After seeing the control maintained by the founders of Facebook, Snap and other public companies, clients often want to discuss multi-share class structures to maintain control of their companies. Index providers S&P Dow Jones, FTSE Russell and MSCI have each adopted or proposed new rules designed to exclude companies with multi-class share structures. The actions highlight growing concerns about an increase in the number of companies implementing these capital structures.
Multi-Class Share Structures
Multi-class share structures are used by companies that want to be publicly traded but retain founder control by using multiple share classes with different voting rights. An increasing number of technology companies have been implementing these structures in connection with their initial public offerings.
One recent example was Snap, which sold non-voting shares in its IPO while certain pre-IPO investors continued to hold shares with limited voting rights. Snap’s founders, meanwhile, controlled almost 90 percent of the vote with a separate class of shares. Other public tech companies, including Facebook, Google and LinkedIn, have also implemented multi-share structures.
Supporters of these structures contend they protect against short-term activist demands and help companies focus on long-term growth. Critics argue the structures diminish the shareholder voice at public companies. Some large institutional investors, including BlackRock and Vanguard, have expressed general opposition to multi-class structures and endorsed a “one-share, one-vote” standard. Certain investor trade groups, such as the Council of Institutional Investors, also support that principle.
Effective July 31, S&P Dow Jones said the S&P Composite 1500 and its component indices – the S&P 500, S&P MidCap 400 and S&P SmallCap 600 – would no longer add companies with multi-class share structures. Existing companies included in these indices would be grandfathered in and would not be affected by the rule change. Companies with multi-class share structures will still be eligible for inclusion in the S&P Total Market Index and other S&P and Dow Jones indices.
The announcement came just days after a proposal from FTSE Russell requiring more than 5 percent of a company’s voting rights be held by unrestricted “free-float” shareholders in order for the company to be eligible for inclusion on the FTSE Russell indices, including the Russell US indices. Free-float is defined as the percentage of shares that are freely available for public purchase. Existing FTSE Russell companies are given a five-year grace period to allow for time to change their capital structure.
MSCI is also considering similar changes to rules regarding non-voting shares. For potential new MSCI companies, under the proposed rules MSCI will not include non-voting shares in the MSCI GIMI and MSCI US Equity Indexes when the company level “voting power” of listed shares is less than 25 percent. Existing companies would be maintained in the index if its listed voting power (defined as the voting rights of listed shares over total voting rights of the company) is above two-thirds of 25 percent (i.e., 16.67 percent) and would have one year to make capital structure changes before being removed.
What This Means
Companies that are contemplating an IPO will likely have to weigh the benefits of inclusion on a stock index, which is often considered an important milestone for startups, against the limitations on its capital structure. If nothing else, the announcements demonstrate a willingness from index providers to play an active role in shaping corporate governance standards.
One concern has been the rule changes may discourage companies from going public, something FTSE Russell acknowledged in its rule release: “The inclusion of such an eligibility hurdle might…discourage future tech IPOs should companies prefer to stay private rather than lose a degree of control.”
With respect to the FTSE, companies looking to maintain a multi-class share structure will have to monitor their float to make sure they meet the eligibility requirements and consider lowering the relative voting power of their high-vote stock. Those seeking to be included on an S&P index will face even tougher requirements and will be restricted from any multi-class structure.