CII criticizes Blue Apron IPO share plan

Blue Apron’s planned stock voting structure has sparked concern at an association of employee benefit plans, foundations and endowments with combined assets under management of more than $3 trillion.

‘We are concerned that Blue Apron Holding is going public with a triple-class structure that severely limits accountability to public shareholders over the long term, and without a reasonable sunset provision (the share structure apparently will collapse to one-share, one-vote only nine months after the death or disability of the CEO),’ writes Kenneth Bertsch, executive director of the Council of Institutional Investors (CII), in a letter to Blue Apron sent last week. ‘Blue Apron proposes to issue low-voting shares on going public, but with authority to issue shares with no voting rights whatsoever.’

According to an SEC filing, Blue Apron intends to go public with two classes of voting common stock, Class A common stock and Class B common stock, and one class of non-voting stock, Class C capital stock. Upon the completion of the offering, president and CEO Matthew Salzberg will hold roughly 29.7 percent of the voting power of the outstanding capital stock, according to the filing.

Bertsch argues that public companies should give all shareholders voting rights proportional to their holdings, and that newly public companies that do not should sunset the unequal structure over a ‘reasonable period of time.’

‘We strongly urge [Blue Apron] to reconsider going public with a multi-class structure, or to incorporate sunset provisions that revert to one-share, one-vote within five years,’ he writes. ‘And we urge that you make no use of Class C non-voting shares. The principle of one-share, one-vote is a foundation and core value of good corporate governance and equitable treatment of investors. The board and management of the company should be accountable to the owners, as can be the case at single-class public companies.’

CII’s concerns over the Blue Apron IPO echo those raised regarding Snap’s IPO earlier this year (CorporateSecretary.com, 3/9). The operating company in charge of Snapchat drew criticism from certain parts of Wall Street for its three-tier voting structure, which offered no voting rights to any new investors that participated in the IPO.

The number of companies offering restricted voting rights is on the rise. According to Dealogic, 27 of the 174 IPOs in the US in 2015 used dual-class structures – roughly half of those were technology companies. In 2005, just 1 percent of all IPOs used that structure.

‘We recognize that the holders of super-voting shares will in fact own a significant majority of shares immediately post-IPO, minimizing our concerns in the short run,’ Bertsch writes to Blue Apron. ‘However, our interest is in the longer-term health of capital markets. Blue Apron’s share structure amounts to a ticking time bomb for the gross misalignment of ownership and control, with Class B holders operatingthe clock.’

Bertsch says that, although Class B holders initially will hold 84 percent of outstanding equity, theshare structure ‘clearly contemplates growth in the equity capital base over time such that thefounders and other holders of Class B shares eventually will own a minority of shares,potentially less than 10 percent and even a much lower portion to the extent that some Class B holders exit and/or if controlling holders approve authority for shares beyond authorization at IPO.’

CII acknowledges that in recent years, some ‘young companies with dynamic leadership and promising products, like Blue Apron’ have been able to attract capital in the public markets despite having dual-class structures. But the performance record of dual-class companies is ‘decidedly mixed in the long run and even in the medium term, notwithstanding selection bias affecting which companies adopt multi-class structures,’ Bertsch adds.

Blue Apron did not respond to a request for comment.