Dual-Bid Corporate Charters, Entrepreneurial Incentives and Social Efficiency

In the standard dual-class equity structure, the founder retains control via a blocking minority, typically achieved via multiple-vote share ownership. This strengthens the founder's position in takeover fights or talks and thus stimulates entrepreneurship but, in The Economist's wording, such companies are 'shunned' by many investors. To stimulate entrepreneurship with full respect of One-Share/One-Vote and without any blocking toehold, one can, instead, stipulate that a takeover requires the votes of both equity classes. Acquisitions happen after an open fight, where the incumbent's only advantage is that they can block the attempt by counterbidding for just one class. The incumbent's option to block the takeover by buying just one class of shares, we show, generates better terms if and when the firm is taken over, which translates in a higher IPO or PE value and, thus, stronger entrepreneurial incentives. The cost of the proposed charter is, inevitably, some degree of managerial entrenchment, but by our reckoning the benefits exceed the cost. The value-boosting effect is quite powerful when the potential for value-improving takeovers is high, notably for entrepreneurs who do have bright ideas but are not good at organization, or for incumbents facing rivals with big toeholds.