Snap IPO Triggers Outcry Over Non-Voting Shares

April 11, 2017

On March 1, 2017, Snap Inc. made history by becoming the first U.S. company to go public by selling only non-voting shares. Of the 200 million shares offered in the IPO for the company behind the popular mobile messaging app Snapchat, absolutely none have any right to vote on directors, executive compensation, a corporate sale or other key corporate matters. Rather, those rights rest exclusively in the hands of Snap insiders. Many institutional investors and shareholder advocates are alarmed about Snap’s dual-class structure that deprives shareholders of a voice. Many want to avoid owning such shares, but worry that if Snap is added to an established index, then ownership may become inevitable. To avoid such a scenario, several investor groups are advocating that index providers exclude Snap from major stock indices.

It is common for institutional investors to hold some portion of their portfolios in one or more established indices that track various industries. Thus, if Snap is one day added to a popularly tracked index, many investors would be forced to hold Snap despite its dual-class structure. Investors are fighting back. In early February 2017, top U.S. fund managers including BlackRock Inc., Vanguard Group Inc. and T Rowe Price called on companies to give shareholders voting rights “in proportion to their economic interest.” Additionally, before the Snap IPO, the Council of Institutional Investors (CII), a nonprofit association that advocates for pension funds and other institutional investors, sent a letter of objection urging Snap’s co-founders to reconsider its then-contemplated dual-class structure, noting that “[s]ome companies lacking effective accountability to owners soar for a time but others crash and burn, and still others pursue mistaken strategies for far too long.”

Post-Snap IPO, CII and others have turned their attention to index providers in an attempt to keep Snap out of major stock indices. CII approached index providers S&P Dow Jones Indices and MSCI, Inc. looking to exclude Snap, and any other company that sells investors non-voting shares, from their stock benchmarks. Additionally, the Investment Association, a lobby group that represents the largest U.K. investment managers, is urging FTSE Russell, MSCI Global and S&P Dow Jones Indices to only include companies that allocate “control of a company in direct proportion to total economic interest and the level of exposure to investment risk.”

The indices are reportedly studying the issue and Snap’s structure. One provider, the FTSE Russell, recently announced that it would consult with stakeholders on this issue and plans to announce in July whether to add Snap and other companies with nonvoting shares to its stock benchmarks.

Issues surrounding dual ownership are not limited to Snap. Technology companies, such as Google and Facebook, have concentrated control in the hands of their founders, creating different classes of stock with differing voting rights. Snap, however, has gone one step further by publicly offering only “Class A” non-voting shares. Classes B and C stock have voting power, but are reserved for executives of the company and early investors. As a result, co-founders CEO Evan Spiegel and CTO Bobby Murphy hold a combined 88.5 percent of the company’s total voting power. Thus, even after going “public,” Snap is still Spiegel’s and Murphy’s company.

Proponents of multiple-class share structures say they are the reason visionary founders, such as Mark Zuckerberg at Facebook, have been able to concentrate on building long-term value rather than worrying about short-term share price pressures. Opponents argue that such dual-class structures remove investors from oversight roles, remove incentives of management to perform for fear of the risk of being taken over and result in higher pay for CEOs but without comparable payoff for shareholders.

The pressure on the indices is expected to continue, and lobbying groups have also indicated that they will target the exchanges themselves to bar companies with dual-class structures. Moreover, the U.S. Securities and Exchange Commission is also considering the issue, possibly with an eye toward regulation. Kurt Schacht, who chairs the SEC’s Investor Advisory Committee, indicated at an investor advisory committee meeting on March 9 that dual-class structures “might be the next big thing.” SEC Commissioner Kara Stein warned that “unequal voting rights present complex and new issues that need to be understood and addressed.”