Posted by David Berger (WSGR), Daniel Gallagher (Robinhood Markets), and Steven Davidoff Solomon (University of California), on Saturday, August 8, 2026
The corporate governance landscape is grappling with a curious anachronism: a prohibition on midstream recapitalizations, a rule originating from the leveraged-buyout frenzy of the 1980s, continues to impede dual-class companies from adjusting their capital structures, even when such adjustments demonstrably benefit shareholders. This relic, known as the exchange ban on dual-class recapitalizations, is now casting a shadow over companies seeking to extend sunset provisions for their dual-class stock structures. Recent actions by Nasdaq suggest a stricter interpretation of this rule, potentially impacting numerous companies and raising questions about the adaptability of listing standards to contemporary business needs.
The Genesis of the Voting Rights Rule: A Response to 1980s Hostile Takeovers
The 1980s were a turbulent era for corporate America, characterized by a surge in hostile takeovers and aggressive corporate raiders. Figures like Carl Icahn, Victor Posner, and the Belzberg brothers frequently made headlines, instilling fear in corporate boardrooms. In response, companies employed a variety of defensive tactics, one of the most controversial being the "midstream recapitalization." These maneuvers typically involved restructuring a company’s stock by issuing high-vote or non-voting shares, or exchanging existing shares on differential terms. The primary objective was to shift voting power away from the public float and consolidate it with management or founders, thereby thwarting hostile takeover attempts. Infamous cases, such as the 1987 Harcourt Brace Jovanovich recapitalization and the 1985 Multimedia recapitalization, left minority shareholders with unenviable choices: either accept coercive terms in a hostile deal or be left holding thinly traded, low-voting stock.
The U.S. Securities and Exchange Commission (SEC) responded to this perceived crisis in 1988 by adopting Rule 19c-4 under the Investment Company Act. This rule aimed to prevent listed companies from issuing stock that would "disenfranchise" existing shareholders by diminishing their proportional voting power midstream. The SEC explicitly justified the rule as an indirect enforcement of its long-standing preference for the "one-share, one-vote" governance model. This initiative was part of a broader campaign by the SEC against dual-class stock structures that were being adopted as takeover defenses after initial public offerings (IPOs).
Judicial Rejection and Exchange Adoption: A New Framework Emerges
The SEC’s Rule 19c-4 faced a significant legal challenge. In 1990, the U.S. Court of Appeals for the D.C. Circuit struck down the rule in Business Roundtable v. SEC, ruling that the SEC had exceeded its statutory authority. This judicial decision created a perceived vacuum in the regulation of corporate voting rights.
In response to the court’s ruling and to mitigate the risk of a "race to the bottom" among listing venues, stock exchanges—including the New York Stock Exchange (NYSE), the American Stock Exchange (Amex, now NYSE American), and later the Nasdaq Stock Market—swiftly adopted their own listing rules. These "Voting Rights Rules" effectively prohibited "disenfranchising" midstream recapitalizations. However, they crucially included an exception, grandfathering dual-class structures that were established at or before the company’s IPO. This "IPO exception" allowed companies that went public with differential voting rights to maintain them, while preventing companies that initially adopted a single-class structure from later introducing such arrangements.
The consequence of this regulatory framework has been a significant restriction on corporate flexibility. Companies like Google (now Alphabet) and Snap, which went public with dual-class stock or even non-voting shares, are permitted to do so. However, a company that began with a single-vote structure and later identified a legitimate business rationale for adopting differential voting rights—such as attracting a strategic investor, facilitating an Up-C umbrella partnership structure, or other strategic objectives—has been categorically blocked from doing so for over three decades.
Dual-Class Structures and Shareholder Value: Empirical Evidence
Recent academic research has consistently indicated that companies with dual and multi-class share structures, on average, have outperformed companies with single-class shares, both in the short and long term. These findings suggest that the benefits conferred by dual-class structures can translate into tangible value for shareholders. The ability to maintain founder control and a long-term strategic vision, often facilitated by these structures, has been linked to enhanced corporate performance and stability.
Nasdaq’s Evolving Stance: A Shift in Interpretation
Historically, Nasdaq appeared to adopt a more permissive stance regarding extensions of dual-class structures. For instance, in 2020, The Trade Desk, Inc. (Nasdaq: TTD) modified its existing triggers for the elimination of its dual-class structure without objection from Nasdaq. Similarly, numerous Nasdaq-listed companies have created or sought to create non-voting stock to preserve the control of significant stockholders and prevent the erosion of their influence. Notable examples include Alphabet (Google), Meta Platforms (formerly Facebook), Zillow, and IAC.
This precedent seemed to be reaffirmed in the fall of 2025 when The Trade Desk decided to amend its charter to extend its dual-class structure. Concurrently, the company amended its bylaws to empower the lead independent director to call special meetings of independent directors and committed to holding annual "Say-on-Pay" votes. These actions were approved by the company’s shareholders in September 2025.
Shortly thereafter, in October 2025, Seer, Inc. (Nasdaq: SEER) proposed a five-year extension of its time-based sunset provision for its dual-class structure. The company’s board also committed to appointing an independent, non-employee director as board chair and to hold annual Say-on-Pay votes. Like The Trade Desk, Seer undertook this action based on Nasdaq’s apparent prior interpretation that such extensions did not violate the Voting Rights Rule.
However, in a departure from this historical precedent, Nasdaq informed both companies that it viewed their efforts to extend their dual-class structures as potential violations of the Voting Rights Rule. In response to Nasdaq’s concerns, Seer ultimately withdrew its proposed amendment. When The Trade Desk proceeded with its amendment, it received a letter of reprimand from Nasdaq, which determined that the company had violated the Voting Rights Rule. Notwithstanding the reprimand, Nasdaq permitted The Trade Desk to maintain the extended dual-class structure.
Re-evaluating the Rule’s Purpose and Text: An Argument for Flexibility
The authors, David J. Berger (Wilson Sonsini Goodrich & Rosati), Daniel Gallagher (Robinhood Markets), and Steven Davidoff Solomon (University of California, Berkeley School of Law), argue that Nasdaq’s position, particularly as it pertains to barring dual-class sunset extensions, is incongruous with both the purpose and the text of the Voting Rights Rule.
Alignment with the Rule’s Purpose
They contend that extending a dual-class sunset does not contravene the core objective of the Voting Rights Rule, which is to protect shareholders and enhance shareholder wealth. Instead, such extensions, they argue, align with this goal. A dual-class sunset extension does not diminish existing shareholder governance rights or voting power, nor is it typically enacted to the economic detriment of shareholders. On the contrary, by preserving a capital structure that has demonstrably created value for the company, a dual-class extension can be seen as enhancing, rather than restricting, the governance rights of existing public shareholders. It allows for the continuation of a governance framework that has proven effective in delivering shareholder returns.
Compliance with the Rule’s Text
Furthermore, the authors assert that dual-class extensions comply with the letter of the Voting Rights Rule as currently implemented by both Nasdaq and the NYSE. The rule generally prohibits the voting rights of existing shareholders from being "disparately reduced or restricted through any corporate action or issuance." The rule provides specific examples of such prohibited actions, including "the adoption of time-phased voting plans, the adoption of capped voting rights plans, the issuance of super-voting stock, or the issuance of stock with voting rights less than the per share voting rights of the existing common stock through an exchange offer."
A dual-class extension, the authors argue, does not involve any of these enumerated actions. Crucially, it does not contemplate any changes to the actual voting rights of stockholders or the mechanics by which they exercise their voting power. The existing shares retain their current voting rights, and the method of voting remains unchanged. The "extension" merely defers the expiration of a pre-existing structure.
Broader Implications for U.S. Corporations and Competitiveness
Nasdaq’s current stance presents a significant impediment for dual-class companies seeking to maintain their established corporate governance arrangements. Approximately 10% of U.S. companies that have completed IPOs over the past decade have adopted multi-class structures. This figure is even higher for technology companies, with as many as 50% of technology IPOs in recent years incorporating such structures. Many of these companies have time-based sunsets on their dual-class provisions, which are slated to expire in the coming years. Consequently, directors and shareholders of these companies may determine that maintaining their dual-class structure is in the best interests of the corporation. This decision, the authors argue, should be permitted under the corporate law of their state of incorporation.
This market-based approach to interpreting listing rules is increasingly aligned with developments in state corporate law. Delaware, for instance, has streamlined its rules for approving transactions, including amendments to capital structures. In an effort to attract and retain corporate franchises, several states, including Nevada and Texas, have enacted significant statutory amendments designed to facilitate transaction planning, enhance corporate flexibility, and provide greater deference to the decisions of boards of directors.
International Competitiveness and Regulatory Deference
The current situation also raises concerns about the competitiveness of U.S. corporations. Ironically, both Nasdaq and NYSE permit non-U.S. companies to adhere to their home country practices regarding voting rights, provided these practices are not prohibited by their home country’s law. This exemption allows foreign corporations to operate under more flexible corporate governance standards than U.S. corporations. This disparity places U.S. companies at a competitive disadvantage.
Moreover, this approach appears to contradict the SEC’s stated policy objectives over the past year, which have focused on reducing regulatory burdens on U.S. companies, easing certain corporate governance policies, and deferring to state law for corporate governance matters. SEC Chairman Atkins, speaking at a Texas Stock Exchange event in April 2026, emphasized that the SEC’s role is to regulate disclosure, not to act as a merit regulator, and that states, rather than the SEC, should govern corporate governance. Given that the exchanges have explicitly stated that their Voting Rights Rules are "based upon, but more flexible than," former SEC Rule 19c-4, the authors believe these rules should not be interpreted in a manner inconsistent with the approaches adopted by the SEC and leading states in corporate law development. If a proposed action, such as a dual-class extension, is consistent with state corporate law, the exchanges should interpret their Voting Rights Rules flexibly to accommodate the evolving needs of U.S. companies.
A Call for Repeal: Embracing State Fiduciary Duty Standards
Ultimately, the debate extends beyond dual-class sunset extensions; it touches upon the fundamental principles of corporate governance regulation. The Voting Rights Rules were originally conceived as a precautionary measure against economically inferior transactions and potential abuses of minority shareholders. However, the legal and economic environment in which these rules were created has changed dramatically.
In today’s landscape, the need for such broad, categorical bans is diminished. Widespread shareholder litigation to enforce fiduciary duties, the increasing assertiveness of institutional investors, and more efficient market pricing provide robust mechanisms for accountability and quick consequences for corporate misdeeds.
The authors advocate for the repeal of the exchange Voting Rights Rules. They propose that the analysis of such transactions should instead be governed by state corporate law. States like Delaware have developed processes for considering these types of transactions through independent mechanisms, which may include votes by disinterested shareholders or disinterested directors. This state-centric approach, they argue, provides the appropriate standard for enabling U.S. companies to engage in value-enhancing transactions.
Repealing the exchange voting rights rules would not usher in an era of 1980s-style coercion. Instead, it would shift the regulatory guardrail from a crude, categorical prohibition to a principled, transaction-specific inquiry under state fiduciary law—precisely where such matters should reside. This would also empower companies to implement and preserve value-creating corporate structures, such as dual-class extensions. The forty-year experiment with the midstream recapitalization ban serves as a cautionary lesson in regulatory humility. Well-intentioned, mandatory rules enacted during perceived crises often outlive their utility and become impediments to adaptation in new circumstances, as is the case with dual-class sunset extensions. The 1980s, with their distinct economic and regulatory climate, are a chapter in history. It is time for listing rules to reflect the realities of the 21st century.
