Counsel, LinkedIn Corporation;
Annemarie Tierney, Vice President, Head of Strategy and New Markets, Nasdaq Private Market; and Sam Weinstein, Fellow, Berkeley Center for Law, Business and the Economy, University of California, Berkeley School of Law The Advisory Group played an important role in helping formulate the ideas and principles put forth in this paper. However, the views expressed herein, including but not limited to the suggested “best practices,” are solely the personal opinions of the coauthors and may not be those of the members of the Advisory Group or the entities with which the coauthors and Advisory Group members are affiliated. The coauthors wish to thank the advisory group for their
participation. For further information, please contact:
David J. Berger Partner Wilson Sonsini Goodrich & Rosati 650 Page Mill Road Palo Alto, CA 94304 email@example.com Steven Davidoff Solomon Professor of Law University of California, Berkeley School of Law 215 Boalt Hall Berkeley, CA 94720 firstname.lastname@example.org Organizations listed for identification purposes only. Further, Nasdaq Private Market is separate from, and does not represent, the Nasdaq Stock Market or the views of the Nasdaq Stock Market.
In today’s capital markets, the principle of “one share, one vote” is increasingly under scrutiny. The rise of high-vote and no-vote stock has created a popular alternative for companies at the initial public offering (“IPO”) stage. According to Dealogic, approximately 14% of IPOs in the past year used some form of dual-class stock, compared to only 1% in 2005.5 Prominent companies that have adopted a separate class of high-vote stock in recent years include Alibaba, Facebook, First Data, Google (now Alphabet), Pure Storage, and Square.6 The rise of dual-class stock has created a culture of “haves” and “have-nots.” Companies with dual-class stock may be more insulated from shareholder activism and other shareholder demands than companies with a single class of stock. Supporters often claim that dual class structures provide companies greater ability to plan and act for the long term, taking into account shareholder considerations but also avoiding actions that result in a short-term increase in the company’s stock price but harm the company’s ability to create long-term value.
In contrast, many public companies with one share, one vote structures assert that they are unable to shield themselves from short-term shareholder pressure to increase their stock price. They complain that this forces them to take myopic actions such as financial engineering that may limit the company’s ability to grow and innovate for the long term. It should be noted that many leading institutional investors and other advocates of increased shareholder rights strongly dispute these claims of short-termism. They argue that these claims lack empirical Kristin Lin, The Big Number – Share of IPOs This Year With Dual-Class Stock Structures, WALL ST. J., Aug. 17, 2015, http://www.wsj.com/articles/the-big-number-1439865699.
Companies with a separate class of high-vote stock have existed for many years and are not limited to technology companies. For example, other prominent companies with a separate class of high-vote stock include: Ford, Box, Inc. (“Box”), CBS Corporation, FitBit, Inc., LinkedIn Corporation, News Corporation, The New York Times Company, Viacom Inc., and Zynga Inc.
misperceptions. 7 Still, many prominent institutional and other investors take the opposite position, criticizing what they perceive as the market’s increased focus on short-term results.
The purpose of this white paper is not to resolve or take sides in this debate. Rather, the purpose is to examine an innovative response to the rise of dual-class stock: the use of tenure voting by U.S. public companies. Tenure voting is the award of an additional number of votes to shareholders depending upon the duration of their ownership. There are a variety of different models of tenure voting, but the core principles driving consideration of and support for tenure voting are: (1) giving long-term shareholders increased voting power over corporate decisions, and (2) incentivizing shareholders to be long-term investors. Tenure voting has gained support in many countries in recent years. For example, France recently passed the Florange Act, which makes tenure voting the default option for its public companies. In addition, with the significant increase in proxy access adoptions over the last year, tenured rights have, at least in this context, become an accepted practice in the United States.8 This may signal an increased willingness by George W. Dent, Jr., The Essential Unity of Shareholders and the Myth of Investor ShortTermism, 35 DEL. J. CORP. L. 97, 122–28 (2010) (arguing that short-term shareholders “favor steps that increase long-term value”); Mark J. Roe, Corporate Short-Termism—In the Boardroom and in the Courtroom, 68 BUS. LAW. 977, 1005 (2013) (“Overall, the evidence that financial markets are excessively short-term is widely believed but not proven, and there is much evidence pointing in the other direction.”); Jesse M. Fried, The Uneasy Case for Favoring LongTerm Shareholders, 124 YALE L. J. 1554 (2015) (arguing that favoring the interests of long-term stockholders over short-term stockholders can negatively affect a corporation’s value); see also Charles Nathan, Observations on Short-Termism and Long-Termism, HARVARD LAW SCHOOL FORUM ON CORP. GOV. AND FIN. REG., Oct. 12, 2015, http://corpgov.law.harvard.
edu/2015/10/12/observations-on-short-termism-and-long-termism/ (arguing that “[t]he duration of any investor’s holding period in a company’s stock is simply not relevant to issues involving corporate value creation.”); Liz Murrall, De-bunking the myths of short-termism, INV. ASS’N, http://www.theinvestmentassociation.org/assets/files/articles/2011/20111214-ArticleforIPE.pdf.
Most proxy access bylaws require three years of continuous ownership to assert the right.
See infra at II.D.1.
number of companies in U.S. markets currently use tenure voting.
Tenure voting has the potential to be a more palatable alternative to high-vote and novote shares while also addressing current arguments about long- and short-termism in U.S.
markets. By design, tenure voting rewards all shareholders who hold their shares for an extended period. This could better align incentives with long-term value creation without being unduly punitive toward those shareholders more interested in trading, since all shareholders who wish to take action for the long term will have greater influence in those decisions, while shorter term shareholders will still have a meaningful voice.
Again, we want to be clear that the purpose of this white paper is not to decide the debate between long- and short-termism. The purpose is also not to promote tenure voting as a preferred alternative to dual-class stock, single-class stock, or any other structure. We understand that the wisdom of using tenure voting may ultimately depend upon the particular circumstances of the company involved.
Rather, the purpose is to highlight the effects of tenure voting and to differentiate it from other voting structures. A further goal is to outline possible features of a tenure voting structure, and to suggest some features as “best practices.” The white paper also aims to show why we believe that the adoption of tenure voting is currently permitted under U.S. stock exchange rules.
Ultimately, this white paper is designed to provide a roadmap of the issues and considerations for companies and market participants considering tenure voting under current market conditions and regulations.
The white paper proceeds as follows. Part I discusses the current state of the market and shareholder voting. It focuses on the perceived problems that have led many companies,
includes a brief analysis of the perceived trend toward increased shareholder short-termism and existing solutions. Part II describes tenure voting and its historical use, potential benefits to companies and shareholders, effect on shareholder short-termism, and shareholder appeal. It also explores practical considerations with the adoption and use of tenure voting. Part III explores the legal framework for adopting tenure voting under state law and exchange listing rules. Part IV identifies possible features of a tenure voting plan, and suggests certain features as part of a “best practices” standard. The white paper concludes that U.S. companies and exchanges may consider tenure voting plans as an alternative to either one share, one vote and/or high-vote and no-vote capital structures.
I. CURRENT STATE OF THE MARKET
The debate over shareholder voting is part of the larger debate over whether investors in the U.S. securities markets have become too short-term oriented, such that companies and managers do not have a real opportunity to make the type of long-term investment necessary to create long-term, sustainable growth. There are two factual foundations to this argument. First, there is no doubt that over the past few decades, holding periods have significantly compressed.
Second, the “deretailization” of the market has concentrated investment power with institutional investors. Most institutional investors today tend to hold shares for shorter periods than was historically the case, while at the same time wielding increased influence over the actions of the board and management.
According to New York Stock Exchange (“NYSE”) data, between 1960 and 1980, the average holding period of public company stocks ranged from about three to five years.
decline. By 1990, the period had fallen to about two years, and by the mid-2000s it was less than a year. The average holding period today for individual stocks across all U.S. markets is about seventeen weeks.9 The holding period is shorter still for certain types of institutional investments. Last year, the twenty largest Exchange Traded Funds (“ETF”s) traded at an average turnover rate of 1,244%—implying a 29-day average holding period. The average hedge fund turns over its holdings more than three times a year. Even so-called longer-term institutional investors such as mutual funds in reality have short time horizons. Average portfolio turnover at actively managed mutual funds is estimated to exceed 100% per year. Pension funds typically turn over all of their equity holdings each year. In sum, the institutional investors who own well over 50% of publicly traded stock in the United States tend to hold shares for a much shorter period than is commonly believed.10 The rise in short-term ownership of securities is tied in part to the increased ownership of stocks by institutional investors. In 1950, institutions held between seven and eight percent of U.S. stocks. Six decades later, in 2010, their holdings had increased to 67%. In 1980, institutions held $473 billion in U.S. stocks. By 2010, their holdings had increased to $11.5 trillion.11 The Jason Zweig, Why Hair-Trigger Traders Lose the Race, WALL ST. J., Apr. 10, 2015, http://blogs.wsj.com/moneybeat/2015/04/10/why-hair-trigger-stock-traders-lose-the-race/.
Leo E. Strine, Jr., One Fundamental Corporate Governance Question We Face: Can Corporations Be Managed for the Long Term Unless Their Powerful Electorates Also Act and Think Long Term?, 66 BUS. LAW. 1, 11 n.34 (2010).
Luis A. Aguilar, Comm’r, U.S. Sec. & Exch. Comm’n, Institutional Investors: Power and Responsibility, Address at Georgia State University and J. Mack College of Business, Center for Economic Analysis of Risk (CEAR), CEAR Workshop, Apr. 19, 2013, http://www.sec.gov/News/Speech/Detail/Speech/1365171515808; Marshall E. Blume & Donald B. Keim, Institutional Investors and Stock Market Liquidity: Trends and Relationships (The