Issues for Twin-Class Firms Considering M&A Transactions – Cooley M&A

The rise of founder-led, enterprise capital-backed firms in recent times has coincided with a surge of firms implementing dual-class share constructions in reference to their preliminary public choices. A dual-class construction usually entitles the holders of 1 class of the corporate’s widespread inventory (usually designated as Class B widespread inventory) to a number of votes per share and the category of widespread inventory provided to the general public (usually designated as Class A standard inventory) to a single vote per share. In a small variety of circumstances, a category of widespread inventory is obtainable to the general public that has no voting rights in any respect. Allocating high-vote shares to a category of stockholders – usually the founders, a mix of founders and pre-IPO buyers, or all pre-IPO stockholders (together with holders of fairness granted beneath worker fairness plans and warrantholders) – permits these stockholders to take care of majority voting management after completion of the corporate’s IPO, whereas, over time, a majority of the corporate’s financial possession turns into broadly dispersed amongst new public stockholders. Outstanding dual-class firms embrace Alphabet, Meta Platforms, Snap and Lyft.

There are compelling rationales for adopting a dual-class construction, however even proponents of the construction typically acknowledge that these advantages are considerably mitigated as soon as the dual-class shares are out of the arms of the founders and/or pre-IPO stockholders. Accordingly, the charters of firms with dual-class constructions usually present that any “switch” (broadly outlined) by the unique high-vote stockholders will lead to computerized conversion of the transferred shares into the corporate’s unusual, low-vote shares.[1] Sadly, these broadly worded switch provisions can have important unintended impacts on M&A transactions involving these firms by making it unclear whether or not a high-vote stockholder may enter right into a voting settlement[2] in help of the transaction with out triggering an computerized conversion of that holder’s high-vote shares to low-vote shares.[3]

A overview of charters adopted by dual-class tech firms that went public in 2020 and 2021 means that firms (and their authorized counsel) have grow to be cognizant of this situation, because the overwhelming majority of these charters include an express carve out to the switch restrictions, allowing high-vote stockholders to enter into voting agreements in reference to an M&A transaction accredited by the corporate’s board.[4] Nonetheless, such exceptions weren’t common and, as shall be mentioned beneath, the overwhelming majority of dual-class charters adopted earlier than 2016 that contained switch restrictions didn’t embrace M&A voting settlement carve outs.