Investor Knowledge +
15 Minutes =
Current Insights

Companies offering multi-class shares with unequal voting rights have recently garnered renewed debate and interest from investors and market participants. In April 2023, the S&P Dow Jones Indices reopened certain indices to companies with multiple share classes under certain circumstances, a reversion from its 2017 decision to bar such companies from inclusion. Among Russell 3000 companies excluding the S&P 1500, there has also been an increased number of companies with unequal voting rights in recent years. "Between 2019 and 2022, the percentage of Russell 3000 companies excluding the S&P 1500 with unequal voting rights increased from 11.2% to 15.7%", according to a report from Institutional Shareholder Services, a proxy advisory firm better known as ISS¹.

As of 2023, ISS and Glass Lewis, another leading proxy advisory firm, both have policies within their proxy voting guidelines which hold company directors accountable if a company employs a common stock structure with unequal voting rights in certain markets. While the market has swayed back and forth on the case for unequal voting rights, investors generally prefer following the one-share, one-vote principle.

Engagement as Independent Minority Shareholders in Controlled Companies with Unequal Voting Rights

There is an abundance of academic debate on ownership structures and shareholder returns, including arguments for and against the merits of founder- or family-controlled companies with unequal voting rights. However, there are certain challenges from an investor stewardship perspective for independent minority shareholders.

Issues of corporate governance, including minority shareholder rights, are often intertwined with environmental and social controversies, as many of these issues require the oversight afforded by good governance structures, which includes boards being able to respond effectively to shareholder concerns as represented by shareholder votes. Where votes are controlled disproportionately, most likely by founding executive officers who also wield significant and sometimes majority board influence through direct representation, companies might be less likely to respond to investor concerns on certain environmental or social issues. This is because the shareholder vote results, which invariably will be majority-supported and a reason used by some to legitimize the status quo, will not be reflective of independent shareholder voices when including control blocks. Even if such a company's board is significantly independent (beyond majority), the prospect of the controlling shareholders' votes being used to vote against and threaten an otherwise independent director's election may discourage directors from expressing dissenting views.

This is one reason why unequal voting rights through multi-class shares are uniquely problematic: this setup could foster governance structures and boardrooms where the mandate of oversight gets lost to the certainty of success when it comes to voting outcomes. Investors who take issue with unequal voting rights among multi-class share structures have long advocated for their collapse or sunset, and some have begun to vote against the directors of such companies. However, if investee companies have not been responsive, and shareholder vote results are not very impactful given the controlled status of the vote, then it is equally important for investors to advocate for measures which ensure that independent shareholder voices are heard. This can occur by ensuring that boards have formal avenues for responding to independent shareholder concerns, irrespective of the capital structure of the company.

What Can Independent Minority Shareholders Do?

There are certain requests that minority shareholders can present to investee companies controlled via unequal voting rights in order to address the issue of inaction when it comes to problematic multi-class share structures. These actions are not meant to replace what other market participants have rightly been asking for. Rather, they serve to complement an investor's existing actions on voting, engagement and advocacy.

An investor can ask investee companies how independent shareholder votes are considered at the board level, excluding the impact of controlling shares. Investors should know if the board is formally considering the impact of the independent shareholder votes in a timely manner. Investors should also understand if deliberations at the board level include discussions on how the company intends to respond to shareholder views expressed through their votes. A shareholder proposal receiving majority independent shareholder support or a director not receiving the requisite independent shareholder vote, despite receiving a majority of votes in support when including controlling voting blocks, should warrant and trigger the right discussions at the board level.

An investor can also ask investee companies to consider implementing and publicly disclosing formal policies, procedures or frameworks which outline how exactly the board intends to the take into consideration independent shareholder votes. This should include how the board calculates and reviews vote results after an annual meeting and there should be clear directives outlining what happens as a result. Let's say a company has a director elected via majority shareholder support inclusive of controlling shares but does not meet the requisite support levels when considering only independent shareholder votes. In that case, a hypothetical framework may be to assess the independent shareholder vote results at the board level, consider responsive actions within 90 days, if any, and/or disclose those details in the next year's proxy statement.

These formal policies or procedures, which can be adopted and disclosed by company boards, will hold companies accountable to, at minimum, reviewing the independent shareholder votes. It will also allow investors to initiate conversations about the types of actions that have resulted from what companies said they would do versus what they have done. For shareholder proposals that made it to the vote, unless a substantially similar proposal is filed in the following year where companies choose to include such additional information about how their boards have been responsive in their company response statement, companies are not even obliged to disclose the outcome of any board deliberations, considerations or responsiveness actions. Therefore, the adoption of a formal policy or procedure and its disclosure could help companies standardize the ways in which they respond to shareholder concerns, relay information internally to the board and disclose relevant information to investors.

¹“ISS-Corporate,” a unit of investment adviser ISS STOXX

The information contained herein has been provided by TD Asset Management Inc. and is for information purposes only. The information has been drawn from sources believed to be reliable. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual's objectives and risk tolerance.

Certain statements in this document may contain forward-looking statements (“FLS”) that are predictive in nature and may include words such as “expects”, “anticipates”, “intends”, “believes”, “estimates” and similar forward-looking expressions or negative versions thereof. FLS are based on current expectations and projections about future general economic, political and relevant market factors, such as interest and foreign exchange rates, equity and capital markets, the general business environment, assuming no changes to tax or other laws or government regulation or catastrophic events. Expectations and projections about future events are inherently subject to risks and uncertainties, which may be unforeseeable. Such expectations and projections may be incorrect in the future. FLS are not guarantees of future performance. Actual events could differ materially from those expressed or implied in any FLS. A number of important factors including those factors set out above can contribute to these digressions. You should avoid placing any reliance on FLS.

TD Asset Management Inc. is a wholly-owned subsidiary of The Toronto-Dominion Bank.

^®The TD logo and other TD trademarks are the property of The Toronto-Dominion Bank or its subsidiaries.

---

TDAM Connections at a Glance: