PresentationPDF Available

Valuation of Shares in Dual Class Companies

  • Sutter Securities Financial Services, San Francisco


This presentation discusses the use of dual class structures in various countries and the premiums paid to high-vote shares in acquisitions and recapitalizations in which high-vote shares received a premium.
Organismo Italiano di Valutazione
3rd Annual International Conference
19 January 2015
1 -415-352-6336
“Dual class” companies have common shares with
different voting rights
In most cases, low-vote shares either have (a) the same
economic interest as high-vote shares or (b) the same
economic interest plus a dividend preference
In a few companies (primarily Swiss), all shares have one
vote but the “high-vote” shares have lower par value,
, 100 shares with SF10 par value have 100 times the
vote of 1 share with SF1000 par value
Notes re terminology:
“low-vote” shares include non-voting shares
“dual class” includes companies with multiple classes
Most countries permit some form of dual class shares
Exceptions include Spain, Portugal, Belgium, Japan
Some countries ban non-voting shares but permit
shares with multiple votes (usually with a maximum
10 votes),
, U.K. and Sweden
Some, such as Italy, permit non-voting shares but
mandate a dividend preference for the non-voting
Some limit the number of low-vote shares that can
be issued,
, Germany and Italy, both of which
limit non-voting shares to 50% of equity
Some important stock markets, including London,
Hong Kong and Singapore, do not permit dual class
companies to be listed
The NYSE permits listing by companies that had dual
class structures before they went public, but prohibits
listed companies from creating dual class shares
In the U.S., dual class issues have surged – from January
2010 to March 2012, 20 of the 170 IPOs (primarily in the
technology sector) were low-vote shares in dual class
The NYSE has welcomed dual class foreign companies
that could not list at home, such as China’s Ali Baba and
England’s Manchester United
Frequency of dual class structures (2001-2):
Sweden 62%
Switzerland 52%
Italy 43%
U.K. 25%
Germany 19%
U.S. 6%
France 3%
These numbers are above current levels, primarily because
of trend toward unification of dual class structures
“Loyalty shares” are shares with time-weighted voting rights,
shares within a class are given multiple votes after being
held in registered form by the same shareholder for a given
period of time (usually two years)
oLoyalty shares are not a “class” of shares – they lose their
extra votes upon transfer to a third party
Loyalty shares are widely used in France (usually with 2
votes) but are rare elsewhere
The NYSE will not list companies with loyalty shares, but three
companies are grandfathered
Art. 2437 of the Italian Civil Code now provides that
companies may authorize loyalty shares
o2 votes for listed companies
o3 votes for private companies
Several studies have concluded that companies with
dual class structures are valued at lower levels than
comparable companies
However, several other studies dispute this conclusion
In Germany, average premiums were about 40% in the early 1990s – a
decade later, average premiums were 10-15%
Norwegian high-vote shares sold at average
of about 10% in
the early 1990s – a decade later, average premiums were about 15%
Average premiums in Denmark were 35% in the early 1990’s and 5% in
the late 1990s
Brazilian high-vote shares had average premiums of 10% in 1994, 30%
in 1996, minus 10% in 2000, and 5% in 2004
Average premiums in Italy were low in the early 1980’s, rose to about
80% in the late 1980’s, fell to the 60% level in the 1990’s, declined to
the 20% level a decade later, and were about 3% at the end of 2008
Source: Caprio & Croce (2008)
Several studies have compared market prices of high-
vote and low-vote shares of the limited number of U.S.
companies where both classes are publicly traded
Basic flaw in these studies: the aggregate publicly
traded high-vote shares in the float rarely can impact
control because the control party normally owns a
majority of the vote
If the publicly traded high-vote shares of a company
collectively cannot affect control, how can the market
prices of those shares measure the value of control?
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 & Croce, 2008)
Likelihood (if any) of affecting control
Potential premium (if any) in a unification or acquisition
Liquidity – a function of the size of the float
Dividend expectations
Limitations on transferability (for shares not publicly
Legal environment – voting premiums tend to be low in
countries with good legal protections for minority shareholder
and high in countries where legal protection is weaker
Institutional environment
Can the minority high-vote shareholders be
excluded from a premium paid to the controller in
an acquisition?
In many European countries, a party who buys a
certain percentage of shares becomes legally
obligated to bid the same amount for the remaining
shares of the class – in that case, the answer is “no”
In the U.S. and in Canada, the answer is “yes”
The Delaware Court of Chancery – the primary venue for U.S.
corporate litigation – decided in its 1988
decision that minority 100-vote shares were
functionally equivalent to the 1-vote shares when corporate
control was in the hands of a single shareholder
It ruled that minority high-vote shareholders were not entitled
to a premium over the price paid to low-vote shareholders
The controller had received $135 per share and all other
shareholders of both classes received $36
The Delaware Supreme Court upheld the decision, stating that
the non-control high-vote shares had the same value as the
low-vote shares
To obtain data that can be useful in determining the relative
value of high-vote and low-vote shares, we look at data
available from corporate events in dual class companies
Numerous U.S. corporations have combined high-vote and
low-vote shares into a single class
These are called usually “recapitalizations” or “reclassifications”
in the U.S. and “unifications” in Europe
The terms of these unifications provide useful data as to
relative value in various countries
In addition, there have been numerous U.S acquisitions of dual
class companies which provide useful data as to relative value
Some of the reasons – some country-specific and some
general – why companies unify dual classes,
to eliminate dividend preference
to comply with change in law
because of changed criteria for inclusion in indexes
othe size of a class affects its inclusion in index funds and ETFs
to improve liquidity by having a single class
to improve pricing of new equity offerings
to eliminate perceived undervaluation
oa recent study (Lauterbach & Pajuste, 2014) concluded that
there is a correlation between media criticism and unifications
Studies have reviewed unifications in several
countries throughout the world
U.K. – a study showed that of 49 unifications, 45
paid special dividends to the high-vote shares
(Ang & Megginson, 1989)
Brazil – 25 of 30 reunifications from 2000 to
2008 were 1:1 (Bortolon & Câmara, 2014)
oWe also look at Israel, Germany, Italy, the U.S.,
and Canada
A 1989 change in Tel Aviv Exchange’s rules effectively
forced dual-class companies that wanted to issue new
shares to unify
In 84 dual class unifications from 1990 to 2000, 55%
compensated high vote shareholders (Hauser & Lauterbach,
The mean compensation to high-vote shareholders was
approximately 4%
On average, majority shareholders owned 86% of the
high-vote shares and 63% of the low-vote shares
Almost all the majority shareholders retained control of
their companies
unifications(Dittmann &Ulbrich,2008)
In 47 unifications in Italy from 1974 through 2008,
non-voting shareholders either paid cash to convert or
had an exchange ratio <1:1 in 13 cases (Bigelli, Mehrorta
and Rau, 2011)
In several cases of 1:1 unifications, control shareholders
bought low-vote shares, issued options to buy low-vote
shares, and sold high-vote shares prior to
announcement (
Within the past year, Exor, RCS Media Group, Indesit,
and UnipolSai have announced 1:1 unifications and
Italcementi used a 0.65:1 ratio
In about 85% of unifications and acquisitions of U.S. dual
class companies, both classes received the same
There are numerous reasons why the high-vote shares
might not be able to receive a premium in an acquisition
or unification
1. A requirement under the by-laws that multiple-vote shares
may not be transferred unless they are converted into one-
vote shares
2. A provision in the by-laws that high-vote shares will
automatically be converted into low-vote shares if
transferred to a party not in the control group
3. A commitment by high-vote shareholders prior to an IPO
that all shareholders would receive the same
consideration in an acquisition
4. A provision that consent of the low-vote class was
required for a merger
5. Prior to a change in accounting rules in 2001, the ability
to account for the transaction without booking goodwill
6. Control shareholder owned similar percentage of each
7. High vote shares collectively were less than 50% of total
A company with 60% high-vote shares and 40% low-vote
shares with no dividend preference unifies its shares on a
1.25:1 basis
The voting shares have a 60% economic interest before the
unification and 66.7% after the unification [1.25 x 60% ÷
(1.25 x 60%) + 40%) = 80% ÷ 120% = 66.7%
Thus, the premium in excess of economic interest is 6.7%
If the non-voting shares have a dividend preference, the
risk-adjusted present value of the preference is a prior
charge and should be excluded from the economic interest
that is shared pro rata by the two classes
We have reviewed all U.S. transactions in the past 40 years in
which high-vote shares received greater consideration than
low-vote shares
For each transaction, we calculated the premium in excess
of economic interest
In the 1980’s, extremely high premiums in excess of
economic interest were paid for high-vote shares
Since 1990, these premiums have been about 3%
The median and mean premiums in acquisitions since 1990 are
3.4% and 3.8%
The median and mean premiums in unifications since 1990 are
2.1% and 2.4%
1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014
Determine the value of low-vote class’s dividend
preference, if any, and apply it to the low-vote class
Determine the going-concern value of the company’s
equity (net of the dividend preference)
Then apply the appropriate “premium in excess of
economic interest” to equity value net of the preference
Premium is currently about 2½% - 3% in U.S.
Probably materially higher in Italy
The premium is added to the high-vote class’s
economic interest
The balance of the equity value is then divided pro
rata between the two classes in proportion to the
number of shares
The value per share of each class is calculated by
dividing the equity value attributed to each class by
the number of shares in each class
Add the per share value of any dividend preference to
the low-vote share value
If appropriate, the resultant values for non-control
shares are adjusted for marketability discounts
interest Portion of
company value
shared pro rata
by high-vote and
low-vote shares
Value of control
Value of non-control
shareholders votes
Value of dividend
Company has 1 million voting shares and 1 million non-
voting shares with preference valued at € 1 million
Going-concern value of equity is € 61 million
Appropriate premium in excess of economic interest is 10%
Premium to equity value for control is € 6 million
Balance of equity value is € 54 million
Value of voting class is €6 million + 50% of € 54 million
= $33 million = €33 per share
Value of non-voting class is € 1 million + 50% of € 54
million = $28 million = €28 per share
Premiums have been paid for high-vote shares in
several Canadian acquisitions
Most Canadian unifications have given no premium to
the high-vote shares
However, in the unification of Magna International, the
control shareholder received a huge premium –
approximately C$1 billion
The premium in excess of economic interest paid to
Magna’s control shareholder was 10% of the equity
value of Magna
Magna’s control shareholder owned 0.6% of the equity
but had 66% of vote
Litigation against the transaction was unsuccessful
The premium in excess of economic interest paid to
Magna’s control shareholder was 10%
Despite the overpayment and negative publicity, Magna
shareholders benefitted from a higher stock price
If the low-vote shares are entitled to a dividend
preference, this preference has a positive impact on
their value
The market premium in many studies has been
calculated based on the difference between the market
prices of shares of each class, with no adjustment for
any dividend preference
To calculate the market premium accurately, the price
of the low-vote shares should be appropriately
adjusted for the risk-adjusted present value of any
dividend preference
Valuation of high-vote shares depends on their ability to
affect control and/or participate in benefits to controller
1. Highest level –value in hands of controller
2. Major shareholder with partial or shared control
3. Potential swing vote with no single controller
4. No current value to voting right but potential for
participation in future premium
5. Lowest level – no reasonable expectation of receiving
higher price than low-vote shareholders
Purpose of valuation can be relevant –
is the
valuation for tax purposes or for a fairness opinion?
Importantly, the extra votes to which loyalty shares are
entitled are not transferable to third parties
The valuation of a control block of loyalty shares is the
same as a valuation of a control position in a company
without loyalty shares, unless there is a possibility that
a third party could accrue enough extra votes to
impact control by building up its holdings
Valuation of shares in a potential contest for control is
a complex and fact-specific issue that depends on the
probability of various factors
Loyalty shares owned by shareholders who are not
part of the control group are worth no more than
other minority shares
Dual class valuations are country-specific
Dual stock valuations must reflect the legal and social
factors that affect the value of control
To determine how a market values high-vote and low-
vote shares, it would be helpful to study and analyze not
only relevant stock market prices, but also the relative
prices paid in acquisitions and unifications
Most available studies generally do not provide data that
is useful to valuators
Some studies,
Dyck & Zingales (2004), look at
premiums paid for control blocks, which could provide
useful guidelines
Valuations of high-vote and low-vote shares are a subset of
valuations applying control premiums, minority discounts
and marketability discounts
Valuators should ask themselves whether their conclusions
as to the value of specific shares are consistent with the
conclusions they would have reached had the company not
had more than one class of shares
Valuators should ask themselves whether their conclusions
reflect prices that are consistent with what a willing buyer
might pay and a willing buyer might accept
High-vote and low-vote shares should be valued as a
class before calculating value per share
Appropriate adjustments must be made for dividend
Minority high-vote shares that cannot influence control
merit little or no premium over low-vote shares
A valuation should be consistent with the underlying
facts and circumstances
Do not use rules of thumb
Data used should be relevant to the transaction
I would like to thank
Prof. Bini and the OIV
for inviting me again
to this professional gathering
and for the opportunity
to share ideas with you
Your questions and comments are welcome
Amoako-Adu, B., B F. Smith and V. Baulkaran, “Unification of Dual Class Shares in
Canada with Clinical Case on Magna International,” working paper (2011)
Amoako-Adu, B. and B F. Smith, “Dual class firms: capitalization, ownership structure
and recapitalization back into single class,” 25
Journal of Banking and Finance
, 1083
Ang, J S. and W.L. Megginson, “Restricted voting shares, ownership structure, and the
market value of dual-class firms”, 12
Journal of Financial Research
301 (1989)
Bechmann, K.L. and J. Raaballe, “The regulation of bids for dual class shares.
Implication: Two shares - one price,” 15
European Journal of Law and Economics
, 17
Bennedsen, M. and K.N. Nielsen, “The Principle of Proportional Ownership, Investor
Protection and Firm Value in Western Europe,” ECGI - Finance Working Paper No.
134/2006 (2006)
Bennedsen, M. and K.N. Nielsen, “Incentive and entrenchment effects in European
ownership,” 34
Journal of Banking and Finance
2212 (2010)
Betzer, A., I. van der Bongard and M. Goerrnan, “Index membership vs. Loss of
Control: The Unification of Dual Class Shares,” working paper (2013)
Bigelli, M. and E. Croci. “Dividend privileges and the value of voting rights: Evidence
from Italy,” 24
Journal of Empirical Finance
94 (2013)
Bigelli, M., and S. Mengoli, “Self-expropriation versus self-interest in dual-class voting:
the Pirelli case study,”
Financial Management
677 (Fall 2011)
Bigelli, M., V. Mehrotra, and P.R. Rau, “Why are shareholders not paid to give up their
voting privileges? Unique evidence from Italy,” 17
Journal of Corporate Finance
Bortolon, M.P., and R.P Câmara, “Dual-class unifications and corporate governance in
Brazil,” 20
Emerging Markets Review
89 (2014)
Caprio, L. and E. Croci, “The determinants of the voting premium in Italy: The evidence
from 1974 to 2003,” 32
Journal of Banking and Finance
2433 (2007)
Carvalhal da Silva, A., and A. Subrahmanyam, “Dual-class premium, corporate
governance, and the mandatory bid rule: evidence from the Brazilian stock market,”
Journal of Corporate Finance
1 (2007)
Dyck, A. and L. Zingales, L.) “Private benefits of control: An international comparison,”
Journal of Finance
537 (2004
Dimitrov, V. and P.J. Jain, “Recapitalization of one class of common stock into dual-class:
Growth and long-run stock returns,” 12
Journal of Corporate Finance
342 (2006)
Dittmann, I., and N. Ulbricht, “Timing and Wealth Effects of German Dual Class Stock
Unifications,” 14
European Financial Management
163 (2008)
Ehrhardt, O., J. Kuklinski, and E. Nowak, “Unifications of Dual-Class Shares in Germany:
Empirical Evidence on the Effects of Related Changes in Ownership Structure, Market
Value and Bid-Ask Spreads,”
Swiss Finance Institute Research Paper Series No06–12
Hauser, S. and B. Lauterbach, “The Value of Voting Rights to Majority Shareholders:
Evidence from Dual Class Stock Unifications,” 17
Review of Financial Studies
1167 (2004)
Kruse, T.A., “Owneship, Control and Shareholder Value in Italy: Olivetti’s Hostile Takeover
of Telecom Italia,” ECGI – Finance Working Paper No83/2005 (2005)
Lauterbach, B. and A. Pajuste, “The Media Role in Corporate Governance Improvement:
Lessons from Dual Class Share Unifications,” Working Paper (2014)
MacIntosh, J.G., “Some Reflections on
and Dual Class Structures, working paper
Megginson, W., “Restricted voting stock acquisition premiums, and the market value of
corporate control,”25
The Financial Review
175 (1990)
Ødegaard, B.A., “Price Differences Between Equity Classes. Corporate Control, Foreign
Ownership or Liquidity?” 31
Journal of Banking and Finance
3621 (2007)
Zingales, L. What determines the value of corporate votes? 110
Quarterly Journal of
1047 (1995).
ResearchGate has not been able to resolve any citations for this publication.
Full-text available
We study potential roles of the media in a particular form of corporate governance improvement – unifications of dual class shares into a single "one share one vote" class. Examining 72 European unifications in 1996-2002, two central findings emerge: 1) When the press' anti-dual-class-shares sentiment increases, more companies unify their dual class shares; and 2) The long run (seven years after unification) eventual reduction in the voting power of controlling shareholders is larger for firms that are under the media limelight. These findings suggest that media criticism induces or at least facilitates the decision to unify, while media attention augments and preserves the corporate governance gains from unifications. It is also noteworthy that, unlike Lauterbach and Yafeh (2011), in our sample the unification-induced corporate governance gains are not eroded in the long run. This most probably reflects the voluntary nature of our unifications.
Full-text available
Called to vote for a reduction in their dividend privileges, Pirelli's nonvoting shareholders appeared to expropriate themselves and favor the voting class of shares. However, what initially seemed to be self-expropriation became self-interest when the media coverage, voting decisions, and dual-class ownership of 36,361 shareholders were investigated. Most of the institutional investors voting “for” the proposal were found to have ownership ties with controlling shareholders or to have held voting shares. Moreover, dual-class ownership significantly increased the likelihood of shareholders voting to expropriate one class of shares if they benefited from the other class in their portfolios.
We investigate dual-class unifications in a period following the successful inception of a premium single-class listing segment. Firms that unified increased their market liquidity. Investment opportunities and shareholder rights convergence drove unification of firms that later joined the new premium list. Financial constraints impelled unification firms that remained in the least demanding list. All unified firms that joined the new list remained there five years later. Half of the others delisted or were in serious financial distress. The motivations for unification may differ according to the ability of firms to improve their corporate governance and transparency later.
The present paper proposes a new measure of the voting right, the Relative Vote Segment, which incorporates dividend privileges into the inferior class of shares. We test and compare it against the standard Relative Price Difference and the Nenova (2003) measure using 1998– 2008 data from Italy, a country where dividend privileges are relevant. Results show that when dividend privileges are considered, the average voting right equals +35.63%, while its estimated value corresponds to a significantly lower +20.35% and +1.29% with the Relative Price Difference and the Nenova (2003) measure, respectively. Negative values of voting rights drop significantly with our methodology. Results become even more clear-cut when we clean the sample of possible measurement errors. As far as the determinants of the voting premium are concerned, the choice of the measure does not appear to have a significant impact, as long as the dividend differences are controlled for.
Previous research initiated by Claessens et al. (2002) has established a value discount of disproportional ownership structures. Due to endogeneity problems it is difficult to provide a causal interpretation of these findings. We provide a thorough analysis of this value discount in a large sample of Western European firms, which is consistent with a causal interpretation that the discount is driven by incentive and entrenchment effects. First, we show that the value discount is higher in family firms, in firms with low cash flow concentration, in industries with higher amenity value and in countries with better investor protection. Second, we show that these findings are consistent with the predictions of a theoretical model of incentive and entrenchment effects. Third, we address a number of specific endogeneity problems related to omitted variable bias, measurement bias and reverse causality. Fourth, we show that the value discount is significantly higher in firms with dual class shares than in firms with pyramidal ownership. Fifth, we find no impact of disproportional ownership on operating performance, likelihood of going bankrupt, dividend policy or growth. Finally, we discuss policy implications of these findings in relationship to the ongoing process of harmonization of the European capital markets.
I examine ownership structures, minority shareholder rights, and shareholder activism in the context of Olivetti's successful hostile acquisition of Telecom Italia in 1999. Events surrounding the takeover provide mixed evidence of improvements in minority shareholder protections. The story, which gives a fascinating picture of the evolution of Italian corporate governance, is unusual, in that minority shareholders were more willing to stand up for their rights. Moreover, privatization and the introduction of the euro have resulted in shifts in ownership and financing patterns. However, due to the concentration of ownership of listed companies, hostile takeovers in Italy will remain rare.