Dual-Class Voting Structures Spur Growing Revolt
Snapchat 'Spectacles' Camera Glasses

Look for a major spike in activist shareholder efforts in the months to come seeking to give investors more influence at Facebook (FB) , News Corp (NWS) , UPS (UPS) and other major companies that give insiders control.

These corporations and dozens of others were structured at the outset with dual or multi-class voting systems, giving insiders control of the majority of the votes. The structures have already given many institutional investors a significant amount of heartburn. A handful of shareholders and a few funds have taken it upon themselves to try and end the arrangement by backing measures seeking to collapse dual-class share structures at a variety of companies into a single class of stock that would give investors' one vote per share. They have not been successful.

But a recent tectonic shift in the governance landscape suggests that these efforts will escalate in the months to come. At the center of that change in investor attitudes is the recent IPO of Snap (SNAP) The developer of the popular disappearing message app Snapchat took the unprecedented step of issuing only non-voting shares for its IPO. Shareholders complain that as a result the tech darling will be permanently unaccountable to shareholders. Investors, for example, won't have the authority to submit non-binding proposals for consideration at Snap as long as it maintains its non-voting structure.

"I would not be surprised to see the Snap situation lead to more proposals [to collapse dual class stock] next year," said Ken Bertsch, president of the Council of Institutional Investors, a lobby group for the large shareholders.

The CII has been leading an institutional investor effort to discourage other companies from following in Snap's footsteps. The group argues that non-voting shareholders are disenfranchised at Snap and at other companies giving insiders control of the votes. Companies, meanwhile, argue that the dual class structure contributes to stability and long-term shareholder returns. Snap's backers say it could help revive IPOs. 

However, investors are hoping to send a message that Snap's approach isn't acceptable, and they intend to drive home that message at the ballot box when they vote their shares for nonbinding proposals seeking to collapse dual-class share structures.

ISS Analytics, the data and analytics arm of Institutional Shareholder Services, notes that investors have so far issued 45 proposals seeking to collapse dual-class voting structures between 2013 and 2017, including three measures that were withdrawn. That's in a universe of roughly 255 companies in the Russell 3000, roughly 8.7% that have classes of stock with different voting rights, ISS notes. 

The votes on the proposals have received wide-ranging responses, with some obtaining only 10% or 20% of the Yes or No vote while others have garnered as much as 40% or almost 50%. 

In 2017, look for proposals seeking to collapse dual class vote structures at Ford Motor, (F) Comcast (CMCSA) , Lennar (LEN) and possibly at Rupert Murdoch's News Corp

Most of the proposals that have emerged recently are appearing at the same set of companies year-after-year, with proponents arguing that their targets have done little in response.

Proposals issued by the Nathan Cummings Foundation at News Corp. received the backing of 47.4% of the yes or no votes in 2014, 49.5% in 2015 and 32% in 2016.

"Pretty much everyone whose name is not Rupert Murdoch supported it in 2015," said Laura Campos, director, corporate and political accountability at the Nathan Cummings Foundation.

Campos noted that Murdoch family insiders via the Murdoch Family Trust control roughly 39% of the voting class B shares and about 14% economic stake in the company.

One common compromise approach sought by activist funds is to have companies set up so-called "sunset" provisions in their bylaws that would have the dual-class structure convert after a specific interval, typically five or seven years, into shares that each carry a vote. That effort hasn't had much success so far.

"With News Corp. one of the things we've asked about is whether they would start to sunset the dual class structure upon Rupert Murdoch's retirement," said Campos. "The answer was a resounding No."

Instead, companies like News Corp. agree to engage with investors. "They've talked to us for two years in a row and we met the lead independent director as well," Campos said. "They went out and did a listening tour with other institutional investors to try and understand concerns."

News Corp. declined to comment.

Some proposals seeking to collapse the structure also received steadily increasing support over the years. Ford received 33.6% in 2013, 34.8% in 2014, 36.5% in 2015 and 37.2% in 2016. UPS received the vote of 21.9% in 2013, 23.7% in 2014, 24.9% in 2015 and 27.9% in 2016.

A proposal at Comcast did really well in 2013, receiving 41.5% of the for and against vote in 2013 but then dropped a bit to 34.6% in 2015, 38.5% in 2016.

Other proposals have been submitted recently at Viacom (VIAB) Alphabet (GOOGL) , Twenty-First Century Fox (FOXA) , First Citizens BancShares  (FCNCA) , Swift Transportation  (SWFT) , Telephone and Data Systems (TDS) and DreamWorks Animation, which was sold last year to Comcast, uniting two dual-class stock companies, as well as several others.

The majority of the proposals so far have been issued by gadfly individual investors, though larger pension funds are expected to play a bigger role in coming years. Investor John Chevedden, who frequently submits shareholder proposals on a variety of topics, has been one of the top proponents of measures seeking out equal voting for shares. In addition, other proposals, like the "Stop 100-to-one voting power" measure that was under consideration last year at Comcast, were submitted by another shareholder activist, Ken Steiner. And large institutional investors, such as the California State Teachers' Retirement System and other funds have been advocating on their own or in a recently formed organization, the Investor Stewardship Group, for voting rights in proportion to their economic interest.

Although the proposals this year may get a Snap-induced bump in support, expect a more significant uptick in the number of proposals in 2018. That's because Snap's unusual voting rights structure emerged well after the deadline had passed for shareholders at the majority of U.S. corporations to submit proposals for annual meetings in 2017. As a result, new proposals issued in response to the IPO will have to wait until 2018.

"With filing deadlines in the fall and early winter, Snap did not have an impact on what would appear this proxy season," Bertsch added.

Still some companies have later deadlines and could be impacted sooner. For example, News Corp.'s deadline for proposals is in June or July for an annual meeting that typically takes place in November.

Will Nathan Cummings Foundation submit another proposal?

"That remains to be decided," said Campos.

Editor's Note: This article was originally published by The Deal, a sister publication of TheStreet that offers sophisticated insight and analysis on all types of deals, from inception to integration. Click here for a free trial.

Editors' pick: Originally published April 12.


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