Thursday, July 26, 2018
One of the business law academy's power couples, Amy and Bert Westbrook, recently posted an intriguing piece on SSRN that Bert and I have been communicating about a bit this summer. It is entitled Snapchat's Gift: Equity Culture in High-Tech Firms, and it is, indeed, a lovely gift--well conceived and packaged. It is a look at dual class common equity in technology firms--and equity more generally--that confronts and incorporates many perspectives from law, economics, and other social sciences.
Some of you, like me, teach basic corporate finance in a variety of courses. In those situations, it is important for instructors to have a handle on descriptions of the basic instruments of corporate finance--debt, equity, hybrid, and other. What is the package of rights each instrument represents that incentivizes investors to supply money or other valuable assets? In my classes, we ultimately discuss equity as a bundle of rights that includes potentials for financial gain and governance. Snapchat's Gift digs into the validity of these perceived rights in relevant part by focusing on recent changes in the primary public offering market for equity securities in the United States--in particular, the advent of highly publicized and fully subscribed initial public offerings of nonvoting common shares.
Specifically, the Westbrooks assert that the work of Marcel Mauss in a 1925 essay entitled The Gift: The Form and Reason for Exchange in Archaic Societies, sheds light on "recent developments in the U.S. public equity markets, notably the recent initial public offering of Snap, Inc. (SNAP)." (p.3) More specifically, they contend that "depiction of the potlatch system of gift exchanges has much to say about recent offerings of stock with little or no voting rights, notably Snap’s startlingly successful 2017 initial public offering (IPO) of common stock with no voting rights." (p. 4) The article essentially attempts to explain the benefit of the bargain for Snap's IPO investors--what those investors are getting in exchange for their financial capital investment, filling a void in the literature that the co-authors aspirationally describe as follows:
Our hope is to complement the substantial work of behavioral economics in explaining investor choice and organizational behaviors. 22 The field of corporate finance traditionally has been organized around the figure of the rationally self-interested individual. Behavioral economics argues that people are not all that rational. We argue that people in markets are not all that individual.
(p. 6) The article does make that contribution and offers more. In the process, for example, it describes innovative aspects of the current market for public equity, argues that capital appreciation and dividend distributions are illusory financial benefits of relevant public equity ownership, describes the weakness of corporate governance protections for shareholders, and uses Henry Manne's work in interesting ways to demonstrate that markets also do not provide adequate protections to shareholders.
The authors conclude that Maussean gifting provides a useful model to explore. I admit to finding this idea attractive because I (and others) have made similar observations about crowdfunded securities offerings, which the coauthors acknowledge. But the Westbrooks take this idea a step further forward by arguing that the culture surrounding the exchange (e.g., the expectation that the the parties will supply, receive, and reciprocate) is highly relevant to the bargain. "[G]iving and receiving proper gifts presumes, creates and stabilizes relationships, and so society itself." (p. 35) This gifting culture comprises a notion of repeat players in a system that values the collective and status. Based on my crowdfunding work, the cultural context described in the article resonates.
A core benefit of the approach taken in this article is that it explains in a new way aspects of the market for securities offerings that are ill-explained by traditional law and economics analyses. However, this relatively short piece and its ample footnotes more fundamentally represent a launchpad for many follow-on discussions, arguments, and observations relating to the nature of equity securities and the contextual benefits they may represent to investors. It also supplements Bernie Sharfman's argument in A Private Ordering Defense of a Company's Right to Use Dual Class Share Structures in IPOs (featured in an earlier BLPB post written by Marcia) "that the use of the dual class share structure in IPOs is a value-enhancing result of the bargaining that takes place in the private ordering of corporate governance arrangements." (p. 7) Specifically, in the article, Bernie offers that investors in dual class IPOs do so because of "the wealth-maximizing efficiency that results from the private ordering of corporate governance arrangements, and the understanding that agency costs are not the only costs of governance that need to be minimized." (p. 21)
I found the ideas in Snapchat's Gift fresh and accessible. This article has me thinking . . . .