Ins and Outs of Dual-Class Stock Arrangements

A recently announced plan by Times Mirror Co. to spin off its cable television operations has raised questions about corporations’ use of dual classes of stock.

Times Mirror, parent of the Los Angeles Times, is facing several lawsuits from shareholders who contend that the plan unfairly favors the company’s controlling Chandler family. Under the plan, the Chandlers will get a new issue of dividend-paying preferred stock, while common shareholders will get shares in a new cable venture.

It’s not the first time a company with dual classes of stock has been sued over what some shareholders consider to be unequal treatment. Dual classes of stock--which give some shareholders more say in how a company is operated--have been a contentious issue since they became more common during the mid-1980s, says Patrick McGurn, legal counsel for the Investor Responsibility Research Center in Washington.

What are dual-class stock arrangements and what are regulators’ plans for them? Here are some answers.

Q. What is a dual-class stock arrangement?

A. typical dual-class arrangement stipulates that a company has a Class A share and a Class B share.

Those who hold B shares may have greater voting rights than those who hold A shares. However, the A shareholders may get a bigger dividend.

Normally, ordinary investors can buy only one type of share--in this case, the A shares. That’s because the “super-voting” B shares are generally owned by a controlling group, such as the founding family or a management group.

Dual classes gained popularity in the mid-1980s, when hostile takeovers and leveraged buyouts became the rage. The idea was to give a friendly group of stockholders voting control--even if they didn’t own more than 50% of the stock--to thwart unfriendly buyers.

Q. Who has dual classes of stock?

A. survey by the Investor Responsibility Research Center in Washington of the nation’s 1,500 largest public companies found that 122 had dual-stock classes as of the end of 1993.

Companies with dual classes include Dow Jones & Co., Washington Post Co., Citicorp, Dillard Department Stores, E.W. Scripps Co., Home Shopping Network, Adolph Coors Co., Readers Digest Assn., Rockwell International and Tyson Foods, according to the center.

In the case of Times Mirror and several others, the shareholders obtaining super-voting stock were founding family members who already had significant voting power before the new class of shares was created.

Q. Are dual classes necessarily bad?

A. Corporate managers argue that these arrangements ensure that stockholders get a fair shake in a hostile takeover. For example, some managers contend that their companies became targets when an unusual event depressed the price of the stock. Raiders then swooped in and made offers that, in normal circumstances, would seem anemic.

However, some shareholders balk at two-tiered stock deals because they reduce individual stockholders’ ability to influence corporate decisions. Additionally, super-voting shares tend to command premium prices, while other shares tend to sell at a discount, says Nell Minow, principal of Lens Inc., a Washington-based investment group.

Q. How much does it cost investors to have the lesser-voting shares?

A. It depends on the company and the voting power of the super-voting shares. A dramatic example of how vast the disparity can be involved Donald Trump’s purchase of Resorts International. Trump paid $135 for the company’s controlling Class B shares, which commanded 100 votes each, and later bid just $15 each for the single-vote Class A shares.

Usually, the per-share price discrepancies are not as wide, partly because the voting power is not that dramatically different. Super-voting shares usually enjoy between two and 10 times the voting power of an average common share.

Q. What are regulators doing about dual classes of stock?

A. Late last year, the Securities and Exchange Commission urged stock exchanges to adopt rules limiting the rights of companies to create dual classes. The exchanges are complying with the request.

While the new rules are not final, they are expected to largely follow so-called 19(c)4 regulations in effect before 1990.

In brief, these rules barred companies from exchanging shares with equal voting rights for shares with unequal voting rights. The idea is simply that shareholders should not be “disenfranchised.”

Companies that already have dual classes of stock--such as Times Mirror--would be grandfathered, allowing them to maintain the current arrangement. Nor would start-ups and companies that offer dual classes in an initial public offering be hindered, because shareholders buy in knowing their limited voting rights.

But companies that attempt to reduce the voting rights of certain shareholders after the fact, by issuing new super-voting stock, would have their shares banned from trading on major stock exchanges.

Q. When would those rules go into effect?

A. Probably not until late this year or early next year, if at all. That’s because each of the nation’s major stock exchanges must submit its own rule changes based on the SEC request. And the commission wants uniform rules for everyone--a daunting task.

The SEC would put the proposed rules out for public comment, then review the comments and make a final determination about whether the exchange rule changes are acceptable. In ideal circumstances, the process takes six months to a year.