Cannabis Companies, Public Markets and Supervoting Shares

Recently, the concept of “supervoting shares” in U.S. public companies has surfaced again in the news. Supervoting shares are created where founders wish to dilute themselves in an economic sense (in exchange for transformative capital), but retain outsized control in management and governance. This is different than your typical “class A and B shares” setup, where the former class of stock features robust voting rights, and the latter claims marginal or no voting rights. In a supervoting universe, a select and very small class of individuals can throttle all other decisionmakers.

Over the years, we have structured many cannabis companies where governance rights are out of sync with ownership (both LLCs and corps). Some of these companies have expansive roles for directors and officers, some have strong and weak equities classes, and some have a combination of the two. State laws regulating ownership and control items always must be taken into account, but the bottom line is that voting rights and economic rights are two very different things in cannabis businesses, just like anywhere else. And there are a million ways to dice it up.

From a public markets perspective, the concern with supervoting shares is that owners are inappropriately insulated from market pressures. For example, when Facebook users were outraged to learn about that company’s data malfeasance, Mark Zuckerberg never faced any real danger of ouster: his controlling position forecloses that possibility. From an investor advocacy perspective, the concern with supervoting shares is similar: owners are inappropriately insulated from stakeholder influence. In the case of Uber, Travis Kalanick wielded supervoting shares to hang on to board seats during the company’s 2017 public relations crisis, despite the fact that many investors wanted him gone. Ultimately, Lyft and other competitors benefited.

People who launch companies tend to choose the supervoting structure for the simple reason of job security. This is not necessarily a myopic or self-seeking view: without adequate security, a CEO may be far less likely to invest in crucial long-term planning– especially initiatives that hold great promise at the expense of near- and mid-term losses. Said another way: if a CEO is lurching ahead from quarter to quarter to meet near-term performance metrics, long-term company prospects may suffer and innovative ideas may never see the light of day.

In the next decade, we are going to see a steady stream of U.S. cannabis companies go public. Assuming state-level ownership and control restrictions become immaterial, it will be interesting to see if those company founders try to follow Silicon Valley’s lead, with CEOs retaining outsized voting power and board control through supervoting shares. If and when the capital lines up behind those companies, it seems like a likely outcome.