December 8, 2023

“Dual Class”? How About “Dual Series”?

Here’s a post I recently shared on blog:

The Goodwin team that represented the issuer in the first IPO by a traditional venture-backed technology company in more than 18 months recently wrote an alert explaining why the company’s high vote/low vote capitalization structure — which is very common in venture-backed technology IPOs in the last decade — used the terms “Series” A common stock and “Series” B common stock rather than the more common references to “Class” A and B. The certificate of incorporation also included language clarifying that the high vote & low vote common stock were two separate series, not classes.

The alert states that the typical reference to classes, when series is really intended, “created the potential for ambiguity” in Delaware “about the rights granted to the high vote and low vote stock by virtue of Section 242(b)(2).” For example, in cases against Fox Corp. and Snap Inc., the plaintiffs — while they haven’t been successful in this argument — sought to take advantage of this ambiguity to argue that a separate class vote was required to approve a charter amendment for officer exculpation. The alert contends that these claims could have been avoided if the high vote/low vote stock had been labeled and structured as “series.” Here’s why:

Under DGCL Section 242(b)(2), post-adoption amendments to a company’s certificate of incorporation may require different threshold votes of its stockholders depending on whether the amendment affects multiple classes of stock or multiple series of stock. Under Section 242(b)(2), an amendment that changes the “powers, preferences or special rights” of a class of stock requires a vote of the affected class (voting separately) if that amendment is “adverse” to the class.

In contrast, an amendment that changes the powers, preferences, or special rights of a series within a class of stock requires a separate vote of the affected series only if that amendment is adverse AND the affected series is treated differently than other series. Said differently, if an amendment adversely affects two series of stock but affects both series in the same manner, the stockholder vote required to approve the amendment is a vote of the two series voting together on a combined basis.

Compare this to the treatment of classes. In the case of classes, if an amendment adversely affects two classes of stock, then each class is entitled to a separate class vote on the proposed amendment, even if the classes are affected in the same manner. Thus two separate votes are required rather than one combined vote.

Why does this matter? The net effect of a dual class common stock structure is that under Section 242(b)(2), the company’s low vote stockholders have a separate class vote (and resulting veto power) over a proposed charter amendment that adversely affects the low vote and high vote classes of common stock in the same manner. If the intent is to implement a dual series common stock structure, naming the high vote and low vote stock “Series A” and “Series B” will make it clear that the low vote stock does not have a veto right by virtue of Section 242(b)(2) on amendments that treat the low vote and high vote stock the same.

– Meredith Ervine