Did SNAP Skip Out on Proxy Season?

SNAP Inc.’s recent IPO continues to draw both attention and questions related to the first of its kind non-voting rights shares being an integral part of the offering.

We previously commented on the unique and peculiar nature of SNAP Inc.’s Class A common stock offered to investors that carry no voting rights. The question of whether investors will be able to vote on company matters has been answered: you won’t vote. With that said, another question is raised: namely, what does a SNAP proxy season look like, or, more importantly, will there be such a thing as a proxy filing by SNAP?

What would proxy season look like for SNAP Inc.?

SNAP Inc. has made it relatively clear in their IPO that a proxy season will virtually be a non-event for investors. According the IPO, because the Class A common shares are non-voting the company will not be required to file proxy statements or information statements under Section 14 of the Exchange Act.  Proxy statements not only facilitate the investors ability to vote on matters, they also are a key source for information.

While the SNAP “information well” isn’t necessarily going to run dry, many investor will undoubtedly be left thirsty for company information that most shareholders are accustomed to receiving.  SNAP has sent mixed signals as to their course of action. Even though the company’s reporting leads with the fact that it is technically not required to submit proxy statements, SNAP only closes the door halfway.

It all seems to hinge on what information they opt to share with holders of Class B and Class C shares. According to the IPO, if the company does not deliver any proxy statements, information statements, annual reports and other information and reports to the holders of Class B and C shares they then will similarly not provide any of this information to holders of Class A non-voting shares. The company softens this blow by directing attention to other periodic reports indicating that key information will be reported in other public filings, specifically citing Part III of Form 10-K.

There’s no “there, there” for key proxy related topics

SNAP Inc. appears to have craftily side-stepped some thorny proxy related matters that most issuers eventually come face-to-face with. The company will not be required to comply with proxy access rules under Section 14 of the Exchange Act. If the company takes any actions in an extraordinary meeting of stockholders, they will not be required to provide information normally required under Section 14 to Class A stockholders and since this information is not required in the 10-K, holders of Class A shares will have little view with respect to extraordinary meetings of stockholders.

Say-on-pay and say-on-frequency is also off the table for SNAP.  Stockholders will not have an opportunity to provide a non-binding vote on compensation of the company’s executive officers.  Additionally, Rule 14a-8 proposals are out. Holders of Class A common stock will not be able to bring matters before the company’s annual meeting of stockholders or nominate directors, nor can they submit stockholder proposals under Rule 14A-8 of the Exchange Act.

You may not be able to vote — but you could still meet

While SNAP has systematically taken away the vote and some key sources for information for its holders of Class A common stock they will present investors with the opportunity to attend annual meetings.  SNAP has made it clear that these annual meetings will not resemble the more traditional annual meetings of stockholders that other issuers hold.

SNAP will invite holders of Class A common stock to attend annual meetings so that they may “submit questions to our management team.”  In the same breath, SNAP reiterates that any proxy or information statement that they opt to send out will clearly indicate that they are not seeking from non-voting shareholders their proxy to vote on any matter described in the proxy.

Founder proxy agreement

While proxy season will be a somewhat lonely non-event for Class A common stock holders, SNAP founders Evan Spiegel and Roberty Murphy have a fairly tight proxy process in place for themselves thanks to what SNAP reports as the Founder Proxy Agreement.

According to disclosure, both Mr. Spiegel and Mr. Murphy entered into a proxy agreement with each other which will remain in effect after the closing of the IPO.  The agreement applies to all shares of Class B and Class C common stock that each beneficially owns and represents approximately 89% of the outstanding voting power of the company’s capital stock.

Under the proxy agreement, Mr. Spiegel designated Mr. Murphy as his designated proxy holder and in turn Mr. Murphy selected Mr. Spiegel.  If one of the co-founders leaves the business, is deceased or “disabled” the remaining co-founder will assume the right to exercise all of the voting and consent rights previously owned by the other co-founder.

It appears that the SNAP Founder Proxy Agreement will have a long-lasting lifespan. The agreement terminates if the business liquidates, dissolves or winds up business operations, goes into bankruptcy or receivership, both co-founders send written consent to terminate the proxy agreement or nine months after the death of both Mr. Spiegel and Mr. Murphy.

As a result, both co-founders, or potentially either one alone, essentially have the ability to control the outcome of all matters submitted to stockholders for approval. This includes the election, removal and replacement of directors, compensation, and any merger, consolidation or sale of assets.

Clearly, the SNAP IPO is an interesting anomaly and it’s too early to say if “non-voting IPO’s” will become the norm. There are rumblings of displeasure and SNAP is already taking some heat.

According to reports, a group representing large institutional investors has approached S&P Dow Jones Indices and MSCI Inc., pushing to bar SNAP or any other issuer that sells investors non-voting shares from their stock benchmarks.

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