Analyzing Share Issuance and Voting Rights Dynamics in Growth-Stage Biotechs: Navigating Governance and Dilution Risks

The biotech industry, long a bellwether for high-risk, high-reward innovation, now faces a critical juncture. Growth-stage companies are increasingly reliant on capital-raising strategies that prioritize short-term liquidity over long-term shareholder alignment, while governance structures—particularly dual-class voting systems—exacerbate tensions between control and accountability. The result is a landscape where dilution risks and governance asymmetries threaten to undermine value creation, even as firms pursue transformative therapies and technologies.

Consider the case of NovaBay Pharmaceuticals, where a $6 million investment by David E. Lazar in 2025 granted him control over 90% of the company’s common equity on a fully diluted basis through non-voting convertible preferred stock. This transaction allowed Lazar to nominate four directors and steer the company toward a reverse merger or acquisition, bypassing traditional IPO pathways [1]. Yet, the conversion of 120 million preferred shares into common equity could dilute existing shareholders by over 30%, raising questions about whether such governance control justifies the financial toll [1]. This dynamic contrasts sharply with Valneva SE, which employs proportional voting rights to distribute governance power more evenly, reducing the risk of entrenchment [3].

Dual-class structures, while prevalent in biotech, remain contentious. A 2024 Harvard Law School Forum analysis found that firms with such structures—like those in the Russell 3000—historically outperformed single-class peers in both short- and long-term performance, suggesting that concentrated control can insulate companies from short-term shareholder pressures [2]. However, this advantage is contingent on strong governance safeguards. Without them, dual-class systems risk enabling founder self-enrichment or inflexible decision-making, as seen in cases where lack of independent board oversight led to poor strategic choices [2].

The regulatory environment further complicates matters. The Trump administration’s proposed FDA reforms, including accelerated approval pathways and a focus on real-world evidence, have introduced uncertainty into drug development timelines and approval standards [5]. Meanwhile, European Union reforms in 2025, such as joint clinical evaluations for medicines, add another layer of complexity for global biotech firms [5]. These shifts force companies to balance regulatory compliance with capital-raising needs, often at the expense of shareholder dilution. For instance, Galmed Pharmaceuticals raised $7.5 million in 2025 through share offerings, resulting in a 35.5% dilution of shares—a move that triggered a 30% stock price drop as investors reacted to ownership erosion [3].

Investor behavior reflects growing skepticism toward governance structures that prioritize control over transparency. The Investor Coalition for Equal Votes (ICEV), managing $4 trillion in assets, has pushed for “sunset” provisions to phase out dual-class structures within seven years of an IPO [4]. Yet, market tolerance for such arrangements persists, particularly in biotech, where investors often trade governance risks for the potential of breakthrough innovations [4]. This tension is evident in Anbio Biotechnology, where Class B shareholders (CVC and Northwestern) hold 50% of voting rights each, enabling strategic decisions without minority input. A 2024 study found that dual-class biotech firms experience 15–20% higher volatility post-lock-up expiration compared to single-class peers, underscoring the fragility of such governance models [6].

For investors, the path forward requires a nuanced approach. Monitoring governance metrics—such as shareholder approval rates for major transactions, board expertise, and regulatory progress—is critical [3]. In NovaBay’s case, key catalysts like a Q4 2025 special dividend and a strategic acquisition will determine whether the company can transform into a value-creating platform [1]. Similarly, firms like ICON demonstrate the importance of shareholder votes in enabling or constraining corporate strategy, as seen in their 2021 approval of an ordinary share issuance tied to the PRA Health Sciences acquisition [2].

The biotech sector’s future hinges on its ability to reconcile governance flexibility with investor trust. While dual-class structures may offer strategic advantages in high-risk, long-horizon industries, they must be paired with robust accountability mechanisms. For investors, the challenge lies in balancing the allure of innovation with the realities of dilution and governance risk—a task that demands both vigilance and adaptability in an increasingly fragmented capital market.

Source:
[1] NovaBay's $6M Lazar Transaction and Strategic..., [https://www.ainvest.com/news/novabay-6m-lazar-transaction-strategic-turnaround-potential-deep-dive-capital-restructuring-shareholder-creation-distressed-biotech-plays-2508/]
[2] Re-Thinking The Hostility Towards Dual-Class Share Structures: When Dual-Class Shares Work Better, [https://corpgov.law.harvard.edu/2024/10/16/re-thinking-the-hostility-towards-dual-class-share-structures-when-dual-class-shares-work-better/]
[3] Corporate Governance in Biotech: The Double-Edged..., [https://www.ainvest.com/news/corporate-governance-biotech-double-edged-sword-voting-rights-strategic-direction-2508/]
[4] Voting on Voting Rights: How the World’s Largest Investors Sanction Companies with Unequal Voting Rights, [https://corpgov.law.harvard.edu/2025/01/22/voting-on-voting-rights-how-the-worlds-largest-investors-sanction-companies-with-unequal-voting-rights/]
[5] Trump Administration's 2025 Impacts: Pharma & Biotech, [https://www.dlrcgroup.com/trump-administrations-impacts-on-fda-regulations-5-key-changes-for-pharma-biotech-in-2025/]
[6] The Unlocking of Voting Control in Anbio Biotechnology, [https://www.ainvest.com/news/unlocking-voting-control-anbio-biotechnology-post-lock-opportunity-dual-class-ipo-2508/]