The rise of founder-led, venture capital-backed companies in recent years has coincided with a surge of companies implementing dual-class share structures in connection with their initial public offerings. A dual-class structure typically entitles the holders of one class of the company’s common stock (often designated as Class B common stock) to multiple votes per share and the class of common stock offered to the public (often designated as Class A common stock) to a single vote per share. In a small number of cases, a class of common stock is offered to the public that has no voting rights at all. Allocating high-vote shares to a class of stockholders – typically the founders, a combination of founders and pre-IPO investors, or all pre-IPO stockholders (including holders of equity granted under employee equity plans and warrantholders) – allows those stockholders to maintain majority voting control after completion of the company’s IPO, while, over time, a majority of the company’s economic ownership becomes widely dispersed among new public stockholders. Prominent dual-class companies include Alphabet, Meta Platforms, Snap and Lyft.

There are compelling rationales for adopting a dual-class structure, but even proponents of the structure generally acknowledge that these benefits are significantly mitigated once the dual-class shares are out of the hands of the founders and/or pre-IPO stockholders. Accordingly, the charters of companies with dual-class structures often provide that any “transfer” (broadly defined) by the original high-vote stockholders will result in automatic conversion of the transferred shares into the company’s ordinary, low-vote shares. [1] Unfortunately, these broadly worded transfer provisions can have significant unintended impacts on M&A transactions involving these companies by making it unclear whether a high-vote stockholder could enter into a voting agreement [2] in support of the transaction without triggering an automatic conversion of that holder’s high-vote shares to low-vote shares. [3]

A review of charters adopted by dual-class tech companies that went public in 2020 and 2021 suggests that companies (and their legal counsel) have become cognizant of this issue, as the vast majority of those charters contain an explicit carve out to the transfer restrictions, permitting high-vote stockholders to enter into voting agreements in connection with an M&A transaction approved by the company’s board. [4] However, such exceptions were not universal and, as will be discussed below, the vast majority of dual-class charters adopted before 2016 that contained transfer restrictions did not include M&A voting agreement carve outs.

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