Private Law Theory

ABSTRACT
Founders and other corporate insiders often seek to control the companies they take public. For over a century, they have used high-vote stock to obtain disproportionate control rights, which has resulted in seemingly endless debate among scholars, investors, and regulators. More recently, insider shareholders have used a different mechanism to obtain outsized corporate control rights: control by contract. In 2024, contractual control rights took center stage in the Delaware courts and legislature due to the seminal Moelis case and subsequent Delaware legislation. Despite the intense focus on both dual-class companies and contractual control rights, existing research has treated high-vote stock and contractual control rights as alternative tools for insider control.

This Article is the first to consider that insider shareholders in dual class companies often obtain significant contractual control rights in addition to high-vote stock. Based on an empirical analysis of dual-class IPOs from 2000 to 2021, this Article provides a novel dataset showing that over one-quarter of dual-class companies grant insiders significant contractual control rights in addition to high-vote stock. For example, Moelis & Company, the corporation that was the subject of the controversial Moelis case, granted its founder both high-vote stock and substantial contractual control rights. The combination of these two forms of corporate control rights substantially extends and expands insiders’ control over a wide range of corporate decisions, including decisions that are generally not subject to a shareholder vote because they are the exclusive purview of the board of directors. These findings create a more complete account of the myriad ways in which insider shareholders retain outsized corporate control, which allows courts and policymakers to consider important implications for companies that grant insiders control through high-vote stock, contractual control rights, or both.

Shobe, Jarrod and Shobe, Gladriel, Contractual Control in Dual-Class Corporations (February 21, 2025), Yale Journal on Regulation, volume 42, 332-382.