Silicon Valley is known for disrupting industries, and some of its most storied residents seem ready to upend the IPO world–not with technology, but with moxie. Snap, Inc. made headlines this past spring with its novel initial public offering (IPO) selling “Class A” common shares without voting rights. Rather than the standard practice of taking an investor’s capital in exchange for the right to hold the company’s management accountable for its use, Snap sold over 200 million shares at $17 apiece without giving those investors any voting rights. Instead, Snap’s two co-founders retained 88.5 percent of the company’s voting power.
Since the Snap IPO four months ago, investors, industry leaders, stakeholders, and academics have spent ample time considering the implications of such a sea change, and whether non-voting stock is an indication of future market trends for interested buyers or an affront to robust corporate governance. Those debates culminated in two prominent indices banning companies with non-voting stock.
On Monday, July 31, 2017, Standard & Poor’s (S&P) Dow Jones Indices announced that the S&P Composite 1500, which includes the S&P 500, MidCap 400, and SmallCap 600 will no longer add companies with unequal voting rights (i.e., companies with a multiple share class structure). Companies such as Snap are therefore precluded from joining. This change became effective immediately. Existing companies in the indices with multiple classes are grandfathered in. As a result, companies like Facebook and Alphabet (Google) will not be impacted by the change, even though both have classes of non-voting stock.
S&P’s announcement came on the heels of the British index provider, FTSE Russell, proposing new rules on July 27, 2017, requiring companies to make sure that 5 percent of available voting rights are in the hands of unrestricted shareholders of a company in order to be included in their indices. Although it is a modest (and, arguably, a token) percentage, the rule was proposed to address index users’ and other stakeholders’ concern “that the Snap, Inc. IPO set a dangerous precedent for companies to come to the market with few, if any, voting rights attached to their securities.” The limit goes into effect for new IPOs in September. Companies with stock already in their indices have five years–until September 2022–to make the change.
A third index, MSCI, may soon be joining these exchanges. In June 2017, MSCI proposed excluding new index constituents, like Snap, from its MSCI GIMI and MSCI US Equity indices when the company-level voting power of listed shares is less than 25 percent. MSCI is soliciting input from stakeholders until August 31, 2017.
Time will tell whether these index rules will have an impact on whether tech wunderkinds will push classes of non-voting shares when their companies go public in order to protect their interests and level of control. Regardless of whether such structures would allow companies to be included in an index, buyer demand for the stock–and not inclusion on an index–will likely drive an IPO’s success. In that vein, skeptics question whether index providers are the appropriate entities to toe a line against these multi-class share structures, as opposed to regulators.
Nonetheless, by tightening standards to foreclose companies from including non-voting stock, the S&P Dow Jones and FTSE Russell have effectively blocked Snap from being included in their indices. More importantly, the exchanges have taken a meaningful step to preserve the fundamental principle of “one share, one vote” and protect investors’ rights.