Shareholder Rights in the Age of Snap

Published 30-Apr-2017

Background

Snap Inc. envisaged three classes of common stock: class A shares with zero votes per share, class B shares with one vote per share and class C shares with 10 votes per share. However, only the A shares were made available to the initial public offering (IPO), depriving the investing public of any voting power in the company. By reserving Class B shares for company executives and early investors and class C shares for the company’s co-founders, the share structure effectively gave Snap’s two founders control of approximately 90% of the voting power for life. Consequently, investors purchasing shares in the IPO have been denied any say in company matters, no ability to elect board directors, and no input into the company’s pay policies. All of these are rights that are typically granted to owners of common equity in companies.

While Snap’s IPO represented the first time that a company issued only non-voting shares, multiple-class share structures are not uncommon in the US market. Large S&P 500 companies such as Alphabet Inc., News Corporation and Ford Motor Company have all issued multiple share classes with different voting privileges.

While we believe one vote per shareholder is a central principle of shareholder rights, we recognize that both the motivations for issuing shares with unequal voting rights as well as the appropriate responses to multiple shareholder structures are complex. Some observers have linked the decision of Snap’s founders to retain nearly all voting rights to the chilling effect aggressive activists have had on young companies. In addition to a decline in the number of companies going public, those that do go public are often averse to losing control in the event that an activist mounts a vigorous takeover campaign. They therefore attempt to keep voting rights tightly secured.

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