Lucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance, Harvard Law School. Kobi Kastiel is Assistant Professor of Law at Tel Aviv University, and a Research Fellow at the Harvard Law School Program on Corporate Governance.
This post is the third in which they analyze the terms of dual-class IPOs by major companies, following their earlier posts on The Perils of Dell’s Low-Voting Stock and The Perils of Lyft’s Dual-Class Structure (discussed on the Forum here and here). Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock (discussed on the Forum here), and The Perils of Small-Minority Controllers (discussed on the Forum here), both by Lucian Bebchuk and Kobi Kastiel, and the keynote presentation on The Lifecycle Theory of Dual-Class Structures.
Pinterest, Inc. (“Pinterest”), the digital pin board company, is about to go public with a dual-class structure in an IPO valuating it at over $10 billion. This post focuses on the governance costs and risks that Pinterest’s public investors should expect to face down the road.
Our analysis builds on our earlier research work on multiclass structures, including The Untenable Case for Perpetual Dual-Class Stock (Virginia Law Review 2017) and The Perils of Small-Minority Controllers (Georgetown Law Journal 2019). Below we identify and analyze in turn two significant problems:
- Tiny-minority controllers: Although Pinterest’s co-founders will hold together only a minority of voting power immediately following the IPO, the company’s IPO structure will enable them to become majority controllers over time, and to retain such a lock on control while holding only a tiny ownership stake of the company’s equity capital (less than 5%); and
- Extremely long-lasting lock on control: Pinterest’s co-founders will be able to retain control for an extremely long period, which could well last for five or six decades, even if they become value-decreasing leaders.
Each of these governance risks can be expected to both (i) decrease the expected per share future value of Pinterest by increasing agency costs and distortions, and (ii) increase the discount to a per-share value of Pinterest at which low-voting shares of Pinterest will trade. Each of these effects would operate over time to reduce the market price at which the low-voting shares of public investors would trade. These effects should thus be taken into account by any public investors that consider holding Pinterest shares.
Expected Emergence of Tiny-Minority Controllers
Post-IPO, Pinterest will be a publicly traded dual-class company in which public investors hold low-voting shares entitling them to one vote per share. Pinterest’s three co-founders, as well as a host of venture capital investors, will hold high-voting shares entitling them to 20 votes per share. In the case of Pinterest, the design of its governance structure can be expected to produce what we define as tiny-minority controllers (see the typology we introduced in The Perils of Small-Minority Controllers).