The Council of Institutional Investors reiterated its belief in the principle of one-share-one-vote in a letter in which the group urged the directors of Lyft, Inc., to either forgo a novel share class structure or impose a seven-year sunset on a possible multi-class share structure. The CII’s concerns were prompted by reports in The Wall Street Journal and elsewhere indicating that Lyft’s co-founders could wield majority voting control after an IPO despite owning less than 10 percent of the company’s stock. Although this latest CII letter addresses what could become Lyft’s “outlier” status among similar IPOs due to its co-founders’ apparently low ownership threshold, the CII has commented previously on numerous (at least a dozen) planned IPOs that involved multi- or dual-class share structures or that took advantage of the Up-C structure to achieve tax benefits while also creating multiple share classes.
Lyft may be unique. The CII’s motivation for sending its letter to Lyft is bolstered by what the CII sees as a characteristic that could make a Lyft IPO and its resulting share class structure an “outlier.” According to CII, many dual or multiple class share structures are designed to collapse into one-share-one-vote structures if a company’s founders’ ownership falls below a stated percentage, such as 10 percent. The CII noted that Lyft’s co-founders already appear to hold less than 10 percent of Lyft’s stock.
Additionally, the CII reiterated its call for Lyft, and other similarly situated companies, to impose time limits on any multiple class share structures they adopt as part of their IPOs. The CII further noted that rumors Lyft may adopt a multiple class share structure with super-voting rights as a public company would conflict with Lyft’s philosophy as a private company of according equal voting rights to its shareholders.
“While establishing accountability to new owners does not always maximize comfort and compensation for management, we believe accountability is important for performance longer term, especially through bumps in the road that every company will experience,” said the CII. “We hope that if the board feels compelled to grant Lyft’s founders super-voting rights, it will also adopt a time-based sunset to enfranchise the company’s public shareholders within seven years.”
Fading value premiums. A portion of the CII’s Lyft letter focused on the sustainability of value premiums enjoyed by some newly public companies that maintain multiple class share structures. According to two studies cited by the CII, these premiums fade starting in years six through ten post-IPO. As a result, the CII and others have called for such structures to have time limits, with seven years being a common, although not exclusive, duration. The CII also cited numerous companies that went public with three, five, or seven-year sunsets, several of which also successfully collapsed their multiple class structures.
The CII’s view is not unlike that of SEC Commissioner Robert Jackson, who in one of his earliest speeches as a commissioner addressed the issue of multiple class share structures. Jackson’s specific focus was the “forever” variant of these structures, which he said can help newly public companies by giving their founders the freedom to shape a growing business but whose benefits may diminish over time and which, on a larger scale, can undermine American notions of fairness in politics and business. Jackson conducted his own preliminary study of more than 150 IPOs over a 15-year period and found that companies that went public without multiple class share structures (or that gave up those structures) tended to perform better than companies that maintained such structures without sunsets.
Not the first time. The CII has made long-standing objections to companies’ adoption of post-IPO multiple class share structures that have no limits. For example, in a 2018 letter to the then-House Financial Services Committee leadership in the last Congress, the CII lent its “general[] support” to the Enhancing Multi-Class Stock Disclosures Act (H.R. 6322), sponsored by Rep. Gregory Meeks (D-NY), under which company insiders and 5-percent beneficial owners would have had to disclose in a proxy or consent solicitation for an annual shareholders’ meeting two things: (1) the number of voting shares in each class that they hold (expressed as a percentage); and (2) their voting power expressed as a percentage of the total combined voting power of all voting classes. The House FSC reported the bill by voice vote. The bill also had been included in Title XXIX of the JOBS and Investor Confidence Act of 2018 (S. 488), a package of bills colloquially known as JOBS Act 3.0 that aimed to improve capital formation and which could reappear in the 116th Congress.
From time to time, the CII has suggested what it sees as the limits to the “sunset mechanisms” which it expects companies to adopt and implement within a “reasonably limited period.” For example, in a 2016 letter to Institutional Shareholder Services, the CII said it had “concluded that there is no single best format for sunset provisions at all companies,” but it cited two examples of sunsets that it said stretched credulity: (1) a time-based limit of 17 years; and (2) a 5 percent ownership threshold for collapsing a multiple class share structure.
Previously, the CII has commented on at least a dozen planned IPOs. Those companies include: Blue Apron Holdings, Inc.; Domo, Inc.; Dropbox; GreenSky, Inc.; MongoDB, Inc.; Pivotal Software, Inc.; Pluralsight, Inc.; Qualtrics International; Roku, Inc.; Snap Inc.; Switch, Inc.; Vrio Corp.; and Zekelman Industries. The original CII letters sent to all of these companies are available on the CII’s website.
Lyft may be unique. The CII’s motivation for sending its letter to Lyft is bolstered by what the CII sees as a characteristic that could make a Lyft IPO and its resulting share class structure an “outlier.” According to CII, many dual or multiple class share structures are designed to collapse into one-share-one-vote structures if a company’s founders’ ownership falls below a stated percentage, such as 10 percent. The CII noted that Lyft’s co-founders already appear to hold less than 10 percent of Lyft’s stock.
Additionally, the CII reiterated its call for Lyft, and other similarly situated companies, to impose time limits on any multiple class share structures they adopt as part of their IPOs. The CII further noted that rumors Lyft may adopt a multiple class share structure with super-voting rights as a public company would conflict with Lyft’s philosophy as a private company of according equal voting rights to its shareholders.
“While establishing accountability to new owners does not always maximize comfort and compensation for management, we believe accountability is important for performance longer term, especially through bumps in the road that every company will experience,” said the CII. “We hope that if the board feels compelled to grant Lyft’s founders super-voting rights, it will also adopt a time-based sunset to enfranchise the company’s public shareholders within seven years.”
Fading value premiums. A portion of the CII’s Lyft letter focused on the sustainability of value premiums enjoyed by some newly public companies that maintain multiple class share structures. According to two studies cited by the CII, these premiums fade starting in years six through ten post-IPO. As a result, the CII and others have called for such structures to have time limits, with seven years being a common, although not exclusive, duration. The CII also cited numerous companies that went public with three, five, or seven-year sunsets, several of which also successfully collapsed their multiple class structures.
The CII’s view is not unlike that of SEC Commissioner Robert Jackson, who in one of his earliest speeches as a commissioner addressed the issue of multiple class share structures. Jackson’s specific focus was the “forever” variant of these structures, which he said can help newly public companies by giving their founders the freedom to shape a growing business but whose benefits may diminish over time and which, on a larger scale, can undermine American notions of fairness in politics and business. Jackson conducted his own preliminary study of more than 150 IPOs over a 15-year period and found that companies that went public without multiple class share structures (or that gave up those structures) tended to perform better than companies that maintained such structures without sunsets.
Not the first time. The CII has made long-standing objections to companies’ adoption of post-IPO multiple class share structures that have no limits. For example, in a 2018 letter to the then-House Financial Services Committee leadership in the last Congress, the CII lent its “general[] support” to the Enhancing Multi-Class Stock Disclosures Act (H.R. 6322), sponsored by Rep. Gregory Meeks (D-NY), under which company insiders and 5-percent beneficial owners would have had to disclose in a proxy or consent solicitation for an annual shareholders’ meeting two things: (1) the number of voting shares in each class that they hold (expressed as a percentage); and (2) their voting power expressed as a percentage of the total combined voting power of all voting classes. The House FSC reported the bill by voice vote. The bill also had been included in Title XXIX of the JOBS and Investor Confidence Act of 2018 (S. 488), a package of bills colloquially known as JOBS Act 3.0 that aimed to improve capital formation and which could reappear in the 116th Congress.
From time to time, the CII has suggested what it sees as the limits to the “sunset mechanisms” which it expects companies to adopt and implement within a “reasonably limited period.” For example, in a 2016 letter to Institutional Shareholder Services, the CII said it had “concluded that there is no single best format for sunset provisions at all companies,” but it cited two examples of sunsets that it said stretched credulity: (1) a time-based limit of 17 years; and (2) a 5 percent ownership threshold for collapsing a multiple class share structure.
Previously, the CII has commented on at least a dozen planned IPOs. Those companies include: Blue Apron Holdings, Inc.; Domo, Inc.; Dropbox; GreenSky, Inc.; MongoDB, Inc.; Pivotal Software, Inc.; Pluralsight, Inc.; Qualtrics International; Roku, Inc.; Snap Inc.; Switch, Inc.; Vrio Corp.; and Zekelman Industries. The original CII letters sent to all of these companies are available on the CII’s website.