August 1, 2017

Indexes: Russell and S&P to Exclude “Snap-Like” Companies

We’ve blogged many times about the debate over dual-class share structures. Investors have been voicing concern since Snap’s IPO in March.

Last week, FTSE Russell was the first index to announce that it will exclude Snap & other “dual-class” companies that afford minimal voting rights to shareholders – including existing constituents who don’t conform to the new requirements within 5 years. Yesterday, S&P Dow Jones followed suit with an even more sweeping announcement – however, existing constituents are grandfathered in and not affected.

Here’s the nitty-gritty on Russell’s new policy:

– To be listed on FTSE Russell indexes, more than 5% of a company’s voting rights must be held by unrestricted shareholders (as defined by FTSE Russell).

– For potential new constituents, including IPOs, the rule will apply starting with their September semi-annual and quarterly reviews.

– For existing companies, the rule will apply starting September 2022, thus affording a five-year grandfathering period. About 35 companies would need to increase public voting rights to avoid exclusion.

– The rate at which the hurdle is set, along with its definition, will be reviewed in the light of subsequent developments on an annual basis.

– Companies like Facebook & Alphabet – which have multi-class structures but afford more than 5% of voting rights to shareholders – can still be included.

And for S&P’s policy:

– Effective immediately, the S&P Composite 1500 and its component indices – S&P 500, S&P MidCap 400 and S&P SmallCap 600 – will no longer add companies with multiple share class structures.

– Existing index constituents are grandfathered in and are not affected by this change.

– The methodologies of other S&P and Dow Jones branded indices – including S&P Global BMI, S&P Total Market and indices for particular market segments – remain unchanged at this time.

Both indices conducted surveys on this topic a few months ago. Russell’s survey results showed that 68% of responding investors wanted the index to require some minimum threshold for the percentage of voting rights in public hands. Their final rule will be published at the end of this month – and may incorporate additional feedback that Russell receives following its announcement. As noted in this blog, MSCI has made a similar proposal.

If a company is excluded from the indexes, it’s harder – or impossible – for some fund managers to buy its stock. But it appears that many institutional investors favor exclusion – as it aligns with their policies to support “one share, one vote” proposals.

See this “Proxy Insight” article (pg. 6) for a summary of investor perspectives. Also check out the memos in our “Dual-Class Voting” Practice Area.

SEC Commissioners: Will Robert Jackson Be Nominated?

John blogged a few weeks back about Hester Peirce being (re-)nominated as a SEC Commissioner. Now it’s rumored that Columbia Professor Robert Jackson would be nominated to fill the open Democrat slot on the SEC’s Commission. I would stress that this is merely a rumor.

Here’s an excerpt from this WSJ article by Andrew Ackerman:

If Mr. Jackson is nominated, Senate lawmakers would likely seek to speed up his confirmation by pairing him with Hester Peirce, a Republican tapped earlier this month to fill another SEC vacancy. Both would join an SEC down to just three members: Democrat Kara Stein, Republican Michael Piwowar, and Jay Clayton, the chairman, who is an independent.

Mr. Jackson has written on securities topics such as executive compensation and corporate governance. In 2014, he helped uncover a flaw with the SEC’s corporate-filing system that allowed hedge funds and other rapid-fire investors to gain access to certain market-moving documents ahead of other users of the system. The SEC pledged to correct the flaw.

A 2015 research paper he co-wrote suggests corporate insiders might trade on material, nonpublic information before their companies are required to publicly report the information. He is also among a group of 10 academics to petition the SEC in 2011 to require public companies to disclose their political-spending activities.

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Liz Dunshee