For dual-class companies, which offer two or more classes of
stock with differential voting rights, stock dividends have become a potent
weapon for corporate boards to reallocate voting control without shareholder
intervention. For example, the board of CBS Corporation proposed to
distribute voting stock to all shareholders to drastically dilute the controlling
shareholders' voting power. In contrast, the Google board issued new nonvoting
stock to all shareholders to perpetuate the controlling shareholders' lock
on control. In both cases, the proportional distribution of the identical stock
seemingly treats all shareholders equally, but it has a starkly unequal impact
on each class's voting power. Are such governance changes by stock dividends
within board discretion?
The level of board discretion in making stock dividends is primarily governed
by each company's corporate charter. This Article presents the original, hand-collected data of charter provisions on stock dividends from 237 dual-class
companies. The analysis of the charter provisions shows diverse approaches
to stock dividends across companies, and it is unclear how much contractual
freedom on stock dividends should be allowed. At the same time, courts have
long treated dividends as subject to boards' business judgment and declined
to second-guess their substantive merits if they are allocated pro rata. Given
the potential impact on corporate governance, the need for a distinctive
treatment of stock dividends is long overdue
