Switch Inc.'s (SWCH) IPO, which priced at $17 a share Friday, Oct. 6, is raising the ire of a major lobby group for big institutional investors who are opposed to CEO Rob Roy's ability to transfer super-voting rights to his descendants even after he quits.
The public offering is the latest example of companies issuing shares in the public markets in a way that gives insiders, in this case the tech company's CEO, control of the company in a way that will make it almost impervious to activist investors or M&A pressures for years to come.
Switch sought to sell 31.3 million shares for between $14 and $16 a piece, but its shares opened Friday at $21.70 a share, raising $531 million in the offering. The company will have three classes of stock, including a Class C that will give Roy shares with ten votes per share, or about 67.7% of the voting power of the company. Class A shares, issued to the public will have one vote per share, representing about 4.9% of the voting rights, or 5.6% if underwriters exercise their option to purchase more shares.
The IPO isn't as management-entrenching as Snap Inc. (SNAP) , which earlier this year shocked the investor community by taking a step that was unprecedented in modern times --issuing only non-voting shares in its IPO. Big investors lobbied the major index providers, which quickly changed their rules to exclude Snap from participating in their indices. Nevertheless, many index providers still allow companies with dual or multi-share companies to exist, giving insiders a measure of control.
"It is unfortunate that we still are seeing companies IPO with dual class," said Ken Bertsch, chief of the Council of Institutional Investors in response to a question about Switch. "However, it is encouraging that, to my knowledge, we have not seen the Snap-type zero-vote share structure since June. Maybe that is dead."
Switch will be excluded from participating in S&P Dow Jones Indices LLC, including the S&P 500, after the index provider moved in August to exclude businesses that issue multiple classes of shares giving insiders control of the votes from participating in its indexes.
However, Switch likely will eventually get to participate in the FTSE Russell indexes, home of the Russell 3000 index. In July, the FTSE Russell moved to require corporations to have at least 5% of the company's voting rights in the hands of unrestricted public shareholders in order to participate in their indices. Switch has authorized 750 million Class A shares, which suggests that the company will issue more shares to get them above the 5% threshold even if underwriters don't buy enough shares to get the company over that level.
In addition, Bertsch took issue with a provision in the IPO documents that give's Roy the ability to retain super-voting rights even after he quits the company. In addition, he will be permitted to transfer shares with super-voting rights intact to his descendants, according to securities filings
"If there is some argument for Roy's entrepreneurial skill as key to the company's success, it presumably does not apply to his descendants," Bertsch said. "Even Snap does not provide for such transfer."
An increasing number of corporations, particularly those in the tech sector like Switch, are setting up multi-share ownership structures as a form of protection against activist hedge funds, who often push for M&A and other share-price improvement moves. It would be technically impossible for an activist fund to succeed at electing dissident director candidates to Switch's board since Roy has a massive 68% voting stake and would presumably vote that stake for his chosen director candidates. Activists that get directors onto corporate boards are able to drive companies into taking share-price improvement actions, such as forcing firms to auction themselves off.
Nevertheless, big institutional investors aren't happy with the rise of dual and multi-share class companies because they believe executives at these companies aren't accountable to shareholders. Corporations hoping to remain independent have to weigh the costs of not being included in major indexes against the benefit of having a multi-class share structure providing them protection against a future activist at their gate.
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Editors' pick: Originally published Oct. 6.