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Valuation of Shares of Companies with a Dual Class Structure

Authors:
  • Sutter Securities Financial Services, San Francisco

Abstract

This presentation discusses dual class shares, their increasing use in the U.S, and the trend toward unifying dual class structures in Europe. It proposes an approach to valuing American dual class shares, giving consideration not to relative trading prices but to premiums over economic vale paid to high-vote shares as a class in past transactions.
Valuation of Shares of
Companies with a
Dual Class Structure
Gilbert E. Matthews, CFA
American Society of Appraisers
Advanced Business Valuation Conference
September 14, 2016
SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
WHATSHAPPENING








Notes re terminology in this presentation:
a. “dual class” includes companies with multiple classes
b. “low-vote” shares include non-voting shares
SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
BENEFIT OF A DUAL CLASS STRUCTURE







Wall St Journal
[W]hen management uses the dual class structure
...,
the management group is freed to act in the long-term
best interest of the firm.



SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
TECH COMPANIES HAVE LED THE WAY





e.g
SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
WHAT IS A DUAL CLASS STRUCTURE?





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

SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
LEGAL LIMITS ON DUAL CLASS SHARES
e.g


e.g

e.g

e.g.


e.g

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FREQUENCY OF DUAL CLASSES





   
   
   



SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
DUAL CLASS SHARES IN THE U.S. (1)
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
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
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
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
SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
DUAL CLASS SHARES IN THE U.S. (2)


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



SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
SOME MAJOR STOCK MARKETS
WILL NOT LIST DUAL CLASS COMPANIES



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


SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
DOES DUAL CLASS STRUCTURE IMPACT
MARKET VALUE OF PUBLICLY TRADED SHARES?

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

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

o


SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
MINORITY HIGH-VOTE SHARES OFTEN SELL
AT A PREMIUM IN EUROPEAN MARKETS
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


SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
THESE PREMIUMS CAN FLUCTUATE MATERIALLY
BY MARKET AND OVER TIME

 

discounts 
 




minus 

SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
ANEXAMPLE:
PREMIUMS FOR ITALIAN VOTING SHARES
  )

SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
WHY HAVE PREMIUMS DECLINED IN ITALY?



 

 

 


SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
WHY DOVOTING RIGHTS
HAVE VALUE IN THE MARKET?
The main source of value for voting rights is the price a
prospective buyer would be willing to pay above the security
value of voting shares in order to gain control of the
corporation and reap the ensuing private benefits. ...
The size of this voting premium will be related to both
the probability that voting shares will be demanded by
the buyer, and the amount of private benefits expected.
Caprio & Croci, 2008

SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
FACTORS AFFECTING PREMIUMS OR DISCOUNTS
FOR MINORITY HIGH-VOTE SHARES

 
 

 



SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
VOTING PREMIUMS
STUDIES IN THE U.S. MARKET











SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
CAN MINORITY SHARES IN A HIGH-VOTE CLASS
BELEFT IN THE COLD?




 
“no”

“yes”

SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
THE RESORTS INTERNATIONAL CASE
 
 Resorts International  





o




In Re: Resorts International Shareholders Litigation

aff’d
1988 Del. Ch. LEXIS 130
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A PROHIBITION AGAINST SELLING HIGH-VOTE SHARES
AT A PREMIUM ISNOT ALWAYS EFFECTIVE
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SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
UNIFICATIONS IN OTHER COUNTRIES
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SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
HOW CAN WEEMPIRICALLY DETERMINE A REASONABLE
PREMIUM FOR A HIGH-VOTE CLASS?
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SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
PREMIUM IN EXCESS OF ECONOMIC INTEREST
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SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
EXAMPLE OF HOW TO CALCULATE
“PREMIUM IN EXCESS OF ECONOMIC INTEREST
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
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
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SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
HUBBELL THE MOST RECENT RECAP (1)
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SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
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SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
STUDY OF U.S. TRANSACTIONS WHERE
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SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
PREMIUMS IN EXCESS OF ECONOMIC INTEREST
RECEIVED BY U.S. HIGH-VOTE SHARES
0%
3%
6%
9%
12%
15%
18%
21%
24%
1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015
Series1
Series2
Recapitalizations
Acquisitions
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SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
HOW TO APPLY “PREMIUM IN EXCESS OF
ECONOMIC INTEREST(1)
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SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
HOW TO APPLY “PREMIUM IN EXCESS OF
ECONOMIC INTEREST(2)
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
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SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
SIMPLOT TAX COURT DECISION
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Estate of Simplot

SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
SIMPLOT APPELLATE COURT DECISION
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
There was no basis for supposing that whatever value
attached to complete control[,] a proportionate share
of that value attached to each fraction of the whole
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

Estate of Simplot 

SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
DUAL CLASS – VALUATIONS FOR TAX PURPOSES







SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
FAIRNESS OPINIONS IN
DUAL CLASS TRANSACTIONS









SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
COURTS HAVE BEEN CRITICAL OF
DIRECTORS AND INVESTMENT BANKERS

 



SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
THE READERSDIGEST DECISION




[T]he Special Committee never sought, nor did its financial
advisor, Goldman Sachs, ever tender, an opinion as to
whether the transaction was fair to the Class A shareholders.
... Given the obvious conflicting interests of the shareholder
classes, the conceded absence of an evaluation of the fairness
of the recapitalization on the Class A shareholders is significant.
Levco Alternative Fund, Ltd. v. Readers Digest Association, Inc.


SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
THE TELE-COMMUNICATIONS, INC. DECISION (1)




DLJ failed to opine upon the fairness of the TCOMB premium
to the TCOMA holders. ... The  Court mandated more
than separate analyses that blindly ignore the preferences
another class might be receiving... [T]he premium received
by the TCOMA holders ... must be balanced with the fairness
and magnitude of the 10% TCOMB premium.
In re Telecommunications, Inc. Shareholder Litigation


SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
THE TELE-COMMUNICATIONS, INC. DECISION (2)

DLJ opined “that, with respect to the holders of each
series of [TCI] Common Stock …, the Exchange Ratio
relating to such series is fair to such holders from a
financial point of view.” ... Notably, the DLJ opinion
does not discuss the effect of the TCOMB premium
upon the TCOMA holders, ., whether the TCOMB
premium was fair to the TCOMA holders. Unfortunately
for defendants, 
appears to mandate exactly such
an analysis: that the relative impact of a preference to
one class be fair to the other class.
Id. 

SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
WHAT SHOULD AN OPINION-GIVER DO?










SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
DUAL CLASS – STATUTORY APPRAISAL

i.e


no premium for control





SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
VALUE OF DIVIDEND PREFERENCE









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SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
VALUATION DEPENDS ON CONTEXT


 
 
 
 

  

 e.g., 

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SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
LOYALTY SHARES

i.e., 






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SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
VALUATION OF LOYALTY SHARES
 





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SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
FURTHER STUDIES ARE NEEDED









e.g.,   

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SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
SANITY CHECK










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SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
CONCLUSION










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SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
Your questions and comments are welcome
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SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
Selected bibliography p. 1
 

 
Journal of Banking and Finance
 
Journal of Financial Research 
   
European Journal of Law and Economics 
 
 
 Journal of
Banking and Finance 
 
 
  

 Journal of
Empirical Finance 
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Selected bibliography p. 2
 
Financial Management 
 
Journal of Corporate Finance 
 Emerging
Markets Review 
 

 
Journal of Banking and Finance 
  
Journal of Corporate Finance 
 
Journal of Corporate Finance 
 
European Financial Management 
 Journal of Finance

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SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
Selected bibliography p. 3
 
Swiss
Finance Institute Research Paper Series No06–12 
  
Revista Direito GV
 
Review of Financial Studies 
 
Review of Financial Studies 
 

 Journal of Corporate Finance, 
  
 
 
 
 

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SUTTER SECURITIES INCORPORATED GILBERT E. MATTHEWS GIL@SUTTERSF.COM
Selected bibliography p. 4
 Magna 
 
The Financial Review 
 
Journal of Banking and Finance 
  

   
Journal of Accounting and Economics 
 
 
 International Financial Law Review 
 
 
Univ. Of Pennsylvania Law Review 
 Quarterly Journal of Economics 
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