Corporate Governance

MULTI-CLASS VOTING STRUCTURES By Richard Alsop Multi-class voting structures involving disparate voting rights have emerged as the single most contentious issue in the realm of IPO governance. The detailed provisions of these structures vary, but at a basic level the publicly listed class (low-vote shares) are entitled to one vote per share (or no votes) and the shares held by pre-IPO investors or founders (high-vote shares) are entitled to multiple votes per share (often 10). Investor criticism of disparate voting rights has become more pronounced since Snap Inc.'s 2016 IPO, the first in which the public offering consisted solely of no-vote shares. Why is this an IPO issue? The NYSE and Nasdaq have long- standing policies on shareholder rights that limit the ability of listed companies to reduce or restrict the voting rights of a listed class, but nevertheless permit the adoption of disparate voting rights and listing of the low-vote class at the time of an IPO. Given the competitive environment at the exchanges and the SEC's limited authority in this area, it seems doubtful that these structures will be further limited by SEC or exchange rules. The trend of IPO companies adopting multi-class voting structures has been accelerating in recent years, as successful IPOs with more aggressive terms suggest the market will accept them. At the same time, these structures have been evolving, with some issuers abandoning sunset provisions or eliminating restrictions on transferability of high-vote shares, and others, like Snap and Google, listing no-vote shares. The reason for disparate voting rights most often cited by their proponents is that they allow company founders to continue to operate the company in a manner that creates long-term value without having to worry about pressure from shareholders with short-term interests. Emerging technology companies, with their founder-owner culture, have enthusiastically embraced this philosophy, a contributing factor in the increase of IPOs with multi-class voting structures. Shareholder activism has doubtless also contributed to the issue, as disparate voting rights provide meaningful insulation from assaults by activists. Opponents argue that these structures, especially in the absence of any sunset provision, create a long-term lack of accountability to shareholders. The Council of Institutional Investors has led a broad campaign against multi-class voting structures that has been taken up by other major institutional investors. The Investor Stewardship Group also states in its corporate governance principles for listed companies, that shareholders should be entitled to voting rights in proportion to their economic interest. S&P Dow Jones recently announced that it would exclude companies with multi-class voting structures from a number of major indexes, and FTSE Russell has proposed to take similar action for dual-class companies that do not have at least 5% of voting rights in the hands of non-affiliates. Litigation tactics have also begun to bear fruit, as evidenced by the abandonment of Facebook's no-vote reclassification proposal in September 2017. Whether all of this opposition will have a meaningful impact on IPO governance remains to be seen. 30 | IPO Governance CONCLUSION As expected, ISS launched a major withhold campaign against directors of IPO companies based on governance policies adopted in anticipation of going public. It is still not clear that the new ISS policy will have a major impact on "out of the gate" governance policies for IPO companies. For issuers that are controlled companies following the IPO, the focus on anti-takeover measures seems somewhat irrelevant in the short term. For the reasons described above, we believe IPO investors remain relatively insensitive to governance policies at newly public companies, and the initial public offering process provides substantial opportunity for investors to make their sentiments known. IPO issuers will of course be responsive to issues that significantly affect valuation and should be mindful of growing criticism of disparate voting rights. IPO companies should continue to sensitize new director nominees to the fact that the ISS policy may result in lower "for" votes than might otherwise be expected, even if, for controlled companies, the vote has no real impact. Boards of newly public companies should also give consideration to putting sunsets in place for certain governance practices, and in the absence of sunsets, take another look at corporate governance practices at an appropriate time (for example, when the company ceases to be majority controlled). Shearman & Sterling

• Cover