Understanding Tesla's Dual Class Share Model and Its Impact

Tesla's dual class share model is a unique feature that sets it apart from other publicly traded companies. This model allows Tesla to have two classes of shares, with different voting rights.

The Class A shares, which are available to the general public, have one vote per share. In contrast, the Class B shares, which are held by Elon Musk and other insiders, have 20 votes per share. This means that insiders have a significant amount of control over the company.

This dual class share model has been in place since 2010, when Tesla went public. It's a key factor in the company's ability to make decisions quickly and efficiently.

The impact of this model is significant, as it allows Tesla to focus on its long-term goals without being held back by short-term pressures.

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Dual class shares allow founders and executives to maintain control over the company while raising funds via the stock market. This is often done by offering one class of shares with lower voting rights to the general public, while keeping another class with greater voting rights for themselves.

One class of shares, usually denoted as share A, is typically offered to the public and comes with lower voting rights. In contrast, another class, share B, is usually owned by the company's founders, executives, and/or family, and comes with greater voting rights.

Dual class shares can also have different dividend payment levels, which can affect the return on investment for shareholders. This can be a significant consideration for investors looking to buy shares in a company.

Founders and executives often prefer dual class shares because they allow them to maintain control over the company, even if they offer shares to the public to raise funds. This is particularly important for young, high growth tech companies that need to scale quickly to stay competitive.

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Companies use dual class shares to maintain control over the company while raising funds via the stock market. This allows founders and executives to hold onto power even as they bring in more investors.

The dual class share scheme is particularly appealing to young, high growth tech companies that need to scale fast. Technology companies build invisible enablers in our daily lives, and they often require massive funding to achieve this.

A large equity raise would dilute the ownership and control of the founder, which is a major concern.

The dual class share structure has a long history that dates back to the 1600s with the Dutch East India Company, where directors were accused of buying company goods at low prices for themselves.

Accusations of unequal treatment of shareholders were also made against the Dodge Brothers in 1926, who issued non-voting shares. This led to the New York Stock Exchange banning the structure until the 1980s.

The IPO boom of technology companies in the past decade brought the issue to the forefront once again. This is evident in the fact that ~46% of technology companies that went public in 2021 used dual-class shares, compared to just ~23% of non-technology companies.

Companies like Apple, Netflix, Amazon, and Tesla are among the largest in the world and continue to innovate and grow despite the perceived 'burden' of shareholder democracy.

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Young tech companies often prefer the dual class share scheme because it allows founders and executives to maintain control over the company while raising funds via the stock market.

This is particularly important for high growth tech companies that need to scale fast, as a large equity raise would dilute the ownership and control of the founder.

Technology companies rely on innovative ideas and speed to stay ahead, and dual class shares enable them to do so without sacrificing control.

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Dual class shares can give investors confidence that founders will stay on long-term to guide the company.

However, this comes with a risk that the company will be solely controlled by these same shareholders, putting smaller investors on the losing end if their interests are not aligned.

Angel investors and venture capitalists provide funding for technology companies in their early phases, while public shareholders fund them when they go public.

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This can create a power imbalance, where smaller investors have less influence over the company's direction.

Dual-class structures can create a roadblock to shareholder democracy, inhibiting the ability of shareholders to hold company directors to account.

In fact, there's growing evidence that dual-class structures are not benefiting long-term investors.

Starting in 2023, some companies will vote against the re-election of the chair of the board if they don't provide a plan to set a time limit on dual-class structures or give shareholders the opportunity to vote on it.

This is expected to improve accountability and sustain healthier markets.

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Pension funds have called on Tesla to keep to one share, one vote, citing concerns that the company may depart from this principle.

The Investor Coalition for Equal Votes (ICEV) has expressed concerns that Tesla's proposed re-incorporation document includes powers for the board to issue new preferred shares with differential voting rights.

A recent Delaware Court of Chancery ruling found that Tesla's board of directors breached their fiduciary duties in granting CEO Elon Musk a $55.8bn compensation plan.

The majority of Tesla's board is reportedly "beholden to Musk", according to the court's findings.

Restructuring the capital structure to distort the link between equity and control isn't necessary for Tesla's continued long-term success, according to the ICEV.

The ICEV has over 15 members, including Railpen, NEST, Ethos Engagement Pool International, Ethos Foundation, and People's Partnership, which have signed a statement calling on Tesla to maintain equal voting rights.

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Dual class shares refer to stocks with two share classes that come with different voting rights. This allows founders and executives to maintain control over the company while raising funds via the stock market.

One class of shares, usually called share A, is offered to the general public and comes with lower voting rights. Another class, called share B, is usually owned by the company founders, executives, and/or family, and comes with greater voting rights.

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The different share classes are often entitled to different dividend payment levels. This means that investors in share A may receive different dividend payments than those in share B.

Dual class shares give investors confidence that founders will stay on long-term to guide the company. However, there is a risk that the company will be solely controlled by these same shareholders, putting smaller investors at risk.

Angel investors and venture capitalists provide funding for technology companies in their early phases, while public shareholders provide funding for technology behemoths when they go for listing.

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