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Why Is the Number of Dual Share Class Companies Increasing?

November 1, 2020

A dual-class company is one that issues equity with different voting rights assigned to each share class. We have noted that there has been a marked increase in the number of dual share class companies over the last decade. What factors might be driving that increase? Why should you consider investing in dual share class companies? And what is one way to gain exposure to dual share class companies?

On the Rise Our research shows a large rise in IPOs over the past decade. From only 4% of IPOs in the 1980s, dual-class companies totaled 16% of IPOs during the 2010s and rose to $3.5 billion in market value during 2018.[1]

What may be responsible for this increase? A paper published on dual share class companies offers some potential answers.[2]

Can’t Touch This – Rise of Intangibles The authors show that intangible assets such as research & development, digital services, and human capital play an increasingly important role in shaping and sustaining a company’s competitive advantage. While these investments may produce long-term benefits, they hurt profits in the short-run. Many shareholders have a myopic focus on next quarter’s earnings.

The Rise of the Activist Investor An activist investor is an individual or group that purchases a large number of a company’s shares and tries to obtain seats on the company’s board to effect change.

The authors highlight that the assets under management of activist investors have risen from under $20 billion in 2004 to over $120 billion in 2015. Why might this be significant?

Activist investors are often trying to maximize short-term gains. Thus, they may cut intangible assets to boost short-term profits at the expense of long-term prospects. Additionally, they may force change in the company that runs counter to the founder’s visions and the ultimate long-term health of the company.

The dual share class structure may help to prevent activist shareholders from forcing a short-term agenda on a company.

Decline of Antitakeover Strategies Finally, the authors highlight that practices such as staggered boards[3] and poison pills[4] that have served as effective antitakeover strategies in the past are in decline. This decline may make companies more susceptible to shareholder pressures for short-term results over long-term profits.

How Can Investors Gain Access to Dual Share Class Companies?

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 may provide investors with an attractive vehicle to gain exposure to the potential benefits of dual share class companies.


[1] North Shore Indices Internal Research
[2] Govindarajan, Vijan & Srivastava, Anup, Reexamining Dual-Class Stock, 8/21/17
[3] A structure where only a fraction of board members are elected at each annual meeting.
[4] A plan which allows existing shareholders to buy additional shares at a discount, thereby diluting the ownership interest of any new, hostile party.

Exchange Traded Concepts, LLC serves as the investment advisor. The Fund is distributed by SEI Investments Distribution Co. (1 Freedom Valley Drive, Oaks, PA 19456), which is not affiliated with Exchange Traded Concepts, LLC, North Shore Indices, or any affiliates. Check the background of SIDCO on FINRA’s BrokerCheck.

Carefully consider the Fund’s investment objectives, risk factors, charges and expenses before investing. This and additional information can be found in the Fund’s full or summary prospectus, which may be obtained by visiting ( dualetf.com). Investors should read it carefully before investing or sending money.

Investing involves risk, including possible loss of principal. In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from social, economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Narrowly focused investments, investments in smaller companies, and those in commodities typically exhibit higher volatility. Issuers in energy-related industries can be significantly affected by fluctuations in energy prices and supply and demand of energy fuels.

There is no guarantee the fund will achieve its stated objective. Indices are unmanaged and do not include the effect of fees. One cannot invest directly in an index. The fund is non-diversified.

Shares are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Brokerage commissions will reduce returns. Market price returns are based upon the midpoint of the bid/ask spread at 4:00 PM Eastern time and do not represent the returns you would receive if you traded shares at other times. The first trading date is typically several days after the fund inception date. Therefore, NAV is used to calculate market returns prior to the first trade date because there is no bid/ask spread until the fund starts trading.

Dual Share Class Companies create unique risks. Dual Share Class Companies allow for a concentration of voting power in the hands of company insiders through a disproportionate allocation of voting rights among stockholders, which may negatively affect common stockholders in a variety of ways. For example, a company’s owners may use such power for personal benefit, while passing on financial risk to common stockholders. Further, Dual Share Class Companies allow entrenchment of management in the company, which may prevent common stockholders from being able to address issues relating to mismanagement of the company, such as share dilution, increased company debt, and financial underperformance relevant to the market. Investing only in a portfolio of Dual Share Class Companies may impact the Fund’s relative investment performance depending on whether such investments are in or out of favor in the market. A portfolio of Dual Share Class Companies may underperform a portfolio that includes companies with traditional ownership structures.