When Snap, the parent of social media platform Snapchat, went public in March without giving all shareholders voting rights, some investors cried foul. But with the number of listed companies in decline, Nasdaq’s opinion is on the other side.
Nelson Griggs, head of global listings at the Nasdaq Stock Market, said Nasdaq supports companies that want to go public with a dual-class share structure, as long as investors know what they’re getting into. Companies often use multiple share classes – each with different voting rights – to help founders and CEOs maintain control or as a tool to fend off activists. Technology and media companies have been among the biggest users of multiple share classes.
[II Deep Dive: State Street Blasts Snap Over Lack of Shareholder Voting Rights]
“In the U.S., if companies disclose that they have multiple share classes, then investors can make a decision on whether they want to be a financial owner,” said Griggs. “We think it’s in the best interest of companies to have that option.”
Griggs said the exchange is calling for multiple reforms to make it more attractive to be a public company, including fighting back against some activists aiming only to increase a stock’s price in the short term. He said ten years ago, 2 percent of companies listed on the Nasdaq had A and B shares. Now about 10 percent of Nasdaq companies have A and B shares.
“If companies have the ability to set that up, they have more control over their long-term approach,” he added.
Investors, including hedge funds and traditional asset managers, are increasingly impatient for results from the strategies put in place by the management at the companies they own. As a result, many private companies are weighing the benefits of tapping the public markets for capital with the risk that activist investors will overturn their long-term plans. A dual class share structure is one way to mitigate that risk.
The issue of dual-class shares has become a hot-button governance topic ever since Snap went public in March without giving the bulk of shareholders voting rights. State Street Global Advisors, the index giant, criticized the company for being undemocratic . Earlier this month, S&P Dow Jones Indices announced that it would ban companies with multiple share classes from its benchmarks. The ban is an influential move given the wide use of the benchmarks by indexes and other investors.
Nasdaq, which requires companies to disclose the terms of share classes to investors, wants other reforms. Currently, investors are required to disclose their holdings 45 days after the quarter ends. Institutions are also required to disclose positions that reach 5 percent or more of a company’s outstanding shares within 10 days. Nasdaq is now calling for short positions to be disclosed as well. Griggs explained that the lack of disclosure on shorts keeps companies in the dark and prevents them from effectively communicating with all shareholders.
