The UK is examining proposals for ‘dual class share’ structures in premium listed companies on the London Stock Exchange. The Kalifa Review and Hill Review suggested this could be desirable, and the Financial Conduct Authority is looking at whether changes to Listing Rule 7.2.1A are prudent. For example, should we allow ‘founding’ shareholders to have 20 times the votes of other shares for a limit of 5 years? If multiple-voting shares operated as in Delaware, it would make incumbent directors irremovable, like Mark Zuckerberg at Facebook, or Larry Page and Sergey Brin at Alphabet/Google, for 5 years post-IPO. In April, Deliveroo plc was listed with dual class shares, but barred from premium listing. Along with disdain for its denial of riders’ employment rights, social security, and paying tax, Deliveroo was ‘the worst IPO in London’s history’. But could Deliveroo be an anomaly, and could dual class shares be a way to create a new, innovative ‘Global Britain’?
On this blog at least six posts have sounded scepticism and enthusiasm for dual class shares. Paul Davies suggests ‘institutions would not buy into such companies’ whether or not dual class shares are lawful. Luca Enriques notes that inclusion of companies with dual class shares in an index is the choice of a mutual fund, and anyway doubts that the ‘City’s competitiveness’ will be improved given dual class listings are possible in the US or Asia. More positively, Min Yan views dual class shares as a ‘necessary step to stay relevant in a time of relentless competition’ between London, NY, Hong Kong, Singapore and Shanghai. Bobby Reddy contends ‘UK tech-firms are disproportionately the subject of M&A activity’ and posits that dual class shares might ‘encourage British tech to remain British.’ Marc Moore argues the real debate is whether super-rights cease after a period of time, or upon transfer to someone else. Bernard Sharfman argues dual class shares are ‘simply the result of the bargaining process’. A joint KCL-Edinburgh-Cambridge debate, available on YouTube, saw all of these views expressed, and more.
This post suggests that even if dual class shares were allowed, they cannot and should not override the Companies Act 2006, which prevents directors of large companies being irremovable. Summarising chapters 4 and 5 of my 2014 doctoral thesis in a new light, this blog unpacks three main points, that (1) even where dual class shares exist in large companies’ articles, they cannot evade company law, (2) irremovable directors are a terrible idea, (3) the evidence shows that innovative enterprise comes from job security for all staff – not just directors – and investment in education.
(1) Company law matters
The Companies Act 2006 sections 168 and 282 mean that shares can have multiple voting rights in general, but this may not affect the right to remove directors by simple majority in large companies. In Bushell v Faith  AC 1099 a majority of the House of Lords held that in a three person company, a shareholder/director could benefit from a company article that his votes were tripled if there was any vote on removal as a director. Lord Reid supported the result only because Table A (at that time) foresaw weighted votes. Lord Morris, dissenting, said allowing vote multipliers made ‘a mockery of the law’. This ‘apparently indefensible decision’, as Gower & Davies puts it, could be defended because it preceded the unfair prejudice protections for minority shareholders. People in a quasi-partnership had no other legal protection for their investments. Now they do. Either way, the decision does not apply to large companies where there is a broad separation of ownership and control. The very purpose of the law, as it was put in Parliament’s Second Reading, was to reverse the ‘more and more shadowy’ trend, and to restore corporate accountability given ‘the great growth in the size of companies’.
So, if a majority of Deliveroo plc members voted to remove the CEO, Will Shu, they could do so despite Shu’s ‘class B’ shares, which purport to carry 20 votes per share: he has 6.3% of shares, but he purports to hold a total of 57.5% of the voting rights. Notwithstanding the articles, Deliveroo members can sack Shu after a fair hearing. Reportedly, Deliveroo intends to keep this arrangement for 3 years, but if Shu’s directorship proves a disaster before then, why should his voice override the interests of every other person who invests their capital and labour in the company? The answer that UK company law gives is that his voice does not. Shu has the right to 28 days’ notice before a resolution, and ‘to be heard on the resolution at the meeting’. But in a democratic society, no person is above the law and the judgement of their peers. And no corporation is above Parliament.
(2) Irremovable directors are a terrible idea
Directors of large companies are not irremovable in UK law because the alternative led to the Great Depression. As Berle and Means described in 1932, ‘the disappearance of the principle that shareholders had the right to remove directors at will’, and ‘classes of stock’ with skewed voting rights, were key steps in the ‘weakening of control’ over the ‘direction of enterprise’ before the Wall Street Crash. Contrary to myth, Berle and Means believed that directors must ‘serve... all society’, not shareholders, because the corporation is a ‘social institution’. The great New Dealers knew that the worst choice of all is that company directors are accountable only to themselves, a Dodd’s recipe for ruin. They saw non-voting shares at Dodge Motors, and across corporate America in the 1920s. They saw the damage it did.
Less well known is that in Germany in the 1920s, shareholder voting rights concentrated even more than in the US, with even worse consequences. By September 1925, one study found that 860 out of 1595 listed companies had multiple voting shares. Those shares represented just 2.5% of capital, but accounted for an extraordinary 38.2% of the voting rights. Cartels and monopolies amassed, and these were the banks and big corporations that formed the ‘Circle of Economic Friends’ that funded Hitler. Faced with an emergency, they listened and followed as Hitler blamed everything on democracy and trade unions, promised that cartels would be protected, that directors as leaders would be exalted, and that workers would be crushed. The Aktiengesetz 1937 (Public Companies Act 1937) was passed to ‘carry into effect National Socialist principles within the sphere of economics’. Paradoxically, this contained a one-share, one-vote norm, but it was a sham as the law ensured the votes were cast by banks, and directors were practically irremovable. Unfortunately, the bank-voting norms have remained in the Aktiengesetz 1965.
Back in the US, the post-New Deal system and SEC regulation maintained director accountability through one-share, one-vote norms, but only until the 1980s. Then competition between the NYSE and the newer Amex and NASDAQ exchanges impelled the NYSE to request abandoning the rules. The SEC initially allowed multiple-voting shares up to a factor of 10, but now non-voting shares are widespread. Fierce opposition of public and union pension funds, and other institutional investors, has not been able to stop big-tech from making their directors irremovable.
The big myth is that dual class shares create innovative companies. Companies like Apple, Tesla or Amazon all have ordinary share structures and their leading directors are minorities, but retain control because they perform. They have serious, systemic problems with labour rights and competition law, but their rolling out of innovation (as opposed to its creation) has not been affected by share structure. And do we want a ‘British Google’ anyway? US federal antitrust officials are now aggressively, and rightly, pursuing big-tech monopolies. Google’s initial innovation was its Stanford-educated PhD students writing the algorithm for search engines. But now Google is a giant advertising monopoly. This is no longer innovation. It became the surveillance of your email, your searches, and increasingly your every movement on websites through ad-based-tracking. YouTube started as a free service, and then it was bought. DeepMind was a UK company, and then it was bought. We stop innovation-stifling takeovers with competition law, by preventing monopolies augmenting their power, not by encouraging the spread of the corporate power structure within monopolies. We prevent major takeovers of long-listed companies, like Invensys, CSR, ARM or Worldpay by having a thriving, democratic economy, not one cheapened by austerity and cutting Britain off from the world. We do not and should not want a ‘British Google’, because that would mean another corporate predator that vacuums and stifles innovative enterprise.
Facebook is worse still, where Zuckerberg remains in office despite condoning Holocaust denial across his platforms, where he profits from the ads run alongside. Like Google and Twitter, Facebook has enabled a toxic descent into hate speech, and given conspiracy theorists, racists and the Kremlin a megaphone that culminated the national terrorist attack on the US Capitol. Irremovable directors threaten an already damaged democracy in the US. The managed democracy of Singapore, or the vanishing democracy of Hong Kong, which have allowed dual class shares, are not the best examples to follow. Our post-war standards are more important than getting a listing from Alibaba, which is now also being targeted by Chinese competition authorities and/or the Xi regime. We don’t have to choose between irremovable directors and innovative companies. We don’t want authoritarianism in the economy, any more than we do in politics. We can have a better competition law and ban destructive mergers and takeovers, as we build the real basis of innovation.
(3) Job security and investment in education make innovative enterprise
The evidence-based route to innovative enterprise is job security and investment in education. Professors Acharya, Baghai and Subramanian have shown that there is a statistically significant correlation between patent filings and stronger protections for all workers (not just directors) through notice, fair reasons before dismissal, redundancy pay, and collective voice in the process. If we want innovation, everyone needs strong, participatory job security, particularly by giving rights to everyone on day one, the right to elect work councils, and staff seats in boardrooms. This is what we see in high-performance workplaces with the greatest innovation, particularly in Northern Europe. We also see it at Oxford University, where the staff-led Congregation can control unjust redundancies, and the Council is majority-elected. These norms trace back to 1852, and reversed ‘successive interventions by which the government of the University was reduced to a narrow oligarchy’.
Deliveroo exemplifies why our priorities are backwards. The Deliveroo CEO argues that none of his rider staff have employment rights, to a fair dismissal, to bargain, or to a minimum wage and paid holidays. This is one reason that investors boycotted Deliveroo. In law, the CEO has the right to 28 days’ notice and a fair hearing before he is dismissed, plus good reasons before termination of his employment contract. But he denies job security rights to everyone else, and he also asserts that with dual class shares he alone is irremovable. This is wrong, hypocritical, and everyone can see it. If we want innovation, we should set the record straight by punishing rogue employers, like Deliveroo, that evade and misrepresent their employees’ rights, and we should make them pay their fair share of tax.
Second, we know that an ‘entrepreneurial state’ comes from public investment, not private profiteering. Silicon Valley emerged next to Stanford University, which receives billions in federal funding, and the University of California. The most innovative technology, from GPS, to touch-screens, to the internet (most things in an iPhone), was created with government funding, including from the US Department of Defense. Public investment drives American innovation, not its class based obstacles to university access. We should all fulfil the universal human right to free higher education. We should take the universal ‘right to scientific advancement and its benefits’ seriously. We should divert our government budget away from war, and into research, especially to stop climate damage, and forge international agreement for every country to do the same.
Above all we should stop thinking that cheapening our corporate law standards will help. Making directors irremovable, for any length of time, will damage British innovation, and damage corporate governance. Dual class shares might be fine for small companies, but they are a distraction for our leading enterprises. If we want a Global Britain, if we want gigafactories not gig-fraud, we should lead by example. Dual class shares won’t bring innovative enterprise. Job security and education will.