How common are restricted voting rights for US shareholders?

Snap’s IPO last week will likely be the biggest and most controversial on the NYSE in 2017.

The operating company in charge of Snapchat drew ire 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.

John Coffee, the Adolf A Berle professor of law and director of the Center on Corporate Governance at Columbia Law School, tells Corporate Secretary: ‘This is an extreme case. You’re going to have a corporate governance crisis at some point.’

Snap's press office did not respond immediately to a request for comment. Snap’s own SEC prospectus notes that ‘to our knowledge, no other company has completed an initial public offering of non-voting stock on a US stock exchange.’


RESTRICTED RIGHTS ON THE RISE
While it is unprecedented to offer no voting rights during an IPO, the number of companies offering restricted voting rights is on the rise.

According to data from Dealogic, 27 of the 174 IPOs in the US in 2015 used dual-class structures – roughly half of these were technology companies. In 2005, just 1 percent of all IPOs used that structure.

This structure was popularized by Google, and has since been adopted by a range of companies including Facebook, Square, LinkedIn, Groupon, Shake Shack and Fairway. The New York Times Company and News Corporation also have two-tier stock options, to create a wall between the companies’ financial interests and editorial output.

In July 2016, Mark Zuckerberg was able to install a third tier of shares at Facebook to offset his charitable donations. But this was approved only after years of financial overperformance, and investors still inserted clauses to protect themselves if corporate performance were to dip or Zuckerberg were to resign.

Proponents of restricted shareholder rights argue that it protects a company from the short-term interests of some investors. ‘It’s logical that when you go public you might seek no voting to protect yourself from the wise guys,’ said Jeffrey Ubben, founder and CEO of ValueAct Capital at a recent Reutersevent. ‘It takes the vitality out of the public markets, but it’s related to hedge fund activism.’

According to FTI Consulting, the number of activist campaigns in the US rose from 135 in 2010 to 645 in 2016. The US and Canada are the two countries most susceptible to activist campaigns in the world.

Ubben, who has taken activist positions in companies as big as Microsoft, said at the Reuters event that restricted shareholder rights might be a reality of the current US market for companies of a certain size. ‘I don’t condone it…but I understand it,’ he said. ‘If that’s what it takes to get growth companies [to go] public, at least sunset it.’

The Council of Institutional Investors has called on numerous occasions for sunset provisions, which would determine a point in the future where the company’s structure reverts to one share, one vote.


REASSURING INVESTORS WITH RESTRICTED VOTING RIGHTS
Bob Lamm, senior adviser to Deloitte’s governance services practice, says that companies can still maintain positive relationships with investors while operating with a restricted share structure.

‘Most public companies can develop good governance practices and explain why they do what they do,’ he tells Corporate Secretary. ‘But if they don’t convey good corporate governance practices, they run the risk of investor discontent.’

Zach Oleksiuk, director and head of Americas investment stewardship at BlackRock, believes certain board members should be particularly cognizant of their duty to shareholders.

‘Our expectation is that the independent directors of the board are planning for an eventuality where the CEO is no longer in the role,’ he says. ‘And they need to make a change to the capital structure to prevent an issue that would be detrimental to shareholder interests.’