Samuel Brunson (Loyola-Chicago) has published a new piece on SSRN, “Shareholder Democracy, Dual-Class Equity Structures, and Pass-Through Taxation.” Here’s the abstract:

For more than a century, some corporate founders have wanted to maintain control of their corporations, even after the corporation enters the public market. Many have consolidated around one idea: providing a separate class of common stock with multiple votes per share to the insiders who want to maintain control. These supervoting shares allow insiders to maintain control at a lower cost than acquiring a majority of the outstanding common stock. The control supervoting shares provide to insiders allows them to follow their idiosyncratic vision, even where that delays the corporation’s profitability. It also allows passive investors who do not care about control to invest solely in the corporation’s revenue.

These benefits come at a cost, though. Supervoting shares effectively eliminate shareholder democracy, including the ability of shareholders to police management and hold it responsible. The benefits flow primarily to the insiders who hold supervoting shares, while the costs are spread broadly, not only on shareholders but, sometimes, on society at large. As a result, insiders have an incentive to overuse supervoting shares.

This overuse has become significantly more salient since Google went public in 2004. Today, a significant portion of technology companies include a class of supervoting common shares in their public offerings.

In this Article, I propose that the federal income tax treat classes of supervoting shares as quasi-pass-through interests. That is, rather than wait until a corporation distributes dividends, holders of supervoting shares should include their pro rata share of net corporate income in their gross income in the year the corporation earns that income, irrespective of whether it distributes that income or not. By requiring shareholders of supervoting shares to include their pro rata share of corporate income in their gross income every year, the tax law would increase the net present cost of owning such shares and force would-be supervoting shareholders to evaluate whether having an outsized voting interest in the corporation is worth the cost. I also look at whether this pass-through treatment meets the possibly constitutional realization requirement and determine that, under recent Supreme Court precedent, it does.