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Companies that keep control by giving public investors little to no say in board elections and other matters shouldn’t be allowed to call the shares they sell common stock, according to a panel advising the Securities and Exchange Commission.
The term should only be used by companies going public with stock that gives its holders a traditional one vote per share, the SEC’s Investor Advisory Committee said in a draft recommendation that it’s considering.
“If you take a security public and it has zero voting rights, I don’t think that’s common stock anymore,” Harvard Law School professor John Coates said at a committee meeting Dec. 7. Coates, a member of the committee, said the SEC’s staff “ought to think carefully” about when the label applies.
The commission has already shown a willingness to make voting status more apparent in its comments on disclosures for Snap Inc.'s initial public offering earlier this year. The Snapchat maker, which took the growing trend of issuing stock with less power to a new voteless extreme, added the phrase “non-voting” to the first page of its IPO filing based on feedback from the SEC’s staff.
Companies should also tell investors more about the risks of stock structures that give different voting rights to different investors, the committee’s draft says. Those risks now include being blocked from joining popular benchmarks like the S&P 500 and the Russell 3000, after major index providers acted on shareholder concerns about a lack of accountability.
“The reason it matters for investors,” Coates said, is that being included or excluded from an index “will directly affect liquidity and it will directly affect value.”
Companies say these so-called dual-class shares let executives focus on long-term goals rather than short-term market pressures. The committee’s proposal on dual-class disclosures is expected to go to a vote in March before being sent as a recommendation to the SEC.
The committee is working on another proposal related to corporate reporting on cybersecurity risks. That one is more likely to be acted on by the commission, which recently revealed a hack of its own.
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