Dual class stock unifications and shareholders’ expropriation

An increasing number of firms with dual class shares are deciding to unify their shares around the world. Though the return to “one share one vote” is usually considered good news, the unification can give rise to a wealth transfer between the two classes of shares, expecially in the presence of high voting premia. This paper develops a model that quantifies the wealth effects on the two classes of shares depending on the type of unification, the voting premium and the equity structure. The model shows that voting shareholders can be substantially harmed by a 1:1 unification in the presence of high voting premia. The model predictions are then tested and validated on Italian unifications, characterized by the presence of a majority shareholder, high value of voting rights and no form of compensation for voting shareholders. Unifications can be a form of expropriation of minority voting shareholders, as confirmed by five case studies where majority shareholders hedge or even take advantage of such operations by engaging in the following activities some months before the unification decision: buying relevant blocks of nv-shares, selling voting shares or approving stock option plans on nv-shares. At the stock unification announcement the price of a voting share in the five case studies dropped by a minimum of –4.26%, to a maximum of –10.41%, consistent with the assertion that dual class unifications expropriate minority-voting shareholders to the benefit of the controlling shareholders.