Snap-Like Firms Should Report Investing Risks, Panel Tells SEC

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By Andrea Vittorio

Companies like Snap Inc. that give public shareholders little to no voting power over executive pay and other issues should make clear the potential risks and benefits of owning their stock, according to an investor-focused panel that advises the Securities and Exchange Commission.

The panel of investment professionals, academics, and others said in a March 8 recommendation to the SEC that risk reporting is one of several disclosure gaps that need filling as these so-called dual-class share structures become a more common way to keep corporate control.

Its chair, Anne Sheehan, said it’s “not always clear” to investors buying dual-class stock that it gives them fewer votes than founders and early backers. So added disclosure would be helpful, she said.

The panel took up the issue after Snap, creator of the Snapchat messaging app, sold voteless stock in its initial public offering last year. That was “the final straw” for investors, Sheehan told Bloomberg Law. For the past decade, Sheehan has led corporate governance at the California State Teachers’ Retirement System (CalSTRS). She’s set to retire from CalSTRS at the end of March, but she’ll remain on the investor advisory panel.

Investor Outcry

CalSTRS and about 50 other investors with a collective $22 trillion in assets came out against Snap’s share structure and others like it that don’t follow a one-share-per-vote approach. In response, major index providers decided to block companies like Snap from joining the S&P 500 and other popular benchmarks that passive funds follow.

Companies including Alphabet Inc., Facebook Inc., and Dropbox Inc. are increasingly turning to unequal voting stock structures to shield themselves from pressure by public investors, according to a study from Stanford University’s Rock Center for Corporate Governance. The trend began with just a few companies per year in the 1990s and early 2000s and has turned into many times that number lately.

The SEC didn’t return a request for comment on whether it would take up the panel’s advice for more and better disclosure from companies that offer dual-class shares. Its newest Democratic commissioner, Robert Jackson, recently criticized companies that let founders keep voting control for their entire lives, or sometimes even longer. He called on stock exchanges to develop a way for their supervoting power to fade away over time.

Sheehan said the investor panel may pick up on that idea in a future recommendation to the SEC.

To contact the reporter on this story: Andrea Vittorio in Washington at avittorio@bloomberglaw.com

To contact the editor responsible for this story: Fawn Johnson at fjohnson@bloomberglaw.com

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