Issue 2.3 – October 4 2017
Tech companies are especially in the crosshairs on this and related issues.
This is a heads up, especially, to Tech firm executives and board rooms and key insiders of all company sizes:
Powerful key capital market players don’t like to see IPOs coming to market now with dual- or multiple-class voting shares.
One of the big news items as we came into September here in New
York was generated by S&P Dow Jones Indices — newly-public
companies will be barred from some of the many indexes / indices / benchmarks that global investors use if the company (1) issues multiple classes of voting shares or (2) has a very small percentage of voting stock in the hands of non- restricted shareholders.
Note that the action taken includes future barring of companies from the S&P 500; the S&P Composite 1500; S&P Midcap 400; and, S&P SmallCap 600 (all registered trademarks of the company).
This comes in the recent days after IPO shares (a prime example is Snap Inc., with US$3.4 billion in market cap in March 2017) which came into public ownership with in reality no voting rights. This was not a good example of “democratic capitalism,” and “investors having their say,” corporate governance experts groused.
Earlier, of course, we saw companies like Google (IPO in 2004) coming to market with dual-class shares (that began the recent trend of tech founders holding voting shares in different classes).
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One week earlier, FTSE Russell announced its decision (in the week before S&P DJ announced its new policies). FTSE Russell will bar companies from its popular indexes if companies have 5% or less of voting rights in the hands of unrestricted shareholders. This includes no inclusion of the IPO company in the Russell United States Indexes; the FTSE Global Equity Index Series (GEIS); and non-cap weighted indexes such as the FTSE and Russell RAFITM Index Series.
Companies presently in these and other FTSE Russell indexes will have five years to change their voting structure (from today to September 2022).
CFO magazine noted that 40 corporate issuers in the U.S.A. do not meet the FTSE Russell guidelines (the 5% rule) including Clear Channel Outdoor; SecureWorks; Terraform Global; VMWare; Virtu Financial; Hyatt Hotels; and, U.S. Cellular.
FTSE Russell wanted to make the threshold 25% and will re-visit that higher limit annually. CFO says on that basis, 148 issuers have at least 5% restricted but could not meet the 25% rule if this was adopted by the influential FTSE Russell organization for its index/benchmark products. (Note: FTSE Russell is a trading name of FTSE International and Frank Russell Company; both are members of the London Stock Exchange Group plc.)
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The influential Council of Institutional Investors (CII) put out a statement praising the moves: CII members represent more than US$3 trillion in Assets Under Management.
Keep in mind: In March 2016, the Council issued a statement that “a company going public should have ‘one share/one vote’ policies, with an independent boards and annual elections for all directors.”
The CII 2016 policy statement was prompted by high-profile IPOs debuting on U.S. markets in 2016 with multiple-class structures. These included such firms as: Alibaba; First Data; Groupon; Linked In; Square; and, Zynga. (In 2015, CII cited Dealogic data showing that dual-class IPOs raised more than twice the capital than was raised in 2014.)
CII believes that even high-performing multi-class companies such as Facebook incur long-term risks because of the mis-alignment between equity and shareowner voting power .
CII Executive Director Ken Bertsch remarked: “It is troubling when companies tapping public markets insulate controlling shareholders forever, with lack of reasonable sunset requirements on provisions that dis-empower public shareholders.”
The CII set out “key practices” that investor-members feel undermine accountability:
- Multi-class equity structures have unequal voting rights.
- Plurality vote requirements for uncontested director elections.
- Lack of independent board leaders.
- Classified board structures.
- Super-majority vote requirements for bylaw amendments / other proposals.
These are other elements are spelled out in CII’s “Investor Expectations for Newly-Public Companies.” Expect to see these in coming proxy voting resolutions submitted by institutional investors.
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And from far away: Hong Kong Exchanges and Clearing, Ltd — operators of The Hong Kong Stock Exchange (HKEX) is hearing from CII as well as from Norway’s Sovereign Fund managers ( These power players in capital markets want to see the Exchange not set up a parallel exchange that allow listing/trading of dual-class listings (the approaches are favored by many company founders in Asia).
Right now, the Hong Kong Exchange does not allow dual-class listings. That, the exchange owners worry, is setting up an environment in which IPOs skip over to other exchanges with more lax listing rules.
Hong Kong, says Bloomberg LP, is the world’s fourth largest stock Exchange. Allowing dual- or multiple-class shares to trade on a new exchange or on the Hong Kong Exchange (say the protesting
organizations, would encourage other exchanges around the world to instigate a race to the bottom. The U.S.A. maybe included!
We should remember that reference to Alibaba (above). Corporate Governance critics charge that the company skipped Asian exchanges to issue its IPO in the U.S.A. — where exchanges do allow dual- or multi-class shares to be listed and traded.
Bloomberg LP reports that seven (7) of the large IPOS coming to market are multi-class: Alibaba; Baidu; JD.com; Netease; Ctrip.com; Weibo; TAL Education; New Oriental Education; ZTO Express; and 58.com.
Stay tuned to this issue, especially if your company is: (1) in the tech industry and (2) considering going public in the future.
Key Takeaway: A growing universe of investors want single class stock to be issued!
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