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EAsy lies the crowns worn by Meta, Alphabet, Snap and Berkshire Hathaway as well as Ralph Lauren and The New York Times Co.
Twitter has a lower percentage.
Why’s it better for the company chieftans at Meta and the others? Their firms have dual-share classes, two types of stocks designed to keep control firmly in insiders’ hands. This is usually done by a founder who wants to hold on to power and set up dual shares when the startup goes for public markets. The structure also works to ward off corporate raiders or other aggrieved investors.
“It’s done by founders who really care about control and think they know best about what’s in the best interest of the company,” says Andrew Metrick, a Yale professor who has studied and written about dual shares and corporate governace.
Meta is probably the best example of dual-share systems. You or I have the option to buy Class A shares. These were most recently available for purchase at $214 per share. Each Class A share gives us one vote. Meta also has Class B shares, which we can’t purchase. Every Class B share is eligible for 10 votes. Mark Zuckerberg, the CEO and founder of Facebook controls more than 90% of Class B stock via personal sharesholdings or agreements with Class B owners. Put another way: Zuck may only own about 14.5% of the common Class A shares, yet he calls all the shots without worrying about anybody else—courtesy of those Class B shares.
TThis protection is not available to witter, which may soon want it as it struggles against activist pressures from Elon Musk. Tesla CEO, a billionaire, has bought 9.2% in Twitter. He also declined an offer to be on its board. It suggests that Musk may have chosen a hostile strategy for forcing changes at Tesla.
Even though Twitter went public in 2013 around the same time as Meta (2012) and Snap (2017), it didn’t install a dual-share class ahead of its IPO. Likely, that’s a legacy of Twitter’s tumultuous beginning. By the time it was moving toward Wall Street in 2013, it had already gone through two CEOs—founders Jack Dorsey and Ev Williams—and had passed the baton to an outsider, Dick Costolo, who’d joined from Google a couple years earlier.
Costolo was CEO of Twitter and had a 1.6% stake before the IPO. But it was smaller than Dorsey’s 4.9% and Williams’ 12%. So neither he nor Twitter’s founding investors, such as venture capital firm Benchmark (6.7%), would’ve been eager to set up a system giving enormous power to two men who had already gotten and given up chances to run the company. (Neither Costolo, Dorsey, Williams nor Benchmark’s Peter Fenton could be reached to comment for this story.)
Further, it’s not clear Dorsey, who returned to be Twitter CEO from 2015 through November 2021, would’ve wanted dual shares. He has been a strong advocate for decentralization in technology companies and launched Bluesky, which was a Twitter-funded initiative to examine how to best decentralize certain elements of social media. With Dorsey again gone from the CEO role, it has passed to Parag Agrawal, Twitter’s former chief technology officer who also ran Bluesky.
It is more popular to have dual-share classes. Columbia Law School data from a year back shows that nearly 30% of all IPOs were built with this structure. This is an increase from 7% in 1990s. Columbia’s research shows founders with these shares typically retain around 30% more voting power than their common shareholders. This so-called “wedge” is then likely enough to forestall any advances on the company, since overcoming the hurdle would be hugely expensive.
Some large money-management institutions have recently started to lobby against dual-share classes, arguing they’re undemocratic and could stifle possibly lucrative innovation. In 2017, the S&P 500 index said it wouldn’t allow any more dual-share companies to join. There have been some minor successes in legal proceedings. Also in 2017, the California Public Employees’ Retirement System sued to stop Barry Diller and IAC from establishing a new type of stock designed to keep Diller on the throne. After the California group brought its lawsuit, IAC dropped the plan.
What’s Twitter to do if things get rough with Musk? There is an existing defense in the way the board elects its directors. It has a three-year staggered system that ensures the slate cannot be wiped clean and prevents it from introducing an adversarial board. A poison pill defense might be adopted by it, as have other public companies since the 1980s’ raiding boom. With a poison pill, Twitter would sell company stock at a discount, reducing Musk’s stake in the company but also driving down its shares’ value.
Elon might find it difficult to overcome the combination of both. Resteady the crown.
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