DISADVANTAGES OF TRACKING STOCK :

For investors, tracking stocks can be of a mixed bag. Like regular stocks, tracking stockholders are entitled to
dividends paid out by the subsidiaries issuing the tracking stock. Yet the holders of tracking stocks do not have
ownership in the company, instead, at-times tracking stock shareholders vote on issues affecting the corporate
parent, not the subsidiary whose stocks they own. Another downside is the fact that the board of directors of the
tracking-stock subsidiary is often put in place by the parent company and is not elected by tracking stock
shareholders, which would cause conflicts of interests.

The tracking stocks are highly skeptical also. Shareholders have limited voting rights, if any, and they cannot
elect their own boards. Moreover, if the parent company falls on hard times, conflict could develop between the
shareholders of a tracked division, especially if it continues to do well, and the shareholders of the parent company. The potential for such conflict could affect the performance of the tracking stock.

Another important drawback with tracking stock is that it can dramatically increase the potential for conflict and
litigation over accounting policy. It is because the owners of the tracking stock have rights only over dividends,
and dividend payouts are driven by the recognition of divisional profits, the arguments over profit recognition are almost sure to arise whenever tracking stock investors are disappointed in their returns. They will surely be
tempted to accuse corporate management of adopting policies that deliberately understate their profits.