Equal Treatment Agreements: Theory, Evidence & Policy

While the rise of dual-class companies—companies like Facebook, Google, and Visa, which have two or more classes of common stock that differ in voting rights—has been widely observed over the past decade, prior commentators have largely overlooked the important “equal treatment” agreements that are embedded in many dual-class charters. Equal treatment agreements require that stockholders are treated equally, for example by ensuring that all stockholders receive the same consideration per share in the sale of the company, thereby potentially taking away one of the most important benefits of holding the high- vote shares. Using an original database of 312 dual-class charters and their equal treatment agreements, this Article is the first to conduct a robust empirical analysis of equal (and unequal) treatment agreements in dual-class companies. As a policy matter, the Article identifies when such structures are desirable and efficient from a law-and-economics perspective. In doing so, this Article highlights certain agreements (which I term “unequal treatment agreements”) that require equal treatment except for a fixed proportion of disparate consideration as promising structures to facilitate efficient deals, deter inefficient deals, and manage moral hazard. Based on this analysis, the Article provides implications for stakeholders including founders, investors, practitioners, and courts.

For founders and investors, who often hold the high-vote and low-vote shares, respectively, and issuers, who create and sell the dual-class stock, this Article examines the importance, features, and power of equal treatment agreements, and the impact of the current doctrinal landscape on their utility. For practitioners, who draft and negotiate these agreements, this Article analyzes the interaction of multiple equal treatment agreements within the same charter and identifies nuances in the scope and degree of equality afforded under various formulations of purportedly “equal” treatment. For courts, who interpret and apply equal treatment agreements, this Article argues that because of the impact of recent doctrine on corporate practice, many equal treatment agreements fail to fully protect low-vote stockholders from disparate treatment. Accordingly, the Article proposes normative recommendations for approaching equal treatment agreements and contends that unequal treatment agreements may have a broader role to play in dual-class charters.