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CALIFORNIA CORPORATE & SECURITIES LAW

Class A Is Class A and Class B Is Class B And Shall Ever The Twain Meet?

In addition to directors and officers, Section 16 of the Securities Exchange Act of 1934 applies to every person who is “directly or indirectly the beneficial owner of more than 10 percent of any class of any equity security (other than an exempted security) which is registered pursuant to Section 12” of the Act.  This, of course, begs the question of what is a “class of any equity security”?  Specifically, how should two classes of stock be treated when calculating percentage ownership?  Should they be combined so that the ownership percentage must be calculated based on the combined total number of shares or is it sufficient that a person own 10% or more of at least one of the classes.

U.S. District Court Judge Phyllis J. Hamilton recently tackled these questions in Greenfield v. Criterion Capital Mgmt., LLC, 2016 U.S. Dist. LEXIS 86907 (July 5, 2016).  In that case the issuer allegedly had two classes of common stock outstanding.  The issuer’s Class A shares were low voting shares, but registered under Section 12.  The Class B shares had greater voting rights but were unregistered.  The defendants contended that the Class A and Class B shares should be considered together in determining the ownership percentage.  Judge Hamilton rejected that position, ruling:

The court interprets § 16(b) as requiring that the “beneficial owner” be the owner of 10 percent or more of a single class of the issuer’s stock. The court finds further that the Class A stock and the Class B stock are two different classes of stock. Thus, the allegations are sufficient for pleading purposes.

Notably, the Exchange Act does not define “class” for purposes of Section 16 (the term is defined only for purposes of Section 12(g) in Section 12(g)(5)(A)).  In the context of Section 16(a) (which governs the obligation to report changes in beneficial ownership), the Securities and Exchange Commission staff has seemingly taken the same view, agreeing that two classes of shares with differential voting rights could be treated as distinct classes even though both classes were registered under Section 12.  Turner Broadcasting, Inc., 1990 SEC No-Act. LEXIS 200 (Feb. 6, 1990).

A note on “twain”

Although widely used by William Shakespeare, the word “twain” now has somewhat archaic sensibility.  It is derived from the Anglo-Saxon, twegen, meaning two (in general, Shakespeare favored Anglo-Saxon over Latin derived words).  It does have its uses as “two” has two heterographic homophones – to and too.  Thus, “twain” can be a useful substitute for “two” when a clear distinction between homophones is desired as illustrated from the following line from Act IV, Scene 6 of King Lear: “Thou hast one daughter/Who redeems nature from the general curse/Which twain have brought her to.”

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