Keeping Control of Your Business After the IPO

As the founder and CEO of your company, you’ve worked harder and sacrificed more than anyone to make it successful. You’ve done the research, consulted trusted advisors and decided that the best way to take your company’s growth to the next level is through an initial public offering (IPO). But you don’t want common shareholders, corporate board members or investment companies, who haven’t put their blood, sweat and tears into the company, to determine how it’s run. Here are some methods for keeping greater control of your business after the IPO.

Publicly held corporations can choose to issue different classes of common stock. Each class comes with a different set of rights for stockholders. The most common practice is to issue Class A shares and Class B shares. Class A shares might give stockholders 10 votes or 100 votes for each share they own, while Class B shares might give stockholders 1 vote for each share they own. Or it could be the other way around; there’s no rule that says Class A shares have to be superior to Class B shares. The shares with extra voting rights are sometimes called “super voting shares.” 

When the company goes public, it can give its founders, executives and any other key stakeholders enough super voting shares to help them retain control over the company. Concentrating voting rights among a particular class of shareholders also makes a takeover attempt more difficult. The company can choose to only sell to the public its regular shares with lesser voting rights. Companies that have used this strategy include Groupon, LinkedIn, Facebook and The New York Times. 

The downside of this strategy is that the Class B shareholders may not be happy with it. They may feel that insiders have too much control over the company and won’t act in the best interests of ordinary shareholders, causing the company and its stock to under-perform. The Class B shareholders can try to force a vote of all shareholders to get rid of the two different stock classes and their unequal voting rights. (To learn more, see: What can shareholders vote on?)

Many public companies use different share classes to delegate control. Ford Motor Company (F), for example, has just a small percentage of shares with super voting rights, but they give Henry Ford’s heirs control of 40% of the votes. In May, shareholders voted down a proposal to eliminate the dual-class stock structure, but the fact that a vote was called for at all indicates that many shareholders are unhappy with the system. (Learn more in The Two Sides of Dual-Class Shares.)

A controlled company, under stock exchange rules, is one in which an individual, group or other company holds more than 50% of the shares. These firms aren’t required to have an independent board of directors, an independent compensation committee or an independent nominating function for board members. Members of the audit, compensation and governance committees do not have to be independent in a controlled company. The dual-class stock structure facilitates the existence of controlled companies. 

You could also be a family-controlled firm. These may or may not meet the stock exchange definition of controlled company but, in them, founders or their families own a significant percentage of the company and can appoint the CEO. These types of companies make up nearly one-fifth of the Fortune Global 500, reports The Economist. Examples include Wal-Mart Stores, which is largely owned and run by founder Sam Walton’s children, and Facebook, which is controlled by founder Mark Zuckerberg and has provisions for control to transfer at his death to anyone he appoints.

Even though it isn’t required to, Facebook does have a majority of independent board members, and its compensation and governance committees are made up entirely of independent directors. Even controlled companies can choose to loosen the reins a bit to pacify shareholders.

You can’t keep control a secret, though: You must disclose it in your publicly filed reports. Shareholders have a right to know what they’re getting into, and some see added risk to investing in controlled companies because controlled firms have been shown to under-perform compared with non-controlled firms, and they’re viewed as less accountable to the public. However, controlled companies are still subject to independent audits and most other requirements of being publicly traded. As of 2012, there were 114 controlled companies in the S&P 1500 Composite, including LinkedIn, Zynga, Groupon and Facebook. 

When Chinese ecommerce company Alibaba went public in September 2014, its unusual corporate structure was big news. Instead of using two share classes to let its owners retain control, it would have 27 partners who would nominate the board members; two other companies that were the company’s biggest shareholders, Yahoo and SoftBank, would be required to approve the nominations. The partners would effectively control the board and limit outside shareholders’ input. Like controlled companies, foreign private issuers and limited partnerships are exempt from independent board requirements. 

Today, the Alibaba Partnership has 30 members, and that number will continue to change when new partners are elected and existing partners retire or leave the company. Partners are restricted in their ability to sell their shares, and outside shareholders remain limited in their ability to nominate or elect directors or to influence corporate decision-making. Cofounders executive chairman Jack Ma and executive vice chairman Joe Tsai retain significant control over the company through this structure.

The company’s articles of association also limit the ability of third parties to gain control of the company through provisions such as staggered terms for board members so they cannot all be replaced at the same time. (Despite the well-known potential for conflicts of interest between the Alibaba Partnership and general shareholders, the company had the biggest IPO in history, but its stock price has declined significantly since then. (Learn more in What Is Alibaba? and Understanding Alibaba’s Business Model.)

You don’t have to use different classes of stock with different voting rights or be a controlled company to stay in charge of your firm. Management and board members can own less than 50% of shares but still be in control as long as outside entities don’t own a large percentage of shares. The upside of this strategy is that it may be more palatable to outside shareholders, who appreciate having shares with equal voting rights to what insiders have. The downside is that you can’t control whom outsiders sell their shares to, so a takeover is always a possibility. This strategy isn’t as strong as the others for retaining control of your company.

Taking your company public means losing much of the freedom you had as a private company. Not only do you have to comply with numerous regulations, you also have to keep shareholders happy. When you accept the public’s money, you have to be accountable to them. But that doesn’t mean you have to let them call all the shots. You’ve been instrumental in getting the company to where it is today, and you deserve to stay in control as long as you continue to deliver results.