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Ackman’s European offering to use dual share structure

Bill Ackman
Kerima Greene | CNBC

Hedge fund activist Bill Ackman has never been shy about using his shareholder rights to demand change from company management teams. But as CEO of his own soon-to-be public company, he'll use a dual share-class structure that has traditionally been considered unfriendly to investors—albeit with a twist.

As part of the planned offering of Ackman's foreign offshoot, Pershing Square Holdings, on the Euronext exchange in Amsterdam in October, the company has created two sets of shares, say people familiar with the company's prospectus: One that will be sold to the public in Europe, and a second that will be controlled by a nonprofit organization in Canada.

The nonprofit's leaders, who will oversee a little more than 50 percent of the voting rights attached to the Pershing Square Holdings stock overall, will be expected to side with shareholder interests, say these people.

Dual-class share structures, which often bring with them enhanced voting power for management and diminished influence for average investors, have long come under fire by corporate governance experts.

Although standard fare at certain companies, including news organizations—where editorial independence is thought to be more important than profits—dual-class share structures run the risk of entrenching ineffective management teams, to the dismay of public investors.

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In the case of Pershing Square Holdings, the dual share class was created to ensure that a majority of the company's voting rights were located outside of the U.S.—a requirement if the company is to continue charging its usual management fees, said the people familiar with the matter.

The entity that controls the majority of the Pershing Square Holdings shares is a Canadian breast-cancer charity unaffiliated with the investment firm or with Ackman, these people said.

Third Point Offshore, an offshoot of the New York-based hedge fund company Third Point LLC that went public in 2007 on the London Stock Exchange, adopted a similar structure at that time, putting 40 percent of its voting rights into an entity called VoteCo that was based on the island of Guernsey.

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"They're doing something a bit creative, but it's still insulating him from the accountability of the market," said Nell Minow, a longtime corporate governance expert, of Ackman's proposed structure for Pershing Square Holdings. "There are plenty of less intrusive steps that he could take to protect himself from unscrupulous investors."

Minow raised concerns about the notion of a nonprofit organization, however independent, effectively controlling a company like Pershing Square Holdings. "In the past," she said, "it's not been a great thing for nonprofits to have control of for-profit entities. They have different risk tolerance and different accountability."

As part of Monday morning's announcement that it would launch what was expected to be a $5 billion offering on Oct. 13, Pershing Square Holdings disclosed having already lined up early, or "cornerstone," investors who are buying $1.5 billion worth of shares.

Nonetheless, other potential shareholders expressed mixed feelings about the idea of investing alongside Ackman. They noted that despite an impressive performance of more than 30 percent returns so far for 2014—a figure that leaves nearly all the company's competitors behind—the hedge fund manager had also presided over big investment failures like J.C. Penney, which created nearly $500 million in losses for Pershing Square, and expensive gambles like a bearish position on Herbalife, which has gone in and out of profitability for Pershing Square since its inception in the spring of 2012, in the recent past.

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During the course of multiple months, Pershing Square shorted, or bet against, Herbalife at an average price of $48, said someone familiar with the prospectus. So with the stock trading at about $45 as of Monday, the hedge fund's position is in the black.

—By CNBC's Kate Kelly