You’re likely well-aware of the new policies that have been issued by major stock index providers, which will exclude or alter the guidelines for companies with multi-class stock structures. The S&P Dow Jones, FTSE Russell, and MSCI recently adopted (or are in the process of considering) changes to their eligibility requirements that would bar new companies with multi-class structures from inclusion in certain indices going forward.
While several major institutional investors have been advocating “one share, one vote” for a while now, the conversation picked up with the IPO of Snap Inc., as the company launched with a triple-class stock structure that limited investors to non-voting shares. Even defenders of the multi-class structure have said that Snap Inc. (and other recently public companies like Blue Apron Holdings) have taken the multi-class stock design too far, which has spawned an ongoing stream of articles and critical assessments outlining the pros, cons, and potential impact.
In this blog, however, we focus on two important questions raised this week by our legal experts, the team at Wilson Sonsini Goodrich & Rosati (WSGR). In their timely WSGR Alert (excerpted below), the firm’s top experts raised two questions:
- Will the multi-class exclusion result in fewer companies going public?
- Are these policies yet another step towards a “one-size-fits-all” corporate governance structure?
Founders and private-company board members with aspirations of future IPOs will certainly have more to discuss around the board table as these policy changes are implemented. To access the full WSGR Alert (including a recap of the S&P Dow Jones, FTSE Russell, and MSCI policy announcements), click here.
From Wilson Sonsini Goodrich & Rosati’s Aug. 8 WSGR Alert:
- …There are at least two even more significant problems with the decision by the index providers to exclude companies with multi-class structures. First, although it is far from clear that all newly public companies want to be in the indexes—there are both benefits and drawbacks for a company whose stock is included in a major index—if the goal of this effort is achieved and fewer companies with multi-class structures go public, then it may simply result in fewer companies going public.
As SEC Chairman Jay Clayton has repeatedly emphasized, making it harder for companies to go public in the United States is detrimental to our capital markets. The number of public companies in the U.S. has declined by more than 45 percent since its peak in 1996, while the small, venture-backed company initial public offering (IPO) has virtually disappeared from the market. Even as the SEC is actively looking for ways to encourage more companies to go public, the decision by the index providers has the potential to discourage some of our best private companies from going public.
This leads to the second major problem with the decision by the index providers: it is yet another example of a “one size fits all” view of corporate governance. There has been substantial academic literature demonstrating that there is no single form of corporate governance that inevitably leads to better corporate performance. This research ranges from recent articles showing that the multi-year effort to eliminate classified boards and other defensive measures may have cost the shareholders of these companies hundreds of millions of dollars to questions about the value of the shareholder maximization thesis.2
It also must be noted that while the index providers have chosen to exclude companies with multi-classes of stock from the primary indexes in the U.S., they are not making the same decisions with companies in other parts of the world. For example, MSCI just created a new index for China’s A shares.
Ultimately, we believe that the decision by the index providers should not be a deciding factor in whether or not a company chooses to go public with multiple classes of stock. At the same time, 2015 and 2016 had just 18 technology IPOs each year, and this year is on track to have about the same number. Many of these companies went public with dual-class or multi-class stock, including most recently Snap and Blue Apron. The decision by the indexes will be a factor considered by companies considering whether or not to go public, as well as whether or not to include a multi-class share structure at the time of an IPO. Given the actions by the index providers and how these actions have been precipitated by some of the largest institutional investors, it should not be surprising why many of the best private companies may continue to try and avoid the public markets. Click here to read in full.
Indeed, other industry predictions have ranged widely from those envisioning little impact to those anticipating a global power struggle between profits and governance. Others believe the impact will be felt primarily in tech. We’ll keep you updated as these policy changes unfold.
Among the most outspoken figures has been Ken Bertsch, Executive Director for the Council of Institutional Investors, who deemed the policy announcements a “huge win for investors and a blow to companies that deny shareholders any say in how the company is run.” Don’t miss Bertsch’s appearance in last year’s Board Performance Review, an ongoing series of panels where institutional investors, proxy advisors, CEOs, and activists give critical feedback on corporate board performance.
Also, be sure to catch the regular appearances of the WSGR team on Inside America’s Boardrooms, where past topics have ranged from poison pills to board member liability.