Securities Law Blog

Tracking Stocks – Relic or Retro?

Tracking stocks, a blast from the past, appear to be making a comeback.

Tracking stocks, which were a popular innovation during the 1980s and the Internet boom of the 1990s, appeared to be extinct. However, a few recent transactions and restructurings that included tracking stock indicate that tracking stocks may still remain a useful tool for investors.

A tracking stock, also known as targeted stock or designer stock, is a type of common stock that is typically issued by a parent company to track the performance of a particular division or subsidiary. Often, tracking stock comes into existence in connection with an acquisition or a spin-off.

Unlike the common stock of the parent company, tracking stock usually has limited or no voting rights, does not generally pay dividends and does not provide a legal claim on the assets of the company or the division. When issuing tracking stock, all revenues and expenses of the applicable division are separated from the parent company’s financial statements and bound to the tracking stock.  Management of the parent company retains control over the tracked operating segment or business. The SEC’s registration and reporting requirements for tracking stocks are similar to the requirements for any company issuing a new class of common stock. A tracking stock must be registered under the Securities Act of 1933 if it is publicly offered unless an exemption applies. The reporting requirements under the Securities Exchange Act of 1934 extend to the company that offers the tracking stock to the public. Since the company is usually already required to file reports with the SEC, the impact on the company is generally limited to also including financial statements about the tracking stock in its reports.

Traditionally, tracking stocks were used to separate business divisions with high growth potential from the earnings history of companies that were otherwise low profit businesses with slower growth, resulting in a new market for investors seeking high growth opportunities. During the tech boom of the 1990s, tracking stocks provided a means for companies such as AT&T and Walt Disney Co., who believed that their Internet businesses were undervalued to increase visibility of these units. When the tech bubble burst, tracking stocks, with a few exceptions, generally disappeared.

Tracking stocks returned to the news in October 2015 when Dell Inc. reached an agreement to acquire EMC Corp. in a blockbuster acquisition for cash and shares of a newly created tracking stock issued by Dell’s parent company tied to EMC’s stake in software maker VMware Inc. Dell’s use of this tracking stock will enable EMC’s stockholders to retain an interest in VMware while assisting Dell in financing the deal and allowing Dell to maintain control over VMware in a way that would not have been possible if they were required to sell the VMware shares outright. In November 2015, Liberty Media Corporation announced plans to pursue a reclassification of its common stock into three new tracking stock groups, the Liberty Braves Group, the Liberty Media Group and the Liberty Sirius Group, which recapitalization was completed in April 2016. Liberty pursued this recapitalization, in part, because it believed the market was undervaluing its total assets.

It remains to be seen whether these most recent tracking stock transactions will be successful and whether they will open the door for more tracking stock issuances. Under the right circumstances, tracking stocks may very well be a viable alternative in structuring consideration for an acquisition or to release value without having to incur a spin-off.