Shares sold in a $3 billion initial public offering by the parent of Snapchat will lack voting power, testing the commitment of big asset managers in their recent fight for investor rights.
In a registration document on Thursday that it will use to pitch shares to investors, Snap Inc outlined an aggressive expansion plan for its social media network in what would be the biggest U.S. tech IPO since Facebook.
But the document shows the shares will not have voting rights - an unprecedented feature for an IPO despite years of rising concerns about corporate governance from fund managers looking to gain influence over executives.
Indeed, just earlier this week top fund managers including BlackRock, Vanguard Group and T Rowe Price launched an initiative to improve governance, among other things, calling for companies to give shareholders voting rights "in proportion to their economic interest."
Technically, the framework outlined by the group does not go into effect until the start of 2018, to give companies time to adjust.
But Charles Elson, a professor at the University of Delaware who follows corporate governance, said that to reinforce their message, the big fund managers should not buy into the IPO of Snap or others that might follow.
"They should not buy common stock without a vote," Elson said. That should even include index funds, which ordinarily buy shares to reflect the sector or group of stocks they track, he said.
For investors who do buy Snap shares without voting rights, Elson said, "You're completely hostage to the actions of management."
A Snap representative declined to comment. Snap's filing states it will have a unique stock structure with three share classes, which will concentrate voting power with its co-founders Evan Spiegel and Robert Murphy.
Each of their shares is entitled to 10 votes on governance matters. Current investors such as venture capital firms will have shares entitled to one vote, and shares being sold to the public will have no voting rights. The filing acknowledges the concentrated control could impact Snap's share price. Other technology giants have also been adding to founders' voting power including Facebook and Google.
To be sure, Snap's filing contains a provision to eventually grant all shares an equal vote, but only if both founders die or their ownership falls below a threshold.
In a note on Friday, Edison Investment Research analyst Richard Windsor wrote that while tight control may be justified in a company's private early stages, it is not in large, public companies whose problems can be worsened because founders "tend to be emotionally attached to their companies."
Ordinarily his firm would discount its valuation of a company by 30%, when founders keep control to offset the extra risk to investors, Windsor wrote.
A spokesman for T. Rowe Price Group said the company would not comment. Representatives of BlackRock and Vanguard did not comment.
Another backer of the new governance principles is the California State Teachers' Retirement System, with roughly $200 billion under management.
Aeisha Mastagni, a portfolio manager for the system, said while it does not normally buy shares during IPOs, it usually buys companies like Snap once their stocks wind up in stock indexes like the Russell 3000. Avoiding Snap would only shift the risk to other parts of the portfolio, she said.
The thinking could be different for actively-managed funds, she said, especially in a case like Snap where investors would lack votes needed to change management in a crisis.
"With companies like this, you think they're always fine, until they're not," Mastagni said.
CalSTRS was among a group of 18 co-signers of a letter the Council of Institutional Investors sent to Snap on Friday, urging it to adopt a single-class structure.
Other signatories came from representatives of public pension managers like the California Public Employees' Retirement System and the Florida State Board of Administration.
As of Friday afternoon the large U.S. fund firms including BlackRock, Vanguard and T. Rowe Price had not signed the letter.
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