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SEC commissioner takes aim at companies' use of 'forever shares'

A top official at the U.S. Securities and Exchange Commission wants companies to reconsider their use of multiple share classes after a handful of years.

In a Feb. 15 speech at the University of California-Berkeley, Robert Jackson Jr., one of the newest SEC commissioners, expressed caution over companies using perpetual dual-class share structures, or "forever shares." The model asks investors to trust a founder, "that founder's kids. And their kids' kids. And their grandkid's kids," he explained.

"It raises the prospect that control over our public companies, and ultimately of Main Street's retirement savings, will be forever held by a small, elite group of corporate insiders — who will pass that power down to their heirs," Jackson said, according to prepared remarks of the event.

Using multiple share classes when going public has become an increasingly popular phenomenon among companies as founders worry about short-term pressures like activist investors and declining share prices. The model is commonly thought to be a method for founders to retain long-term control of their companies as shares issued in IPOs that have dual-class structures would include either reduced or no voting rights.

More than one-fourth of the companies to go public in 2016 included a dual-class share structure, according to S&P Global Market Intelligence data.

Companies like Alphabet Inc., Snap Inc. and Blue Apron Inc. all operate with multiple share classes. But in 2017, such companies were targeted by index providers including S&P Global Inc., London Stock Exchange Group Plc and MSCI Inc., which each took separate steps to dissuade companies from using the model.

In July 2017, S&P Dow Jones Indices began to exclude new companies offering multiple share classes or classes with limited or no shareholder voting rights from the S&P 500, S&P MidCap 400 and S&P SmallCap 600. In September 2017, London Stock Exchange-owned FTSE Russell began requiring at least 5% of a companies' voting rights to be held by public shareholders.

MSCI said in November 2017 that it was expanding its review of the model, while also temporarily classifying any companies indicating unequal voting structures as ineligible for two of its indexes.

While he has reservations about dual-class share structures, Jackson also said he has grown "deeply worried" about the index providers' decisions as he fears that by excluding some companies from their indexes, retail investors will be left out from profiting on the companies' gains.

As a result, Jackson wants the national securities exchanges to review their listing standards to address the use of perpetual dual-class shares.

Jackson's comments piggybacked on ones made just days prior by fellow SEC Commissioner Kara Stein, who said Feb. 13 that dual-class share structures are "inherently undemocratic," as they can create an environment in which executives evade management and board accountability.

"Asking investors to put eternal trust in corporate royalty is antithetical to our values as Americans," Jackson said.