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Feb 15, 2017

Anger at Snap’s non-voting shares IPO

CII calls for co-founders to reconsider structure

Investors have expressed anger at Snap’s decision to deny them a say in running the company when the owner of messaging service Snapchat launches one of the largest tech IPOs in the US.

Snap has already said the IPO will be the first to offer shares with no voting power. Snap co-founders Evan Spiegel, chief executive, and Bobby Murphy, chief technology officer, will control the company even if they step down from their roles. The prospectus states that a founder’s voting power would be diluted only if he cut his stake substantially or ‘nine months after his death’. Snap aims to raise $3 bn in the IPO, valuing the company at up to $25 bn. 

A dozen of the biggest US institutional investors have expressed anger and dismay at Snap’s decision. The Council of Institutional Investors (CII), which represents pension funds and asset managers, sent a letter calling for Snap’s co-founders to reconsider the structure, signed by members that control more than $3 tn of assets. ‘Some companies lacking effective accountability to owners soar for a time but others crash and burn, and still others pursue mistaken strategies for far too long,’ the letter notes.

Anne Simpson, head of corporate governance at Calpers, says: ‘Telling us to wait for nature to take its course is a banana republic-style approach.’

Ken Bertsch, CII’s executive director, says Snap’s listing would encourage stock markets outside the US, such as Singapore, to reconsider their ban on dual-class listings in order to win IPO business. ‘What is distressing is that a lot of the world’s exchanges have been able to hold the line, but this could open the floodgates,’ he says.

Other technology companies, including Google and Facebook, have concentrated control in the hands of their founders, creating different classes of stock. But none has gone public with a class that has no votes at all. 

If either Spiegel or Murphy sells more than 70 percent of his stake, his whole stake will be converted into class B shares, which have the voting rights of existing pre-IPO investors. 

Proponents of multiple-class share structures say they are the reason founders such as Mark Zuckerberg at Facebook have been able to concentrate on building long-term value rather than worrying about short-term share price pressures.

Opponents say they deprive shareholders of a process for holding management to account if things go wrong. ‘For every Google or Facebook there is a Zynga or a GoPro,’ says Anne Sheehan, director of corporate governance at Calstrs.

Many funds will be forced to own Snap when it is included in major stock market indices, Sheehan warns, and the right to elect board directors should be fundamental: ‘Directors are meant to be shareholders’ representatives in the boardroom, and to have no voting power over who they are is egregious.’