Saturday, March 18, 2017

[Insert Clever Snap-Related Subject Line]

One of the hottest topics in business news today is the Snap IPO.

It’s the biggest tech IPO in some time (although some smaller ones apparently will be close behind), the company has so far been losing money and its growth has slowed, and oh yeah – its public shares do not have any voting rights.

In some ways, the disenfranchisement of Snap’s shareholders is the natural culmination of the dual-class share structures that have been popular with tech companies for a while.  But Snap is obviously taking things to extremes.  With no votes, there are no proxy statements.  Most of that information will be disclosed in Snap’s 10-K, but it also means there will be no say-on-pay votes and no shareholder proposals.  Sure, these are – or tend to be – nonbinding anyway, but Snap has shut down the mechanism by which shareholders as a group initiate conversations with the companies in which they invest. 

Some commenters call Snap a one-off; after all, even now, Snap’s shares have fallen well below their first day trading price, and analyst reaction has been less than enthusiastic.  But Snap is still trading higher than its offering price (at least for now), and Snap’s founders made hundreds of millions just from the IPO itself, without sacrificing control of the company – plenty of incentive for new players to try to replicate Snap’s results.  The matter has caused enough concern that the SEC has begun to examine it, though it’s unclear what – if anything – they expect to be able to do.  (I mean, the SEC’s power to directly regulate voting rights is a bit limited, but theoretically listing standards for NYSE and NASDAQ could be modified.).

One of the most interesting developments, at least to me, is the effort by institutional investors to have Snap excluded from major indexes (with a parallel effort across the pond); otherwise, they’d be forced to buy Snap’s shares despite their objections to Snap’s structure, and Snap would get a bit of a boost in its stock price - along with a class of shareholders who cannot vote with their feet.  I don’t know what the indexes are likely to do, but if they include Snap, will that open a space for alternative indexes that exclude no-vote shares – like Snap and perhaps Google Class C?  I have to admit, that would be an elegant free market solution.

One other interesting aspect of the Snap IPO concerns the nature of its shareholders: millennials.  Apparently, millennials have snapped up Snap shares, eager to invest in a company that plays such a role in their lives.  Snap doesn’t love them quite as much, of course, but if you view investing as consumption rather than a way to profit, I suppose it’s no worse than any other recreational activity.

In fact, there’s a whole startup devoted to encouraging consumers to buy stock in their favorite companies – and the companies will pay your brokerage fees.  (Joan posted earlier about a similar type of program at Domino's Pizza.) The theory is, stockholder-consumers are more loyal customers (and, I assume, more pliant voters), so it’s worth it to companies to cultivate a consumer shareholder base.  It happened before, that retail investors helped management fend off attacks; I wonder if the next would-be Snap might consider a less draconian approach to shareholder voting, but a more aggressive approach to marketing shares to its user base.

http://lawprofessors.typepad.com/business_law/2017/03/insert-clever-snap-related-subject-line.html

Ann Lipton | Permalink

Comments

We have been covering the Snap IPO in my business associations class. One of my students actually has a few shares. The S-1 Is a great teaching tool re: corporate governance

Posted by: Marcia Narine Weldon | Mar 22, 2017 8:50:32 AM

Oh, I should take a closer look then! I'm teaching Sec Reg this semester, and so I got to use things like the electronic road show, which was fun.

Posted by: Ann Lipton | Mar 22, 2017 9:27:02 AM

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