Every sunset is an opportunity to reset: an analysis of dual-class share regulations and sunset clauses

Abstract

ABSTRACT The dual-class structure tends to increase the agency costs associated with concentrated ownership, such as those stemming from self-dealing and poor-quality management. While corporate law addresses some agency problems, it is unable to eliminate all agency problems without unduly restricting the freedom of corporate controllers to manage their firms. This article uses theory-based and empirical approaches to demonstrate that a specific type of sunset clause may strike the right balance between, on the one hand, addressing agency problems and, on the other hand, providing an effective incentive for controllers of dual-class companies to increase firm value over the long term. The article evaluates current regulatory responses to the dual-class structure in selected jurisdictions and concludes that the existing arguments against mandatory sunset rules may be flawed. We suggest that a time-based sunset rule may be suitable for high-tech and innovation startups characterised by high-growth rates and low profitability.