Non-voting shares are not new in the world of capital markets, but as the mainstay of the public offering on an IPO they are, for all practical purposes, a first.
SNAP Inc.’s $3 billion IPO is garnishing a generous amount of attention and curiosity in a capital markets industry that is still looking to rebound to the days of glory of old. That SNAP’s unprecedented offering of Class A shares, available for public consumption, do not have voting rights, is curious indeed.
Per the disclosure in SNAP Inc’s S-1 dated 2/2/2017, there will be three classes of common stock. Class A, Class B and Class C. Class A are the only shares being sold in the offering and any holders of Class A shares “are entitled to no vote on matters submitted to stockholders.” Needless to say, someone gets to vote and make decisions. Holders of Class B shares and Class C shares will vote together as a single class on “all matters (including the election of directors) submitted to a vote of stockholders.”
Who holds the votes?
SNAP founders Evan Spiegel and Bobby Murphy will hold the Class C common stock and therefore will maintain approximately 88.5% of the voting power following the offer. Spiegel and Murphy (or either one individually) will maintain the ability to “control the outcome of all matters submitted to shareholders for approval.” This control will be wide ranging and encompasses the election, replacement and removal of directors, merger and consolidations, and the sale of all or substantially all of the company’s assets.
This control continues even if the decision-making duo splits up. If one or the others employment is terminated or comes to an end for whatever reason, the surviving member will have the ability to exercise the same level of exclusive control.
You won’t get the votes but you will get some risks
It goes without saying that if you’re doing something in the world of public offerings that is considered a first, there will be some risk considerations that you’ll need to get cozy with. Risks related to the Class A non-voting shares are feathered throughout the offering.
SNAP Inc.is relatively clear regarding the risk right out of the gate stating “Holders of Class A common stock have no voting rights. As a result, holders of Class A common stock will not have any ability to influence stockholder decisions.”
Additional risk considerations tagged within the SNAP Inc. IPO include;
• Company is unaware of any other IPO involving non-voting stock and cannot predict the impact of the capital structure and the concentrated control by founders will have on the stock price or business
• Because Class A common stock is non-voting and due to certain exemptions form U.S. securities laws holders of Class A common stock may have limited access to available information
• The concentrated control by the founders could discourage others from initiating potential mergers, takeovers or change-of-control transactions
• The current capital structure could prolong the influence of Mr. Spiegel and Mr. Murphy on the company
SNAP’s founders are likely betting on the fact they are piloting one of the most hotly anticipated tech IPO’s in an era in which they have almost become extinct.
For investors who pony up for SNAP Class A shares, there will likely need to be a healthy appetite for a rollercoaster ride completely controlled by management. Proxy season will also be a new experience for holders of Class A shares, but we’ll broach that in our part II coverage of the SNAP Inc. IPO.