Securities Law Blog

S&P Dow Jones Joins the Fight Against Multi-Class Shares

S&P Dow Jones Indices bars companies from joining its key indexes if they have multiple share classes.

In a statement released on July 31, 2017, S&P Dow Jones Indices barred companies that have multiple share classes from certain of its key indexes.  Companies that issue different classes of shares conveying different voting rights to investors will no longer be able to join the S&P Composite 1500 and its component indices.  The S&P Composite 1500 is composed of the S&P 500, S&P MidCap 400 and S&P SmallCap 600.  These new restrictions took immediate effect.  Existing S&P Composite 1500 index constituents are grandfathered and are not affected by these changes, permitting companies such as Berkshire Hathaway, Alphabet (parent corporation of Google) and Facebook to remain.  S&P will continue to include companies with multiple share classes and limited shareholder voting in the S&P Global BMI Indices and the S&P Total Market Index.

We previously reported in our Bloomberg BNA article, “IPOs in 2016 Increasingly Include Dual-Class Shareholder Voting Rights”, from July 2016 about the increasing number of pre-initial public offering companies that have set up dual-class or multi-class share structures whereby such companies provide in their certificate of incorporation for at least two classes of authorized common stock with one class containing limited or subordinate voting shares (e.g., one vote per share) and the other class containing ‘‘super-voting’’ or multiple voting shares (e.g., ten votes per share).  Some companies do away with voting altogether for the one-vote shares by having voting and non-voting share structures. 

The announcement by S&P Dow Jones follows last week’s announcement by rival index FTSE Russell that it will require companies to offer non-restricted shareholders at least 5 percent voting rights to be included in its main indexes.  FTSE Russell’s new rules will take effect for new listings beginning in September and companies with stocks already included in their indices will have five years to make any necessary changes to comply.  These actions come in the wake of the decision by Snap Inc. earlier this year to sell shares with no voting rights, which was met by opposition by some institutional investors.  Snap Inc. was the first IPO to provide purchasers no voting rights at all.  Despite the opposition, Snap Inc.’s IPO successfully launched, although the shares are now trading below their original listing price.

While the rationale behind dual-class share structures appears to be an attempt by founders and executives to entrench themselves and maintain control over the company, the idea does have its advocates.  In particular, they argue that the dual-class share structure insulates management and the board from the short-term pressures of Wall Street and enables them to better focus on the long-term strategy of the company.  Those denouncing such dual-class share structures point to the lack of accountability given to managers under such a structure.  While being asked to bear the financial risk of their investment, holders of non-voting or limited voting stock have virtually no means of voicing opposition to management’s actions.  Shareholders are left basically powerless to lobby for change if something goes wrong.

Although S&P Dow Jones and FTSE Russell have taken different approaches, the actions by each of these indices represents a major boost for institutional investors who have lobbied against such multi-class share structures and will likely impact the voting structure decisions of companies that are preparing to go public.  Whether this benefits retail investors remains uncertain.  The ‘average’ investor who invests through 401(k) plans or other funds, which purchase S&P indices and stocks, may be precluded from participating in certain high growth securities.  In addition, certain unicorns, pre-IPO companies with an estimated valuation of more than $1 billion, may be discouraged from going public.