Dual-class shares structure, to be or not to be

Murdoch hopes to add Dow Jones to his already expansive media empire, but the bid was far from plain sailing, mainly due to stumbling block in the form of the Bancroft family, which controlling the super-voting Class B shares which has ten times voting power than the class A shares held by ordinary shareholders.

According to corporate goverance experts, these supervoting shares -- usually impossible for outside investors to get -- often are the regime in place at family-controlled firms, particularly newspaper companies that created separate, unequal share classes as a way to preserve their editorial independence. Of course, it could also prevent those hostile takeover, which appears more relevant given the growing trend in merger and acquisitions.

Many media companies have clinged to the dual-class share structure, like New York Times, and Washington Post. The latest examples is search giant Google, which decided to adopt the dual-class share structure at their IPO. Chinese internet companies have also jumped on the bandwagon, for instance, Baidu, the number one search in China, adopted a similar goverance structure, labelled as Niu Ka Jihua.

But there have been growing dissatisfaction with the structure, saying that it is against the interest of the shareholders, and can not ensure good governance. One notorious example is Conrad Black and his management of the Canadian newspaper firm Hollinger International.
Black held 30% of the company's equity but 73% of its voting power. Along the way, he was accused of granting large fees to managers and himself, as well as taking personal dividends. Hollinger's performance suffered as a result and it eventually was taken over by Sun-Times Media Group Inc.

So the dual-class share strucutre has been designed to repel the takeover bid, but the Hollinger International was eventually taken over by others. So we can see that the dual structure can't make sure of good governance, and there is a risk of management abuse. Consequentially, it could incur takeover from other rivals.

So the key for the dual-class shares structure to work properly is to ensure that those who are in control will not abuse their power. There might need another mechanism to go with the share system to check the super-voting power.

But the change will not come by easily, unless there is compelling reason, for example, the companies' shares have performed quite poorly, so that the great pressure is there for change.
But in the case of Google, the shares value is so high that even ordinary shareholders wouldnot bother to complain against being powerless for holding the class A shares.

In the case of Murdoch's bid for Dow Jones, Murdoch really came up with a very tempting package, almost 60 dollars per share. Refusal to accept the bid could be regarded as hurting the interest of shareholders and stemming the growth of the company. In this case, the Bancroft family was under pressure to have convincing reason like the editorial independence to rebuff the bid. But the Dow Jones board directors have worked out a way to ensure editorial independence. So it has been increasingly difficult for the family to say no.