March 14, 2017

Snap: Overlooked Issues About Non-Voting Stock

Snap launched its highly anticipated IPO earlier this month.  The deal may be done, but questions about Snap’s no-vote stock remain.  This blog from Jim Moloney & company at Gibson Dunn points out that Snap’s capital structure raises some important issues that have escaped most people’s attention.  Here’s an excerpt:

The NYSE, NASDAQ, and other self-regulating organizations have rules requiring the submission of certain transactions to a shareholder vote, such as a change of control transactions or certain issuances of more than 19.9% of the Company’s outstanding shares. With most shareholders lacking any voting rights altogether, how Snap and other companies that may follow in their wake can cleanse such transactions via disinterested shareholder approval remains an open question.

Snap’s structure may also put it in a bit of a bind when it comes to the standard of review that courts will apply to major board decisions:

While the presence of non-voting shares does not itself preclude a review under the business judgment standard, it seems one practical effect of Snap’s voting structure is that it may serve to hamper the company’s ability to seek shareholder ratification from disinterested shareholders or other procedural safeguards (e.g., obtaining a “sterilized vote” – from a majority-of-the-minority) that could otherwise help shield the directors’ actions from heightened judicial scrutiny.

Snap: The Debate Over Voting Rights Continues

Meanwhile, the broader debate over Snap’s issuance of non-voting shares rages on. This Reuters article reports that Snap’s capital structure was a topic of discussion at a recent meeting of the SEC’s Investor Advisory Committee.  In addition, the IAC has asked the agency to look into whether the non-voting status of Snap’s shares will reduce “public disclosure on executive pay or governance matters.” (Actually, anticipated pay & governance disclosures are spelled out in detail in the “Risk Factors” section of the prospectus – see page 40.)

On the heels of the IAC’s actions, the Council of Institutional Investors is reportedly lobbying the major indices to exclude Snap, because “they’re tapping public markets but giving public shareholders no say.”

I just have one simple question –  “What did some of these institutions think they were buying?”  Sure, the investment decisions & voting decisions at most institutions come from different sides of the house, but that only goes so far.  The fact that many institutions were frothing at the mouth to buy non-voting shares from this company a couple of weeks ago really takes the wind out of the sails of their governance complaints.

Update: Several folks have pointed out that the CII is advocating on behalf of index funds. Those funds – unlike many of the institutions who bought in the deal – won’t have any choice but to buy the stock if Snap’s no-vote shares get included in a relevant index. That’s a fair point, and I shouldn’t have lumped them in with the others.

Conflict Minerals Case:  Final Judgment’s on the Way

Cooley’s Cydney Posner blogs that it’s time to say “so long” to the conflict minerals case:

The parties to the conflict minerals case have filed in the D.C. District Court a “Joint Status Report,” which requests that the Court enter a final judgment in accordance with the decision of the Court of Appeals. As a result, it will be case closed for National Association of Manufacturers v. SEC, which decided that the requirement in the conflict minerals rule to disclose whether companies’ products were “not found to be DRC conflict free” violated companies’ First Amendment rights.

Once the final judgment is in hand, the rule’s fate rests with the SEC.  Although the agency is reviewing the rule, for now, it’s business as usual in terms of annual conflict minerals disclosure requirements.

John Jenkins