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- S&P 500 announced changes to its rules Monday that would exclude companies with multiple share classes, including Snap Inc. which offers classes of stocks without voting rights.
- There are different classes of common stock that can be purchased by the public. Typically each share comes with one vote. Snapchat, or Snap Inc., offers multiple classes of stock, some of which do not give members voting rights.
- The new rules will only apply to companies seeking to be listed within the S&P Composite 1500 indices, which includes the S&P 500. Companies already part of the index will be allowed to remain without any changes.
- S&P Dow Jones explained its decision to bar companies with multiple stock options, saying in a press release:
“Companies with multiple share class structures tend to have corporate governance structures that treat different shareholder classes unequally with respect to voting rights and other governance issues.”
- Companies with multiple share classes will still be part of the S&P Global BMI Indices and S&P Total Market Index.
“S&P DJI has determined that the methodologies for these indices should not consider governance arrangements when selecting the universe of constituents. Therefore, the methodologies for these indices are not being modified.”
- The S&P 500 index is comprised of companies that are considered leaders in their industry. The index’s goal is to “reflect the US equity market and, through the market, the US economy.”
- The rules governing the S&P 1500 are more restrictive than the Global BMI and Total Market Indices. Companies included in the S&P Composite 1500 are required to have positive earnings and a minimum float of 50%.
- A minimum float of 50% means that at least 50% of the company’s outstanding common stock must be available to the public — versus being held by the company or a hedge fund.
- Snap Inc. offers three classes of common stock. Class A does not have any voting rights; Class B has one vote per share; and Class C offers 10 votes per share.
- Class C stocks are only held by founders, executive officers, and directors, which allows the founders to maintain 88.5% of the voting rights.
- After Snap Inc.’s decision to offer only non-voting Class A stock options, S&P Dow Jones held a “Consultation on the Eligibility of Non-Voting Share Classes” among members of the investment community to help determine whether companies offering non-voting share classes should be eligible for indices. The outcome of the consultation helped shape the decision to exclude companies like Snap Inc. from the indices.
- Tech companies are often hesitant to bring their companies public despite the large potential for growth.
- A study by Shai Bernstein, an associate finance professor at Stanford, found that going public can have a negative impact on innovation.
- Other tech startups that will be affected include software publishing company Nutanix, cloud communications company Twilio, and online meal kit service Blue Apron among others. It could also influence the decisions made by tech startups such as Uber, Spotify, and Airbnb on whether they will offer multiple classes of stocks should they decide to go public.
Support for New S&P Rule
- In a statement Ken Bertsch, executive director of the Council of Institutional Investors, said:
“This is a huge win for investors and a blow to companies that deny shareholders any say in how the company is run.” He then added “Multi-class structures, especially those with non-voting shares, rob shareholders of the power to press for change when something goes wrong, which happens sooner or later at most if not all companies. Shareholders at such companies have no say in electing the directors who are supposed to oversee management.”
Criticism of New S&P Rule
- International law firm Davis Polk criticized the new rule in a statement:
“With Congress and the SEC working hard to encourage companies to go public in the face of a long-term decline in IPOs, it is disappointing that these measures may discourage founders and other controlling shareholders from taking their companies public in a manner conducive to long-term management perspectives.”
Elisa Morrison contributed to this report.