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SEC Investor Advocate Rick Fleming Warns of Increasing Trend Toward Use of Dual-Class Share Structures

SEC Investor Advocate Rick Fleming urged regulators and stock exchanges to increase the oversight of dual-class share structures, warning that these structures risk harm to investors and the public markets.

In a speech at the International Corporate Governance Network Miami Conference, Mr. Fleming criticized dual-class share structures for giving "company founders and insiders" more voting power than public shareholders. According to Mr. Fleming, the structures produce "unchecked corporate control" that can lead to, among other things, (i) a lack of accountability of those controlling the issuer, (ii) poor accounting controls, (iii) illogical business decisions motivated by "personal whims," (iv) corporate theft and (v) "insular group think."

Mr. Fleming said that these structures are usually justified by the theory that founder control ensures long-term growth and counters shareholder short-term profit demands. However, Mr. Fleming responded that, in fact, dual-class structures are typically less profitable than companies with dispersed voting power.

Emphasizing the gravity of the issue, Mr. Fleming called on (i) regulators to increase oversight and (ii) stock exchanges to adopt reforms to strengthen corporate governance in publicly traded companies.

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