March 4, 2019

Lyft’s Upcoming IPO: “Oh, Brave New World That Has Such Taxis In It!”

Lyft finally dropped the Form S-1 for its much anticipated IPO on Friday.  The filing fundamentally changed humanity forever – or at least that’s the impression you’d get from reading Lyft’s overheated nuclear jargon-bomb of a prospectus. If you think I’m being unfair, check out this lofty description of the culture & values of a company that owes a healthy chunk of its business to ferrying around drunk people:

Our core values are Be Yourself, Uplift Others and Make it Happen. Our team members, who uphold our values and live our mission every day, are at the forefront of cultivating and spreading this culture across the drivers, riders and communities we serve. This continuous interaction across the entire Lyft community creates a virtuous cycle which further reinforces our culture and fuels our growth.

Look, I worked on a lot of IPOs back in the day, and I plead guilty to helping draft a lot of meaningless gibberish about companies doing things like “proactively leveraging synergies” in prospectus summaries with silly captions like “Our Strategic Vision” & “Our Competitive Advantage.” But this thing reads like a parody of a tech company prospectus – starting with the pink cover page & culminating in a founders’ letter accompanied by an assortment of photos & quotes from photogenic millennials whose lives have been transformed by one-click access to an unlicensed cab.  Toss in the nearly $1 billion loss for the most recent year, and you’ve got truly state of the art stuff.

And maybe the biggest inside joke is that many people – including EU regulators – think ride share businesses like Lyft aren’t tech companies at all. Instead, they essentially view them as ‘gypsy cab’ apps. What’s more, in reading Lyft’s filing, you get the impression that its biggest market opportunity lies in the rapidly growing demographic of people who are too poor to buy their own cars. How do you spin that positively?  You do it like this:

We believe that the world is at the beginning of a shift away from car ownership to Transportation-as-a-Service, or TaaS. Lyft is at the forefront of this massive societal change. Our ridesharing marketplace connects drivers with riders and we estimate it is available to over 95% of the U.S. population, as well as in select cities in Canada. In 2018, almost half of our riders reported that they use their cars less because of Lyft, and 22% reported that owning a car has become less important. As this evolution continues, we believe there is a massive opportunity for us to improve the lives of our riders by connecting them to more affordable and convenient transportation options

Of course, since the Lyft folks are working 24/7 to bring humanity into “the broad, sunlit uplands” of TaaS (not to be confused with TASS), management can’t afford to be distracted by the demands of public shareholders.  Perhaps that’s why Lyft not only has a dual class capital structure, but also a staggered board, blank check preferred, and a prohibition on shareholder written consent actions, just to name some of its antitakeover protections.  The CII has already weighed-in with the customary objections.

Personally, I couldn’t care less if Lyft wants to offer the public low vote stock – if you don’t like it, don’t buy it.  But I’m looking forward to the post-closing pearl clutching about these provisions by the governance side of the house of the same institutions whose portfolio managers would likely stampede over their own children to get shares allocated to them in the deal.

If you’re looking for more of a deep dive into Lyft’s proposed IPO, check out this article.

Dual Class Companies: Are “Coattails” the Answer?

Lyft’s just the latest high profile IPO to include a dual class capital structure. There’s been a lot of sound & fury about public companies with these structures – and we’ve blogged about quite a bit of it.  But this recent study claims that our neighbors to the north are the source of an idea for moving forward on this issue.  Here’s the abstract:

The debate over whether dual class of shares increases or decreases share value, should be prohibited or not, should be subjected to mandatory sunset provisions, and so on has been heating up over the last few years. This paper reviews the pros and cons of dual class of shares in light of more recent empirical results of (mostly) American studies. The paper surveys the evolution of dual-class companies in the Canadian context and makes a number of recommendations to enhance the usefulness of this type of capital structure and protect the rights of minority shareholders.

The paper comes out against time-based sunset clauses but supports the obligation for dual-class companies to adopt a “coattail” provision, as is the case in Canada, which provision ensures that all shareholders will have to be offered the same price and conditions should the controlling shareholder decide to sell its controlling stake in the company. The paper also recommends that separate tallies of vote results be made public for each class of shares and that a third of board members be elected by shareholders with “inferior” voting rights.

Now, I hate to disabuse North America’s designated driver of its notion that “coattails” are a Canadian invention, but the there’s lots of precedent for this south of the border as well – and it goes back decades. You need look no further than my all-time favorite deal for evidence of this.

In the Cleveland Indians’ 1998 initial public offering, the company’s charter included a provision that generally prohibited the transfer of the high-vote shares held by then-owner Dick Jacobs other than as part of a transaction in which the low vote shares received the same consideration as the high-vote shares. And you can take my word for it – we weren’t innovators. In fact, we shamelessly stole that language from charter documents filed in several precedent transactions.

ICOs: Court Reverses Prior Ruling Suggesting Tokens Aren’t Securities

The SEC’s limited track record in litigation involving whether tokens are securities has been pretty good – but there was one recent blemish.  In December, a California federal court denied the SEC’s motion for a preliminary injunction against Blockvest’s proposed token offering, holding that the agency had not provided enough information to deem the token a security.  Here’s an excerpt from John Reed Stark’s blog describing the court’s decision:

On February 14, 2019, in a stunning and extraordinary reversal from his November decision, Judge Curiel sent shockwaves through the ICO industry. Specifically, Judge Curiel granted the SEC’s bid for a preliminary injunction against Blockvest after the SEC asked him to reconsider, based upon, “a [now] prima facie showing of Blockvest’s past securities violation and newly developed evidence which supported the conclusion that there is a reasonable likelihood of future violations.”

John Jenkins