By John M. Jascob, J.D., LL.M.
Affirming its commitment to a one-share, one-vote model, the Council of Institutional Investors (CII) has asked the board of directors of Pinterest, Inc. to adopt a sunset provision that would remove all special voting rights for the firm’s Class B shares within seven years of the firm’s initial public offering. In a letter to the firm’s five outside directors, CII wrote that a seven-year sunset provision offers an appropriate period to reap any benefits of innovation and control that a dual-class share structure may provide while mitigating the agency costs it imposes over time by widely separating ownership and control.
One share, one vote. As it has in several previous letters, CII stated its belief that one share, one vote is the best model for sustainable long-term value creation. CII wrote that public company investors have consistently shown that they will support innovation and investment for the long term, as has been the case at Amazon, Apple and many other one-share, one-vote companies. The letter references a study co-authored by University of Notre Dame Professor of Finance Martijn Cremers which found that within six to 10 years, the costs of the unequal voting structures outweigh any increases in innovation and value creation achieved in the period shortly after an IPO.
Gap between ownership and control. CII observes that the preliminary Form S-1 filed by Pinterest published indicates that the Class B holders will control a majority of voting power until Class B shares represent less than 4.76 percent of outstanding capital stock. The letter further notes that the resulting gap between ownership and control at Pinterest will be exacerbated by: (1) the 20:1 vote ratio between super-voting and public shares; and (2) the lack of a meaningful dilution threshold. On the latter point, CII states that many dual class IPOs provide that when the super-voting shares account for 10 percent or less of common shares, the structure automatically converts to one share, one vote.
Although any Class B shareholder who holds less than 50 percent of the Class B shares that they owned immediately prior to the IPO will lose the special voting rights after seven years, this does not represent the sunset provision that CII is seeking. Rather, CII believes that the dual-class structure should convert completely to one share, one vote at seven years or less unless each class of shareholders approves extension of the structure for up to an additional seven years (with additional extensions possible).
The letter also questions a provision that would retain the dual-class structure for up to 540 days after the death or permanent incapacity of CEO Ben Silbermann. This period after death and incapacity is longer than in other dual-class IPOs and would be adopted for reasons that are not clear, CII wrote.