Responding to Stealth Dual-Class Stock

In August of last year, we published a post detailing examples of stealth-dual class structures. These structures can deliver substantially similar entrenchment mechanisms to traditional dual-class stock without creating multiple classes of common stock or adopting widely understood anti-takeover devices such as poison pills.

CII has adopted the following amendments to its policies on corporate governance at its Spring 2025 conference.

Background & Intent

CII has had a long-standing policy opposing dual-class stock structures, which create disproportionate control for insiders relative to their economic stake in companies. The resultant gap in proportionate accountability to public investors has proliferated over decades, not only through traditional multi-class public offerings, but also through contracts and other arrangements that achieve similar outcomes. CII Research and Education Fund’s Misalignment Under the Radar: Stealth Dual-Class Stock outlines some of the novel ways that companies can recreate the effects of dual-class stock without actually adopting multiple classes of stock with disparate voting rights.

The below proposed updates to CII policy are intended to broaden CII’s policies to oppose these novel methods of entrenchment, as well as specifically highlight that contracting away the board’s decision-making rights is inconsistent with the practices of a responsible board.

Gaps in proportionate accountability to shareholders are central to investment decisions and proxy voting. In making investment decisions, voting on directors and voting on other ballot items, it is material to investors if others, such as insiders or early investors, have outsized decision-making rights compared to their ownership, regardless of whether that misalignment is achieved through a traditional dual-class stock structure or by other means. All of these arrangements introduce agency costs of insider control and lack of shareholder accountability that are not in the best interests of long-term shareowners.

CII adopted two sections of CII policy to address this matter.

1. Voting rights

The first amendment is to CII’s existing Policy 3.3 on Voting Rights, with the edits included below.

CII Policy 3.3. Voting rights: Each share of common stock should have one vote. Corporations should not have classes of common stock with disparate voting rights. Moreover, companies should not adopt alternative structures or mechanisms that similarly misalign voting rights and economic ownership. Authorized, unissued preferred shares that have voting rights to be set by the board should not be issued without shareowner approval.

2. Role of the board

The second amendment adds a new section 2.6c to CII’s existing policy 2.6 on Board Accountability to Shareowners.

2.6c Boards should not enter into agreements that substantially reduce or eliminate their ability to independently oversee the management of a corporation, such as agreements that assign decision-making rights disproportionate to economic ownership over issues central to a board’s decision-making responsibility. Companies with a structure or mechanism that misaligns voting or other governance rights and economic ownership should clearly disclose this information to investors in conjunction with materials provided for investment decision-making and voting.

About CII Policies

All CII policy amendments are approved by both the CII Board of Directors and a majority of the U.S. Asset Owners. CII solicits comments on proposed policies from all its members, regardless of membership category, before final adoption. While CII’s policies are corporate governance recommendations, they are not binding on members.