As companies prepare to go public and draft articles of incorporation, there is an opportunity to introduce a number of provisions that may give newly listed companies a significant degree of autonomy from their shareholder base. This is a ‘golden window’ of opportunity when companies can include specific language in their articles of incorporation that is beneficial to the founders/management, giving the company more maneuverability.
What are these provisions and how do they work?
Evergreen Supply: An ever-valid provision in a company’s articles of association is a clause that automatically renews the provisions of the articles of association at the end of their term of office, unless either party gives notice in writing. This means that the Articles of Association will remain in effect indefinitely unless someone takes action to terminate them
A provision for evergreen equity grants is a provision in a company’s equity plan that automatically replenishes the stock pool available for grants each year.
This means that the company does not have to go through the shareholder approval process every year in order to have a new stock pool for employee awards.
Evergreen equity grant top-up provisions are commonly used by high-growth companies looking to attract and retain top talent. By providing a steady supply of stock for grants, companies can ensure that they can reward their employees with stock awards even if the company’s stock price does not increase.
A so-called evergreen provision can only be introduced before they are public. The Evergreen provision creates an automatic equity replenishment facility.
Typically, an evergreen provision offers a company the opportunity to add 3-4% to the stock pool each year, which can last for 4-6 years. This means the company wouldn’t have to go back in annual proxy voting and ask for more equity from shareholders every year.
Shares with two classes: Dual-class shares are a type of corporate structure that grants different voting rights to different classes of shareholders. This means that a shareholder with a small number of shares in one class may have more voting rights than a shareholder with a large number of shares in another class.
Dual-class stocks are often used by companies that want to give founders or other insiders more control over the company without giving up too much ownership. For example, a company might issue two classes of shares: Class A shares with one vote per share and Class B shares with 10 votes per share. This would mean that a shareholder with 100 Class B shares would have the same voting rights as a shareholder with 1,000 Class A shares.
Dual Class Shares can have both advantages and disadvantages. On the one hand, they can allow founders or other insiders to retain control of the company as it grows and expands. This can be important for companies looking to pursue a long-term vision or operating in rapidly changing industries. In addition, it often enables a growth and investment strategy with a longer time horizon to profitability.
On the other hand, dual-class stocks can give insiders too much power and make it difficult for shareholders to hold them accountable. This can lead to poor decision making and a lack of transparency.
In recent years, dual-class stocks have come under increasing scrutiny. Some investors and regulators have argued that they are unfair to minority shareholders and should be banned. However, other investors and companies have argued that dual-class stocks can be a valuable vehicle for fueling long-term growth and innovation.
Here are some examples of companies with dual share class share structures:
- alphabet
- Ali Baba
- Tencent
- SoftBank
These companies all have very strong founders or other insiders who hold a significant number of multiple-voting stocks. This gives them a high degree of control over the company, even though they may not own the majority of the shares.
Dual share structures are controversial and there is no consensus on whether they are good or bad for shareholders. However, they are becoming more and more common, especially with strong founders.
Supermajority voting: A supermajority bylaw provides additional corporate protections. Passing a supermajority proposal requires an above-average majority of shareholder votes. This value is typically at a threshold of 67% to 95%. it may vary depending on the articles of incorporation or articles of association of the company.
There are a few reasons companies might adopt a supermajority charter for shareholder nominations. When a company prepares to go public, it is standard corporate governance practice to hold a supermajority vote, as this can help protect the company. Companies that are new to the stock market can be seen as financially attractive targets for hostile takeovers. Because of this, companies that have been public for more than six years will typically review the supermajority provisions and consider removing those provisions. Finally, in 2022, NetflixNFLX removed its supermajority clause after being public for ten years.
It is interesting to note that supermajority voting is becoming more common and that 51% of all publicly traded companies now have supermajority clauses.
Overwhelming shareholder proposals are often used to approve amendments to a company’s articles of incorporation or bylaws or to merge with another company. They can also be used to approve other important decisions, such as a change in the company’s business strategy or the sale of a significant asset.
In addition, supermajority voting allows companies to maintain board continuity. Because of the supermajority requirements, it would be very difficult for shareholders to remove a board member. This means that directors are not at risk of being removed from the board if they do not follow the recommendations of institutional shareholders.
However, there are also some potential downsides to using supermajority shareholder proposals. First, they can make decision-making more difficult because they require a higher level of support. Second, they can give more power to a small group of shareholders, as they may be able to block a decision even if it has majority support. A supermajority is very difficult to achieve as shareholders’ meetings are usually attended by only a few voters.
For example, TeslaTSLA previously attempted to pass two shareholder-friendly proposals, but since the overall shareholder participation in the vote was only 52%, there was no opportunity to pass the proposals.
Here are some examples of supermajority shareholder proposals:
- In 2018, Alphabet shareholders approved a shareholder proposal by a supermajority that required 75% of the shareholder vote to approve future changes to the company’s dual-class share structure.
- In 2019, Facebook shareholders approved a shareholder proposal by a supermajority that required 67% of the shareholder vote to approve any future merger or acquisition.
- In 2020, Alibaba shareholders approved a shareholder proposal by a supermajority that required 75% of shareholder votes to approve future changes to the company’s corporate governance structure.
I think boards need to be aware of the reactions of the institutional investment community and once companies have this charter in place they can expect to see significant pressure over time to override some of these provisions. The expiration dates for each provision vary anecdotally. They often last about 4 to 6 years. After 7-12 years, expect significant pressure until sundown.
As I reflect on some of the provisions that may be available to private bodies, I think they are worth discussing and considering. I think that if you’re a private company preparing to go public, it can be very beneficial to put many of these types of safeguards in place.
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I’m a 3-time CEO and serial entrepreneur and co-founder of enterprise software companies in the energy, healthcare and software industries. I have scaled companies through hypergrowth and led companies to successful IPOs and acquisitions.
I bring an operational perspective on how you can empower your business through technology and leverage technology to accelerate business solutions for enterprise customers and consumers. I use extensive up-to-date knowledge of digital technology to reduce costs, increase efficiency and productivity by using AI machine learning analytics to streamline processes.
I bring a vision for new customer experiences, uncompromising customer orientation and a high level of business discipline when it comes to implementation.
I have written three books including Be Board Ready: The Secrets to Landing a Board Seat and Being a Great Director.
My board experience spans technology, financial services, healthcare, consumer staples, automotive, manufacturing and industrial sectors. I have served on over 34 public bodies and seen 16 IPOs.
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