Snap IPO Gets Investors Fired Up Over Dual-Class Stock

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By Michael Greene

Snap Inc.’s public offering of non-voting stock has become a rallying point for investor advocates that believe some companies have gone too far in restricting shareholder rights.

Snap became the first company to issue no-vote stock in its March 2 initial public offering. It also imposed a year-long lockup on approximately 50 million shares of its Class A common stock—a quarter of all shares it sold—barring investors from selling during that period. The restrictions go beyond the different share classes with varying investor rights offered by Twitter Inc., Fitbit Inc. and Facebook Inc. when they went public over the last five years.

Snap could serve as a model for other companies, say investor representatives who fear such limits on shareholder rights undermine accountability at publicly traded companies.

“I do think that Snap will encourage others to push the boundaries,” Jon Lukomnik, executive director of the nonprofit Investor Responsibility Research Center Institute, which conducts research on corporate governance issues, told Bloomberg BNA. “With the lockup and the non-voting shares, Snap is creating a new class of security with some of the attributes of public equity and some of the attributes of private equity.”

The Securities and Exchange Commission’s Investor Advisory Committee—which advises the commission on protecting shareholder interests—will discuss the impact of unequal voting share structures at a March 9 meeting.

Ken Bertsch, executive director of the Council of Institutional Investors, who will speak at the meeting, told Bloomberg BNA that CII would like the SEC, through its regulation of stock exchanges, to address investor concerns over dual-class stock. “Dual structures are problematic for investors in the long term,” he said.

CII—whose members include pension funds and asset managers with combined assets of more than $23 trillion—also is meeting this week with S&P Dow Jones Indices LLC and MSCI Inc. to try to get the benchmark providers to bar companies with non-voting stock from their indexes.

An SEC representative declined to comment on dual-class shares. Snap didn’t respond to a request for comment. However, Michael Lynton, chair of Snap’s board, told CII in a recent letter that the share structure extends the company’s ability to remain founder-led, which in turn maximizes its “ability to create stockholder value.”

Pushing the Boundaries

Regulators such as the SEC are unlikely to bar companies from imposing dual-class structures, whether through stock exchange listing standards or other means, Lukomnik said. “What could happen, however, is a market response,” he said. “In general, it takes some time for market participants with longer-term time horizons and foci to catch up to and respond to shorter-term trends in the market, but they do eventually.”

Lukomnik said that large investors, in addition to approaching the indexes, also are considering creating new methodology for assessing index funds that would take voting rights into account.

Ahead of Snap’s IPO, the Investor Stewardship Group—a group of institutional investors managing more than $17 trillion in assets—in late January issued baseline expectations for good corporate governance in which they urged U.S. companies to embrace the “one share, one vote” principle.

The group, which includes BlackRock and State Street Global Advisors, wants every institutional investor and asset management firm investing in the U.S. to sign onto their framework, which goes into effect in 2018.

Broader Implications

Dual-class shares should be a concern for companies as well as investors, Lukomnik said, because companies often benefit by understanding what their shareholders think. “Here, the normal communications channels between the board and the external shareowners will be curtailed, as there will be no voting totals to indicate trends” and probably little engagement since the company will have no need to explain compensation or other issues, he said.

Companies with only non-voting public shares aren’t required to file proxy statements. Their public investors also don’t have the right to nominate directors or submit shareholder proposals.

Snap acknowledged in its prospectus that it wouldn’t be subject to “say-on-pay” and “say-on-frequency” provisions of the Dodd–Frank Act. It also said that it wouldn’t be required to disclose all the information that a public company with voting securities would be required to provide to stockholders. However, the company said that most of this information will be disclosed in other public filings. It also has invited all non-voting shareholders to attend its annual meeting.

It’s a difficult question as to whether the SEC should impose more restrictions on dual-class stock, University of Pennsylvania professor Jill Fisch, who teaches and writes about corporate law, told Bloomerg BNA. Even if the SEC’s goal is to protect investors, that doesn’t necessarily mean that prohibiting dual-class structures is the right answer, said Fisch, who also is speaking at the SEC committee’s March 9 meeting.

For the most part, Snap will be required to disclose most of the same information as other public companies, Fisch said. She added that companies like Snap may choose not to go public if they don’t have the option to issue unequal voting classes of stock.

Meanwhile, several attorneys told Bloomberg BNA that few companies are likely to adopt governance structures similar to Snap’s.

“I don’t think one high-profile IPO makes this a trend,” Timothy Curry, a San Francisco-based partner at Jones Day, told Bloomberg BNA. “Investors were willing to purchase Snap’s non-voting shares because of the incredibly high demand for its stock,” said Curry, whose practice focuses on representing emerging growth and public technology companies.

With assistance from Yelena Dunaevsky

To contact the reporter on this story: Michael Greene in Washington at mGreene@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com

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