Snap's Not Looking to Chat With Shareholders: How the parent of mobile-messaging app SnapChat's new stock structure will undermine investors, corporate governanct and the courts.

AuthorElson, Charles M.
PositionINVESTOR PERSPECTIVES

Increasingly, company founders have been opting to shore up control by creating stock ownership structures that undercut shareholder voting power, where only a decade ago almost all chose the standard and accepted one-share, one-vote model.

Now the Snap Inc. initial public offering (IPO) takes it even further with the first-ever solely non-voting stock model. It's a stock ownership structure that further undercuts shareholder influence, undermines corporate governance and will likely shift the burden of investment grievances to the courts.

By offering stock in the company with no shareholder vote at all, Snap --the company behind the popular mobile-messaging app Snapchat that's all about giving a voice to the many--has acknowledged that public voting power at companies with a hierarchy of stock ownership classes is only a fiction. And it begs the question: Why does Snap even need a board?

Snap's stock has taken a beating since the IPO with losses mounting. In a conference call with analysts, CEO Evan Spiegel "acknowledged he misjudged demand for Spectacles, the video-recording sunglasses," according to a recent Wall Street Journal article.

Without the ability for shareholders to vote for directors and maintain accountability, directors are in the end just products of the company managers; managers who have already admitted to fumbling.

Control until death?

Snap's multi-class, non-voting capitalization gives Spiegel and Robert Murphy, the company's founders and holders of 10-vote shares, a perpetual lock on control, without the need to hold an expensive ownership position. They exercise a decisive 89% of the voting power, despite holding only about 44% of the company's total equity.

Dual- and multi-class capitalizations--in which founders and other insiders retain a class of highvote shares while selling low-vote shares to the public --are nothing new for controlled companies. This mechanism has long allowed founding individuals and families to leverage minority economic ownership positions--say 10% or 20% --into total voting control of large companies such as Snap, Facebook and Google.

But the Snap plan stretches this logic to its limit--with no-vote shares, founders can sell off all but one voting share and nonetheless control every aspect of company policy.

With zero-vote IPO stock, the logic of leveraging control from a minority interest through the dual-class structure has now reached its illogical conclusion. With non-voting shares, a...

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