FIGURE 2.2 Cross-Border Dual-listed Companies

      This figure provides a snapshot of 16 (5 current and 11 former) DLCs. While the 1990s experienced a rise in DLC formations, this complicated stock structure has since seemingly fallen out of favor alongside the trend toward “unification” or “simplification” of the corporate structure. Dates shown are the beginning and end dates for the inception and dissolution (if applicable) of the DLC structure.

Unilever Example To contextualize the properties of DLCs, consider Unilever, a transnational consumer goods company, which is the combination of Unilever PLC and Unilever NV, a U.K.- and Dutch-domiciled company, respectively. Unilever PLC's primary listing is on the LSE and Unilever NV's is on the Amsterdam Stock Exchange. Unilever is organized under the separate entities structure: The PLC and NV companies are legally distinct entities, which each fully own their respective operations. Equalization agreements between the two enable them to operate as a single economic entity. According to the Unilever Group (2019), “To avoid punitive taxation levies and the disruption to the business that would result from dividing integrated national companies into their component parts, both companies pooled their interests through a business merger as opposed to a legal merger.” This structure enables non-Dutch investors to invest in Unilever shares without being penalized by Dutch withholding taxes. For example, a British investor is subject to a 15 percent withholding tax on dividends paid to NV shares, but not on dividends paid to PLC shares. Recall that gross dividends may be equalized (adjusted to foreign exchange rate movements), but a British investor in NV shares is disadvantaged relative to a Dutch investor in those same shares on an after-tax basis. The dual-listed structure of Unilever enables a British investor in PLC shares to receive dividends while avoiding the Dutch dividend withholding tax.

      Tracking Stock

      A tracking stock is a special type of equity in which a multidivisional corporation issues shares whose value is designed to reflect a specific subsidiary or business unit of the company, rather than the entire enterprise. Other names for these securities are “targeted stock,” “lettered stock,” and “alphabet stock.” A tracking stock's value is intended to mirror the economic results of the subsidiary it targets. Still, tracking stock shareholders are shareholders in the parent corporation rather than in the tracked subsidiary. Therefore, shareholders do not have “direct ownership of the subsidiary to which their cash flows are tied” (Chemmanur and Paeglis 2005, p. 102). Corporations with tracking stocks report financials of the stand-alone business units for the tracking stock groups, reducing information asymmetry between insiders and the market. Although tracking stocks embody separate, tradeable assets, the parent corporation retains legal ownership and control of all assets and cash flows from which the tracking stock purportedly derives its value, suggesting that the intention to reflect subsidiary performance may not indicate economic reality. Tracking stock groups do not have a separate board of directors. Rather, the parent's board of directors sets capital allocation policies for the overall corporation in the interest of the parent, which may conflict with tracking stock group shareholders (Haas 1996).

      Numerous corporate governance issues arise from the absence of legal ownership of assets. For companies with multiple tracking stocks in issue, the lack of a direct claim on assets has an interesting implication. By virtue of the parent's fundamental legal control, the value and price of one tracking stock group within a company may influence other tracking stock groups, despite theoretical independence. The returns for multiple classes of a single company's tracking stock may be interdependent, given the parent's discretion of cash flow allocation (Haas 1999).

      Additionally, though the assets and liabilities are attributed to individual groups, all are ultimately owned and incurred by a consolidated entity. The obligations of any tracking stock group are thus shared by each of the other groups (Haas 1996). Although the earnings attributable to the tracking stock group should determine the dividends available to the group, the board of directors sets dividend policy and may determine to divert funds away from the profitable group toward less profitable groups in the best interest of the corporation as a whole (Logue, Seward, and Walsh 1996).

In relation to traditional stocks and bonds, tracking stocks are a relatively new development, first designed in 1984. Murphy (1989) offers a comprehensive analysis of General Motors Company's (GM) inaugural offering. This offering sought to provide investors with choice, aligned managerial incentives, and information via the separately traded security, while GM retained legal ownership of a newly acquired subsidiary's assets, and GM's board of directors made capital allocation decisions. The issuance of tracking stock is a form of corporate restructuring like a spin-off or equity carve-out in which shareholders in a tracking stock group do not have a legal claim on the underlying subsidiary assets it tracks (Danielova 2008). Tracking stocks also provide investors with an increased choice: Rather than investing in the conglomerate, investors may choose to invest in a corporation's tracking stock for a specific subsidiary, often faster-growing than the parent organization (Murphy 1989). Given that diversified firms tend to carry a discount to their theoretical value, tracking stocks are a corporate restructuring tool that attempts to unlock value by creating a pseudo pure-play company, without relinquishing control (Billett and Mauer 2000). Because of separate financial reporting for tracking stock groups, management may be compelled to improve operating decisions for the division more than would otherwise occur (Harper and Madura 2002).

DUAL-CLASS COMMON EQUITY

      Dual-class structures separate economic ownership from control via the difference in voting rights for each share class. This wedge between the degree of economic interest and actual voting power to affect corporate changes has been subject to investor debate. Economic ownership and voting power are intrinsically linked for a single class of equity: one share equals one vote. However, dual-class equity structures give preferential voting rights to one class of stock. Holders of these super-voting classes then retain outsized influence per unit of economic ownership. With a dual-class structure, influence and control instead become independent from an economic interest in the company.

      In