The 80s called—they want their shoulder pads, synth-pop, moon-walks, and, apparently, their blanket prohibition on midstream recapitalizations back. For more than three decades, a doctrinal relic from the leveraged-buyout fever of that era has quietly blocked shareholders from rearranging their capital structure midstream, even when those deals are demonstrably fair and value-maximizing. Though a relic, the exchange rule banning dual-class recapitalizations is still biting. Nasdaq has recently taken the position that the extension of a sunset on dual-class stock implicates (and possibly violates) the rule. While the NYSE has not commented publicly on Nasdaq’s position, its rule is largely identical to Nasdaq’s rule and presumably would be interpreted in the same way. The consequence is that this 80s by-gone now conceivably stands in the way of a host of dual-class companies seeking to extend sunset provisions to the benefit of their shareholders.
A Relic of the LBO Wars: The Genesis of the Voting Rights Rule
In the tumultuous 1980s, hostile takeovers were a daily headline, with corporate raiders like Carl Icahn, Victor Posner, and the Belzberg brothers instilling fear in corporate boardrooms. A particularly controversial defensive tactic employed during this era was the "midstream recapitalization." This maneuver typically involved a controlling shareholder or incumbent management proposing a restructuring that often involved issuing high-vote or non-voting stock, or exchanging existing shares on differential terms. The primary objective was to dramatically shift voting power away from the public float and toward management or founders, thereby thwarting hostile takeover bids. Infamous examples, such as the 1987 Harcourt Brace Jovanovich recapitalization and the 1985 Multimedia recapitalization, left minority shareholders with a stark choice: either tender their shares into a coercive, hostile deal or be left holding illiquid, low-vote stock.
Responding to this perceived crisis and a broader trend of companies adopting dual-class stock structures as takeover defenses after their initial public offerings (IPOs), the U.S. Securities and Exchange Commission (SEC) adopted Rule 19c-4 in 1988. This rule, enacted under the Investment Company Act framework, aimed to prohibit listed companies from issuing stock that would "disenfranchise" existing shareholders by reducing their proportional voting power midstream. The SEC explicitly justified the rule as a back-door enforcement of its long-standing preference for "one-share, one-vote" governance.
Judicial Reversal and Exchange Rule Adoption
The SEC’s authority to implement Rule 19c-4 was challenged, and in 1990, the U.S. Court of Appeals for the District of Columbia Circuit struck down the rule in Business Roundtable v. SEC, holding that the SEC had exceeded its statutory authority. However, the major stock exchanges—the New York Stock Exchange (NYSE), the American Stock Exchange (Amex, now NYSE American), and later the Nasdaq Stock Market—swiftly moved to fill the perceived regulatory vacuum. Fearing both political backlash and a "race to the bottom" among listing venues seeking to attract companies, they each adopted their own listing rules, collectively known as the "Voting Rights Rule." These rules effectively banned "disenfranchising" midstream recapitalizations while grandfathering dual-class structures that were already in place at the time of a company’s IPO. This grandfather clause, often referred to as the "IPO exception," created a distinct divide between companies that went public with differential voting rights and those that did not.
The practical effect of these exchange rules has been significant. A company like Google or Snap could go public with a dual-class stock structure or even non-voting shares. However, a single-vote company that later identified a legitimate business reason to adopt differential voting rights—whether to attract a strategic investor, facilitate an Up-C umbrella partnership structure, or for other strategic purposes—has been categorically blocked from doing so for over three and a half decades.
The Emerging Challenge: Dual-Class Companies and Sunset Extensions
The current controversy centers on dual-class companies that are seeking to extend their "sunsets." A sunset provision in a dual-class structure is a predetermined mechanism, often time-based or triggered by specific events, that gradually phases out the differential voting rights, typically leading to a single-class structure. Recent research has consistently indicated that companies with dual and multi-class shares, on average, have outperformed companies with single-class shares across both short and long-term horizons, suggesting that these structures can indeed provide value to shareholders when properly managed.
Historically, Nasdaq appeared to adopt a more flexible interpretation of its Voting Rights Rule. For instance, in 2020, The Trade Desk, Inc. (Nasdaq: TTD) modified the triggers for the elimination of its dual-class structure without any objection from Nasdaq. Furthermore, numerous Nasdaq-listed companies, including prominent technology firms like Google (now Alphabet), Meta (formerly Facebook), Zillow, and IAC, have created or sought to create non-voting stock. These actions were often framed as a means to extend the control of significant stockholders and prevent the erosion of control that a sunset provision might otherwise precipitate.
A Shift in Interpretation: The Trade Desk and Seer Inc. Cases
The landscape began to shift in the fall of 2025. The Trade Desk decided to amend its charter to extend its dual-class structure. Concurrently, it amended its bylaws to grant its lead independent director the authority 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 extending its time-based sunset by five years. The 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 took this action relying on Nasdaq’s apparent prior view that these types of extensions did not violate the Voting Rights Rule.
However, in a departure from its historical precedent, Nasdaq informed both companies that it viewed their efforts to extend their dual-class structures as a potential violation of the Voting Rights Rule. In response to Nasdaq’s stance, Seer ultimately decided to withdraw its proposed amendment. The Trade Desk, choosing to proceed with its amendment, received a letter of reprimand from Nasdaq. The exchange determined that The Trade Desk had violated the Voting Rights Rule in connection with the completed extension, although Nasdaq permitted The Trade Desk to maintain the extended structure.
Analyzing Nasdaq’s Position: Purpose vs. Text of the Rule
The authors of the original article, David J. Berger, Daniel Gallagher, and Steven Davidoff Solomon, argue that Nasdaq’s position, to the extent it bars the extension of dual-class sunsets, is at odds with both the purpose and the text of the Voting Rights Rule. They contend that a dual-class extension does not violate the rule’s underlying purpose, which is to protect stockholders and enhance shareholder wealth. Instead, they argue that such extensions do not reduce stockholder governance rights or voting power, nor are they adopted to the economic detriment of stockholders. On the contrary, they believe a dual-class extension enhances the governance rights of existing public stockholders by preserving a capital structure that has demonstrably created value for the company.
Furthermore, the authors assert that a dual-class extension complies with the letter of the rule. Both Nasdaq and NYSE rules stipulate that the voting rights of existing stockholders of publicly traded corporations "cannot be disparately reduced or restricted through any corporate action or issuance." The rule provides examples of such 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." The authors maintain that a dual-class extension does not involve any of these enumerated actions and, crucially, does not contemplate any changes to the actual voting rights of stockholders or the manner in which they may vote their shares.
Broader Implications for Corporate Governance and Innovation
The Nasdaq position creates a significant roadblock for the corporate governance arrangements of dual-class companies seeking to preserve these structures. Approximately 10% of U.S. companies that completed IPOs in the last decade have featured a multi-class structure, with a significantly higher percentage among technology companies, reaching as high as 50% in recent years. Many of these companies have time-based sunsets that are set to expire in the coming years. The authors argue that directors and stockholders of these companies should be allowed to decide whether it is in the best interests of the corporation to maintain their dual-class structure, a decision that should be governed by the laws of their state of incorporation.
This market-based approach to interpreting listing rules aligns with recent developments in state corporate law. For example, Delaware has streamlined its rules for approving transactions, including amendments to capital structures. In an effort to attract corporate franchises, several states, including Nevada and Texas, have adopted significant statutory amendments designed to facilitate transaction planning, create greater flexibility for companies, and afford more deference to boards of directors.
International Flexibility vs. Domestic Constraints
Ironically, both Nasdaq and NYSE permit non-U.S. companies to adhere to their home country practices rather than the exchanges’ Voting Rights Rules, provided such policies are not prohibited by their home country’s law. This allowance for foreign corporations to adopt more flexible corporate governance standards than their U.S. counterparts places U.S. corporations at a competitive disadvantage. It also appears to contradict the SEC’s stated policy positions aimed at reducing regulatory burdens on U.S. companies and deferring to state law for corporate governance matters.
SEC Chairman Gary Gensler has repeatedly emphasized that the SEC is "focused on ensuring that states, and not the SEC, regulate matters of corporate governance" and that the agency "must stay in our lane as a disclosure agency and not be a merit regulator." Given that the exchanges have explicitly stated that the Voting Rights Rule is "based upon, but more flexible than," former SEC Rule 19c-4, the authors believe the rule should not be interpreted in a manner inconsistent with the approaches taken by the SEC and states leading corporate law development. If a proposed action, such as a dual-class extension, is consistent with state corporate law, the exchanges should interpret the Voting Rights Rule flexibly, accommodating the evolving needs of U.S. companies.
A Call for Repeal and State Law Governance
Ultimately, the issue extends beyond dual-class sunset extensions or dual-class stock itself. The Voting Rights Rule was adopted as a precautionary measure against economically inferior transactions and potential abuse of minority shareholders. However, these rules were formulated in a legal and economic environment vastly different from today’s. In the current landscape, the necessity for these rules has diminished due to substantial changes in the market and legal environment. The prevalence of shareholder litigation to enforce fiduciary duties, the assertiveness of institutional investors, and more efficient pricing mechanisms that quickly impose consequences for corporate misdeeds have all contributed to a more robust oversight environment.
The authors advocate for the repeal of the exchange Voting Rights Rules. They propose that the analysis of such transactions should instead be conducted under state corporate law. As states like Delaware have developed processes for considering these types of transactions through independent mechanisms, such as votes by disinterested shareholders or disinterested directors, state corporate law is deemed the appropriate standard for determining the ability of U.S. companies to enter into value-enhancing transactions.
Repealing the exchange voting rights rules would not, in their view, usher in a return to the coercive tactics of the 1980s. Instead, it would shift the regulatory guardrail from a broad, categorical ban to a principled, transaction-specific inquiry under state fiduciary law—where it rightly belongs. This change would also permit 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 tale about regulatory overreach. Well-intentioned mandatory rules, often enacted during perceived crises, can outlive their usefulness and become obstacles to adaptation in new circumstances, as is currently the case with dual-class extensions. As the authors wryly conclude, apologies to lovers of Madonna, but the 1980s are over, and it is time for listing rules to catch up with reality.
