Members of an influential institutional investor advisory group that meets at the Securities and Exchange Commission are scheduled next week to put a spotlight on growing shareholder concerns around the non-voting share structure embedded in today's Snap (SNAP - Get Report) IPO.
At issue are investor worries that Snap, the developer of the popular disappearing-message app Snapchat, will be impervious to activist institutions or hedge funds at its gate because its board makeup will be controlled primarily by co-founders Evan Spiegel and Bobby Murphy.
The shareholder group, dubbed the Investor Advisory Committee, is set to discuss the issue at a meeting set for March 9 at the SEC. Snap begins trading today at the New York Stock Exchange under the ticker symbol SNAP. It priced its IPO on Wednesday at $17 a share.
The panel has scheduled a talk under the heading "Discussion Regarding Unequal Voting Rights of Common Stock," and it plans to hear from Council of Institutional Investors executive director Ken Bertsch and David Berger, a Palo Alto-based partner at Wilson Sonsini Goodrich & Rosati who specializes in governance, activism and M&A. Some panel members in December, raised concerns about dual-class share structures at companies, suggesting that many members may take issue with the Snap non-voting approach at next week's meeting. The panel, which carries a lot of weight with some SEC officials, could eventually issue a recommendation to the agency on the subject.
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The structure has been met with shock and dismay from public pension funds and other index funds, who point out that their passive investment structure will require them to invest in Snap shares once the company joins major indices, as expected because their allocations are made based on an array of companies that make them up. Public pension fund CalSTRS, for example, has stakes in every company in the Russell 3000 and currently owns an interest in Google's parent company Alphabet's (GOOGL - Get Report) nonvoting Class C shares.
Wilson Sonsini's Berger, who will participate in the discussion, may defend the structure. His website bio notes that he advised and represented Google with its "precedent-setting" adoption of non-voting stock. Bertsch, on the other hand, is likely to raise concerns about the structure.
However, unlike Alphabet, which also has voting shares, Snap's structure won't have any voting shares, which means it won't be subject to annual "say on pay" votes of investors. Also, shareholders often seek to vote against incumbent directors in uncontested elections, to send a message about a particular issue. They won't have that ability at Snap. Activist hedge funds say they will stay away, no matter how much the company's performance sags because they will have no ability to nominate directors.
"Snap is so egregious. They're not going to issue a proxy statement, or have a 'say on pay,' it takes it so much further than a Google, which has non-voting shares alongside their voting shares," said CalSTRS Corporate Governance Investment Officer Aeisha Mastagni on the side lines of a CII conference.
Shareholders may soon have something to complain about. According to Equilar data, Snap's Spiegel took home the largest amount of cash compensation, including salary, bonus, and value of perks, of any CEO in a study of top executives at eight peer tech companies. The study looked at each top executive's salary in their S-1 filings reported immediately before their IPOs.
Responding to the IPO, shareholders are also urging exchanges and major indices to change their rules to prohibit listings of companies with non-voting shares if they don't have a serious phase out provision for the non-voting shares embedded in their structures. A spokesman for the London Stock Exchange Group noted that Snap might be eligible to join FTSE indexes as of next week and it may be able to join Russell indexes at the end of June.
The panel's scheduled talk come as a growing number of high-profile companies, particularly those in the technology sector, in recent years have conducted IPOs on U.S. exchanges giving founders and insiders control of a majority of the votes and leaving the rest of the shareholder base with little control over the company's directors or future
Also, other jurisdictions, including Singapore, are moving to change their IPO rules to permit dual class voting systems - and critics argue their action could create a domino-effect limiting shareholder rights elsewhere as countries seek to make their markets more attractive to public issuances.
It's unclear at this stage whether the investor advisory panel will issue a formal recommendation to the SEC urging it to prohibit non-voting share or dual class voting structures.
The SEC often heeds the advice of the committee, though the SEC is in a bit of a holding pattern currently with only two commissioners, a Democrat, Kara Stein, and a Republican interim chairman, Michael Piwowar. The agency normally has five commissioners. It is also unclear where the Trump Administration's pick for SEC Chairman, Wall Street attorney Jay Clayton, stands on the issue. The Senate Banking Committee hasn't yet scheduled Clayton's confirmation hearing before the panel, though staffers expect to set up a date shortly.