Introduction to the North Shore Dual Share Class ETF (DUAL)
Dual share class companies have increased in number in recent years. Companies taking advantage of the equity structure are usually young, innovative companies. The dual-class structure may allow these companies to gain access to the public markets without subjecting them to the short-term pressure of many shareholders.
What Is a Dual Share-Class Company?
A dual-class company is one that issues equity with different voting rights assigned to each share class. Generally, the share class held by the founders will carry the majority of the votes for the company. A typical dual-class structure confers ten votes to the holder of the super-voting shares versus one vote per share for ordinary shares.
Potential Benefits of Dual-Class Companies
The dual-class structure offers potential benefits to the issuing companies, including:
- Allows visionary founders to gain access to the public markets without giving up control. Reduces pressure from outside investors for short-term performance, such as quarterly EPS growth rather than long-term value creation.
- Visionary founders can protect their vision and continue to invest for the long run
- Ability to pursue strategies and goals that may have a longer-term payout.
- Allows the company to focus on long-term vision rather than short-term goals.
Potential Benefits of Dual-Class Structure over the Firm’s Life Cycle
The potential benefits of the dual-class structure may vary depending on the age of the company. One research study showed that the benefits to dual-class companies is highest at the earliest stages of a company and tend to diminish over time . The researchers used the firm’s equity valuation multiple as a measure of those potential benefits. They found that dual-class firms had higher valuations than single-class companies at the time of their IPO. That valuation differential diminished as the company matured.
The Index Exclusion Issue
Many major index providers are reducing the weight of, or excluding completely, dual-class companies. For example, S&P Dow Jones Indices moved to exclude dual-class companies from many of their most widely used U.S. indices. Both FTSE Russell and MSCI have rules which reduce the weight of dual-class companies in their indices.
Thus, individuals may have limited access to dual-class companies, particularly if they chose to invest in index-tracking funds.
Providing Access to the Potential Benefits of Dual-Class Companies
Introducing the North Shore Dual Share Class ETF (DUAL)
The North Shore Dual Share Class ETF (DUAL) seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the North Shore Dual Share Class Index. The index is designed to track the performance of dual-class companies incorporated in the United States.
- DUAL provides access to the shares of dual-class companies.
- DUAL is designed to mitigate the problem of corporate governance by index exclusion.
- DUAL addresses lack of effective sunset provisions in dual-class structures and offers dynamic exposure to potential dual-class benefits over the firm’s life cycle.
- The fund emphasizes younger companies where the potential benefits of the dual-class structure may be the greatest and reduces that emphasis as the company matures.
- Provides access to dual-class companies that may not be available or may be underweighted in many popular equity indices.
The index is rebalanced annually. Additional constraints are placed on the index in an aim to affect liquidity and portfolio diversification.
DUAL may provide investors with an attractive vehicle for exposure to the potential benefits offered by dual-class companies.
 Cremers, Martijn; Lauterbach, Beni & Pajuste, Anete, The Life-Cycle of Dual Class Firm Valuation, December 2018.