Abstract

When firm founders want to increase access to capital, one traditional route has been to take the firm public. Most public firms allow equal voting rights for all shareholders, so by going public, founders and early insiders inevitably give up a certain amount of control over the firm. More recently, however, a governance structure known as multiclass shares has exploded in popularity. Multiclass share structures separate voting rights from economic rights, allowing insiders to retain control while still raising money on public markets. Because multiclass structures can allow insiders to extract private benefits at the expense of outside shareholders, they are frequently criticized by both scholars and commentators as threats to good governance. Yet this narrow focus on maximizing shareholder financial returns fails to consider a myriad of other factors motivating firm governance choices, especially for the growing number of firms pursuing objectives beyond profit.

This Article contributes to the scholarly literature on the efficacy of multiclass structures by adding more nuance and complexity to the traditional understanding. Specifically, it argues that multiclass structures can generate underappreciated and valuable social benefits of control. The social benefits of control accrue in two main ways. First, multiclass structures help solve a challenging private contracting problem among socially conscious firm insiders and outsiders. Second, they promote declining public markets by neutralizing a key reason why firms with objectives beyond profit may choose to stay private. These insights reveal that there are a range of benefits to multiclass structures that must be balanced with the costs traditionally highlighted by corporate law scholars.

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