Monday, December 18, 2017

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Snap out of it

Prominent indices reject Snap Inc.'s non-voting share structure

By Nicole Lavallee and A. Chowning Poppler
Guest Columnists

After months of consultation with market participants, three prominent indices banned companies with non-voting stock.

Among them, the parent company of popular mobile messaging app Snapchat, Snap Inc. The tech company made headlines in March 2017 with its novel IPO selling Class A common shares without any voting rights. Of the 200 million shares sold at $17 apiece, none came with a right to vote on directors, executive compensation, mergers, acquisitions or other corporate matters. Instead, Snap’s two co-founders retained 88.5 percent of the company’s voting power, with the remainder left to executives of the company and some early investors. This was a remarkable shift away from the standard practice of taking an investor’s capital in exchange for the right to hold the company’s management accountable.

Concerned that Snap was disenfranchising shareholders, investor advocates spoke out against dual-class share structures prior to Snap’s IPO. Unpersuaded, Snap went public as planned, raising $3.4 billion for the company without relinquishing any decision-making power to investors. Since then, industry leaders and stakeholders have considered the implications of such a sea change. Proponents argue that consolidated voting power in the hands of founders allows them to build long-term value without worrying about short-term share price pressures. Opponents argue that, even if the structure is efficient at the time of the IPO, the potential advantages are short-lived and potential costs tend to rise as time passes from the IPO. Specifically, dual-class structures remove investors from oversight roles, eliminate management’s incentives to perform or face ouster and result in higher pay for CEOs without comparable payoffs for shareholders.

Investor advocacy groups turned their attention to index providers because many institutional investors hold some portion of their portfolios in one or more established indices. Institutional investors would inevitably end up holding non-voting shares if companies like Snap were added to a popularly tracked index.

Now, three prominent indices banned companies with non-voting stock (one on a temporary basis). In July 2017, S&P Dow Jones announced that the S&P Composite 1500 would no longer add companies with multiple share class structures. Starting in September 2017, five percent of available voting rights must be in the hands of unrestricted shareholders for a new IPO company to be included in British index provider FTSE Russell. A third index, MSCI, announced in November 2017 that it will temporarily treat any securities of companies exhibiting unequal voting structures as ineligible for addition to the MSCI ACWI IMI and MSCI US Investable Market 2500 Index.

Time will tell if these index rules will have an impact on whether tech wunderkinds will continue to push for classes of non-voting shares when their companies go public. Nonetheless, by tightening standards to foreclose companies from including non-voting stock, the S&P Dow Jones, FTSE Russell and MCSI have effectively blocked Snap from being included in their indices. More importantly, these exchanges have taken a meaningful step to protect investors’ rights and preserve the fundamental principle of “one share, one vote”.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of Berman Tabacco or TEXPERS.

About the Authors:

Nicole Lavallee
A. Chowniing Poppler

Nicole Lavallee is the managing partner of Berman Tabacco’s San Francisco office and A. Chowning Poppler is an associate in the San Francisco office.

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