Investors Get Snappy Over Snap No-Vote Shares

Snap Inc.’s trading debut featuring no-vote shares has angered institutional shareholders on both sides of the Atlantic.

In the U.S., the Council of Institutional Investors (CII) and others have reached out to S&P Dow Jones Indices LLC and MSCI Inc. in a bid to get the benchmark providers to bar companies with non-voting stock from their indexes.

In the U.K., a group of fund managers are lobbying against including Snap in indexes run by the London Stock Exchange’s FTSE Russell unit.

Snap was the first company in the U.S. to go public with nonvoting stock. It’s a big deal in the corporate governance world because voting is a key way in which shareholders make their wishes known to companies and their executives. For example, shareholder votes on executive pay packages—the nonbinding “say on pay” required by the Dodd-Frank Act—is often credited with heralding in a new era of engagement between companies and their shareholders.

The importance of this issue was highlighted recently by Securities and Exchange Commission member Kara Stein. “Voting rights have been a foundational component of sound corporate governance,” Stein said at a March 9 SEC Investor Advisory Committee meeting. “Unequal voting rights present complex and new issues that need to be understood and addressed.”

Stein also suggested that the commission “critically assess” its initial public offering regime.

Snap said in its registration statement and in a letter to CII that its triple-class stock structure allows the company to remain founder-led for longer. “We believe that a significant portion of our success thus far has been attributable to our founders’ leadership, creative vision, and management abilities,” it said. “We also believe that our founders’ continued leadership in our company will provide substantial future benefits to us and our stockholders.”

It is unlikely that the SEC, through its regulation of U.S. stock exchanges or otherwise, will have any impetus to act on dual-class stock. The agency still lacks a chairman and currently has only two members—Stein and acting Chairman Michael Piwowar. Even if Jay Clayton—the Trump administration’s chairman nominee—comes on board in the near future, it isn’t likely to be a priority for him.

In the meantime, Stein’s term on the commission expires in early June.

While some investors are fired up, it is important to note that no-vote shares aren’t likely to become mainstream anytime soon. Few companies have the leverage to risk offending their potential investors in that way.

It also is important to note that Snap shareholders that can’t vote still receive the same economic benefits that voting shareholders get.

Finally, activist shareholders—even those holding no-vote shares—invariably find creative ways to make their voices heard by the company.