Meal delivery kit service Blue Apron this month registered to list its $100 million initial public offering (IPO) on the New York Stock Exchange (NYSE), valuing the company at $3.2 billion. Following the example of camera company Snap, which went public in February, the company plans to offer class C non-voting shares.
The decision has incited a response from a number of investment management companies and shareholder lobbyists, including State Street and the Council of Institutional Investors (CII), who are keen to ensure that this does not become commonplace.
Despite previous assertions earlier this year that Snap’s decision to offer shares that allowed investors no say whatsoever in the company’s decision making would not catch on, it appears that the phenomenon is in fact beginning to gather speed. Altice USA, the stateside affiliate of Dutch telecoms company Altice, also announced plans to issue no-vote shares in its own listing, which closed this week.
Regarding Blue Apron, Altice and initially Snap, the cause for concern is that companies elect to offer no-vote rights before going public. Several companies already have three tiers of shares, generally one-vote, ten-vote and no-vote, with varying levels of success. Google initially offered dual-class stock when it went public – although was forced to settle with shareholders following a legal challenge – and others, including Facebook, have followed suit.
Ken Bertsch of the CII believes that this trend should not be allowed to continue – and that it should not have been allowed to happen in the first place.
“If you set up these structures where there is potentially no accountability and the management is electing the board of directors that they report to,” he said, “even if there is a lot of growth and some freedom for the management group, eventually companies run into trouble, management teams make mistakes and there no normal mechanism to hold them to account or to help them refocus.”
In a June 21 open letter, the CII urged Blue Apron to scrap its no-vote share provision. State Street went as far as to ask the Securities and Exchange Commission (SEC) to intervene and put a stop to companies offering no-vote shares.
- Meal delivery kit service Blue Apron this month listed a $100 million IPO, and following the example of Snap, the company plans to offer class C non-voting shares;
- Investment management companies and shareholder lobbyists such as State Street and the CII are keen to ensure that this does not become commonplace, and have asked the SEC to intervene, and Blue Apron to reconsider;
- According to the CII, multi-class structures deny shareholders the power to press for change when something goes wrong, an inevitability sooner or later at most companies;
- Market sources suggest that the nature of the market – a herd mentality – will ensure that companies will be able to issue no-vote shares as long as there is continued demand in hot IPOs;
- The SEC failed in its attempts to curb dual listings in the 1980s, and for this reason there is concern that it will be unable to prevent this trend from escalating and damaging shareholder protection rights in the US.
Josh Korff, partner at Kirkland & Ellis, suggests that from a game theory perspective, this is a difficult situation. The very nature of hot IPOs like Snap and Blue Apron allows issuing companies to effectively do what they please, despite rising levels of shareholder objection.
Blue Apron, he said, although not as widely recognised as Snap, occupies a similar position in that it will be one of the IPOs of 2017 that investors do not want to miss out on. In this scenario a herd mentality develops, leaving a scenario in which companies can get away with giving shareholders inadequate governance rights, or less than is typical, because of an underlying necessity to be involved.
“This is something that investors hate,” he said, “but Snap can get away with it because of the fear of missing out. Everyone is going to invest in Snap's IPO, whether you like their no voting rights policy or not.”
Given the slow-moving nature of the US IPO market in recent years, it is also hardly surprising that investors are reluctant to upset issuers and bankers too much by sticking their necks out in protest of no-vote shares. “If you saw a few of the big investors get out in front of this and say, we don’t want to do it,” continued Korff, “then that would provide cover for others, and you would see a tipping point. Then you would see most investors say ‘we don’t like this, we don’t want to invest in companies that don’t have voting rights’.”
"Management teams make mistakes and there is no normal mechanism to hold them to account"
A suggestion made by the CII, and ratified by others including Korff, would be to introduce sunset provisions. These provisions imply that companies are most susceptible to investor attack immediately following an IPO, so should be allowed greater protections for the initial periods of a company’s public life. After a set period of time, the holders of no-vote stock will legally acquire voting rights on par with other noteholders.
Snap was not the first time that this issue had been raised in a pre-IPO context. In 1925 the proposed IPO of the Dodge Brothers on the NYSE contained non-voting shares, but was refused by the exchange, which subsequently adopted a one-share, one-vote policy for many decades thereafter.
The SEC made its own attempt in the 1980s to prevent dual-class voting structures, which had begun to surface, but was sued by the Business Roundtable on the grounds it did not have the authority to object. Despite the recent calls for the SEC to intervene, there is doubt whether the Commission will have any effect in in this instance either.
Just last week, however, IAC Interactive abandoned plans to introduce no-vote stock, citing fears of lengthy litigation as the sole reason. Despite this, Bertsch remains concerned.
“The stock exchanges compete with each other and we think there is a race to the bottom, that globally has been led by Nasdaq and the NYSE,” he said.
Hong Kong has just proposed permitting dual-class listings, and Singapore made similar propositions earlier this year. There are also concerns about the premium listing on the London Stock Exchange.
“The trend is only going to get worse. It is a bad dynamic,” said Bertsch.
“There has clearly been a pickup in this in the last year – there has been a pick up over the last decade – but it has gotten considerably more serious in the last year.”
The SEC chose not to comment.
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