
S&P 500 to exclude Snap after voting rights debate - dvt
https://www.reuters.com/article/us-snap-s-p-idUSKBN1AH2RV
======
chollida1
I think this is a perfect free market reaction to companies not having voting
stock.

Last week the FTSE Russell index announced the same thing.

As a minor point, dual/triple class shares are still allowed so FB, GOOG and
BRK are still ok.

If you really want to own a stock that gives you no profits, no income from
dividends, no voice in how its run, and actually no value what so ever other
than the greater fool theory then go ahead.

I mean, Google could come right now and offer to buy SNAP for 10x what its
currently valued at and Evan Spiegel could say no, even though its almost a
certainty that the company will never be worth that much.

On the other hand if you don't like the fact that a company goes public and
declares that its ownership is in for life no matter what, then you'll
probably view this as a positive measure.

All this means is that ETF funds will have some recourse to hold management
accountable.

One thing is for sure now ETF investing got a bit less passive.

As a side note on SNAP in particular, Even though the first Lockup has just
expired, most employee's, are in lock up due to earnings coming out on August
10th and a subsequent lock up at the end of the month.

By mid September we should have a clear picture on just how the markets value
SNAP.

EDIT

To give an example of what companies like SNAP are foregoing by not allowing
voting rights is access to, of the 7 largest owners of google stock, 2 are the
founders, the other 5 are mutual funds/ETF fund firms.

~~~
ThrustVectoring
How is this a perfect free market reaction? It's explicitly a reaction not by
market participants, but by the relatively minor players who make up part of
the rules of the game.

The "free market reaction" is that if these capital structures suck, active
investors don't buy them or short them, and the stock price goes down. That
is, if shareholder control was actually valuable, it'd command enough of a
premium to discourage SNAP's behavior.

~~~
pishpash
Why don't you just buy SNAP directly? S&P 500 is just an index, like a
phonebook. They can list or not list whatever they want, and ETF's can follow
or not follow those indexes.

~~~
HappyTypist
They don't arbitrary choose however. They have published and objective
criterias, and they're not singling out SNAP but it is literally the first big
stock without ANY voting rights so theyve decided to draw the line now.

------
JumpCrisscross
"What happened here was not that the pickiest and most careful investors
scrutinized Snap closely and made the bold decision not to buy its stock.
Instead, the very least picky possible investors -- the index funds, whose
mandate is to buy all the stocks in the market -- are the ones who won't be
buying Snap. It makes no sense: In a reasonable world, you'd expect the
passive funds to be passive buyers of whatever the market provides, while
active funds would make active decisions about what the market should provide.
In our actual world, though, the passive funds have all the power, and the
active funds are constrained to follow their lead" (Matt Levine, [1]).

[1] [https://www.bloomberg.com/view/articles/2017-07-27/the-
end-o...](https://www.bloomberg.com/view/articles/2017-07-27/the-end-of-libor-
and-non-voting-stock)

~~~
jon_richards
This misses a key distinction: A passive fund has a mandate to buy stocks in
proportion to the stock's market cap.

Do you rank a company's market cap by the market cap of each class of shares?
If not, you can essentially trick passive investors into buying a large
proportion of worse stock.

~~~
JumpCrisscross
Indices have been handling _e.g._ Berkshire Hathaway's two classes of listed
stock for decades.

Some buy proportionately ( _i.e._ if Berkshire Hathaway is 10% of a market and
15% of its value is in Class B and 85% in Class A--making up numbers for
illustrative purposes--then the index puts 1.5% into B and 8.5% into A) and
others defer to a single class based on judgement and rules ( _e.g._ 10% into
A). But it's a trivial problem of index construction.

~~~
jon_richards
Ah, I stand corrected.

I tried to look more into the decision. These seem to be the two relevant
quotes:

>Companies with multiple share class structures tend to have corporate
governance structures that treat different shareholder classes unequally with
respect to voting rights and other governance issues

>S&P Dow Jones Indices also said that the S&P Composite 1500 indexes, like the
S&P 500, follow “more restrictive eligibility rules,” such as positive
earnings based on accepted accounting rules whereas its other index groups
were “intended to represent the investment universe.”

So I suppose they aren't really "the very least picky possible investors".
Their mandate seems to include actively curating the S&P 500, despite its
tendency to be used by "passive" investors.

------
Dobbs
This title, "S&P 500 to exclude Snap after voting rights debate" is wrong. S&P
500 is moving to bar all stocks with multiple classes with different voting
rights. Existing stocks in the S&P 500 are grandfathered.

Personally I'm a fan of this. Multiple voting classes seem to be abused. Take
the recent Ford case where the Ford family owned a very small percentage of
shares, but had an overwhelming share of the voting power. If I understood it
correctly it took basically unanimous voting from all other shareholders to
remove this imbalance.

~~~
gregshap
SNAP is not an existing member of the S&P 500

They were already unqualified until now, because they lack positive earnings.

[[https://en.wikipedia.org/wiki/List_of_S%26P_500_companies](https://en.wikipedia.org/wiki/List_of_S%26P_500_companies)]

~~~
kgwgk
Good point, because the chances of arriving to profitability are not much
higher than the chances of non-voting shares being granted voting rights.

------
skrause
Are multiple classes of shares really that bad? Here in Germany a possible
concept is the _Vorzugsaktie_
([https://en.wikipedia.org/wiki/Preferred_stock#Germany](https://en.wikipedia.org/wiki/Preferred_stock#Germany))
where you have no voting rights in exchange for a higher dividend than the
normal stocks. If you're just a small investor with no desire to exercise
voting rights anyway it's actually the better deal.

~~~
jon_richards
That sounds fine. I think the problem is with the relatively recent trend of
not paying out any dividends at all. If you have no voting rights to change
that, there isn't really any value inherent in the shares other than the trust
you and everyone else places in the company. It especially throws a wrench in
the notion that the value of a security is the net present value of all future
cash flows.

It's similar to when the US government stopped allowing trades of bills for
silver. In both cases, you stop being able to get "real money" from the
financial instrument and have to just trust that the rest of the world will
treat the financial instrument as real money.

~~~
pm90
Similar but not the same. You are obligated by law to accept US dollar bills
(any denomination) for the satisfaction of debt. Whereas you're not obligated
to do so in the case of these non-voting shares. In a certain sense, by buying
these shares, you are assuming there will exist other people who want them too
(a market) whereas US securities guarantee a market (300 mil + US citizens).

~~~
jon_richards
It is true that the US guarantees liquidity for US dollar bills, but liquidity
is hardly an issue for a public stock large enough to be listed on the S&P
500...

~~~
pm90
You are correct of course. My intention was to point out that this is a great
step so that the S&P 500 _remains_ that way. That you don't let in companies
offering such shares in the same index (and thus market) as ones that don't.

Of course the ones that are already listed can continue to do so. But still a
good step in the right direction IMO.

------
woopwoop
I have a probably naive question. I just learned about the concept of non-
voting stock today. Is there typically some contractual obligation for
companies that, if they do a stock buyback, some fraction of the shares bought
must be non-voting shares?

If not, what is the value of a non-voting share? Particularly for a company
that doesn't pay dividends and doesn't have substantial material assets to
sell in the event of liquidation (my impression is that this describes many or
even most modern publicly traded companies)?

~~~
dragonwriter
> If not, what is the value of a non-voting share? Particularly for a company
> that doesn't pay dividends and doesn't have substantial material assets to
> sell in the event of liquidation (my impression is that this describes many
> or even most modern publicly traded companies)?

Why would a voting share in a firm without dividends or with no assets be
worth anything? Voting just gives you input into a future course which will
hopefully give the firm assets (from which it may or may not issue dividends),
but the voting shareholders will presumably pursue that anyway, and if you
don't have better ideas than they do on _how_ to do that, your vote isn't
actually netting you any additional value.

All stock is based on the (possibly expected future) value of a share of the
net assets of the company. There is nothing else that could provide it value.
Voting rights are just a way to have input on how the company will try to
realize value and how and when it will distribute it to those entitled to it.

~~~
woopwoop
My impression is that modern firms "pay dividends" by doing share buybacks,
which are equivalent to dividends but taxed less (I'm nowhere near an expert
here, if that isn't clear). If you don't have a voting share or some kind of
contractual guarantee, though, what's to stop the voting shareholders from
deciding to just buy only voting stock in the event of a buyback?

~~~
mcguire
Note that the dividend effect is dependent on the share price, and may only be
valid if you sell shares within a short time of the buy back.

~~~
toast0
Outside of taxation, a buy back is essentially equivalent to a dividend that
you're forced to reinvest. At the end of the day, all of your shares are worth
a smidge more of the company. Certainly, the price could go down after a
buyback, same as if you reinvested the dividend.

The benefit for shareholders is that the shareholder can decide when to
recognize that as a capital gain; the negative for shareholders is that they
can't recognize only the portion of their capital gains related to the buy
back.

------
SilasX
>"Companies with multiple share class structures tend to have corporate
governance structures that treat different shareholder classes unequally with
respect to voting rights and other governance issues," the index provider said
in a statement.

Good. Reminds me of the thing with Zenefits where they basically screwed the
(loose cannon, fired) CEO out of his shares by offering heavily discounted new
shares to everyone but him.[1] I know, not quite the same thing here, but a
good measure to hold the line against dilution trickery that might get that
far.

Edit: According to this recode piece[2], the shares on the stock market (class
A) have no voting rights, B have 12%, and the C class have 88% and are held by
the founders. Yeah, I'm surprised the exchanges tolerated such weak offerings
to begin with, let alone the indexes.

[1]
[https://news.ycombinator.com/item?id=12013321](https://news.ycombinator.com/item?id=12013321)

[2] [https://www.recode.net/2017/2/21/14670314/snap-ipo-stock-
vot...](https://www.recode.net/2017/2/21/14670314/snap-ipo-stock-voting-
structure)

------
hendzen
Now to see if the next big startup to IPO (AirBnB, Uber, etc) learns their
lesson about issuing these bullshit shares to the public.

$SPY alone is a significant chunk of total equities ADV - and there are other
SP500 ETFs that hold significant assets. By not being eligible to be part of
these indices pre-IPO shareholders are ignoring a _huge_ and growing segment
of the market.

------
cbhl
If you actually believe in passive index investing, this seems like a bad
thing. You want lots of little pieces of various companies, _especially_ ones
that protect from distractions/meddling by activist investors.

~~~
MichaelDickens
If you believe in passive investing, it might make more sense to buy something
like the Vanguard Total Stock Market Index rather than the S&P 500, which has
inclusion rules and isn't a true broad-market index. (Although the S&P 500
performs almost exactly the same as a total market index).

------
drewg123
I just don't get the whole non-voting shares thing for established, profitable
companies like Google.

AFAIK, the idea behind non-voting shares is to be able to continue to raise
money by selling stock. Selling non-voting shares allows the founders to
maintain control. For an established, profitable company like Google that does
not need to raise additional funds, why even bother with non-voting shares? Is
the purpose just for compensation in the form of stock grants / options?

Why not just increase salary or bonuses, and get rid of stock grants? At least
at my level, I never thought anything I did could have a dramatic impact on
the stock value, so holding stock did not provide motivation (and most of us
were on auto-sell anyway). Is it just to provide executive level motivation?
Why not just have meaningful performance targets and performance bonuses to
motivate execs?

~~~
mox1
Well when you give out salary or bonuses (or even a dividend) taxes are paid
twice (once by company, once by employee/investor).

By playing stock tricks (buying back shares, non voting shares) the company
never pays taxes, just the employee/investor.

That's probably not the whole story, but part of it I think.

~~~
drewg123
I should have thought of this. It all comes down to avoiding taxes.

------
kristopolous
So there's going to be a time where Snap gets snatched up for real - I don't
care about the current promises from the founders, reality has a way of making
itself happen.

The real problem is to get in a bit before the snatch up because there's
usually a stock boost then. It'd be a quick, low-yield safe return.

The risk there is sometimes the captains do go down with the ship and you're
going to just have to write things off when things get bought for peanuts (aka
my SUN holdings) so I don't know if it's a farm-betting strategy.

And finally, this strategy has some weird consequences, like when I bought
Apple stock in the late 90s after Jobs publicly said they had a couple month
runway. I thought Compaq or Gateway would come by and get them (and no, I sold
it off at a reasonable double digit percentage profit and am damn happy about
not being greedy). Crystal balls are very cloudy.

This is not financial advice.

~~~
njarboe
"The real problem is to get in a bit before the snatch up because there's
usually a stock boost then. It'd be a quick, low-yield safe return."

If you know the future, one can certainly get quick, safe returns. Until you
get kidnapped.

~~~
kristopolous
I can draw the future stock market price of many companies with pretty high
confidence as long as you grant me the permission to not label the axis. Turns
out not to be very useful.

------
c3534l
This is so strange. Multiple classes of stock are commonplace. Nonvoting stock
is for people who want to invest in the company, but not be real owners of it.
That sounds like why most people buy stock. Was there a lead up to this that I
missed?

------
bpodgursky
Carl Ichan is just angry that vote-free shares aren't useful for corporate
raiding and pillaging. No casual investor cares about voting power.

This move is bad for employees and founders, and good for Wall street. Don't
buy into the narrative.

------
rajacombinator
Surprising, but excellent news for America's 401ks. Bad news for Uber
shareholders.

------
sebleon
Give up control of the company to short-term minded public investors vs.
losing access to passive funds? Seems like an easy choice.

I believe Snap has what it takes to grow another 10x under its current
leadership, while S&P could prop the stock up 20% without actually creating
real value.

Glad Snap is going down this route.

------
malchow
Good rulemaking, but any thought as to why it isn't retroactive?

~~~
kgwgk
Because then it would be bad rule making.

~~~
HappyTypist
And also, good luck convincing people that you're dumping alphabet and
Berkshire Hathaway.

------
debt
I guess SNAP doesn't want easy money.

------
guelo
It's just an index. I'm sure there will be many index funds with SNAP in them
if you want to buy them.

~~~
tryitnow
Not really. It's one of the, if not the top index. A lot of passive investors
(myself included) put a large chunk of their investment funds in ETFs and/or
index funds that just track the S&P500. Not being included means a massive
reduction in the number of people indirectly holding their shares.

Index inclusion/exclusion is something that must have been studied by some
academic - I wonder what their conclusion is. My hypothesis is that the stock
price would be lower given the significant reduction in quantity demanded.

~~~
gabbo
And not just S&P, also FTSE Russell:
[https://www.bloomberg.com/news/articles/2017-07-27/index-
pla...](https://www.bloomberg.com/news/articles/2017-07-27/index-plan-to-dump-
some-dual-class-stocks-would-bar-snap-hyatt)

This is a big deal (in a good way, IMO). Companies have a very real
disincentive to go public with a shareholder-rights-unfriendly listing now,
since a large portion of the passive investment universe will be prohibited
from ever buying.

I see this as a case where everybody wins: the default option ends up being
friendly to shareholder rights, but if you really want to and are in an
advantageous position you still have the option to list go public with non-
voting/less-voting shares if you want to gamble.

~~~
pm90
Well...kinda. I don't know if they were invented for this specific purpose,
but preferential shares do prevent activist shareholders from imposing their
will on public companies, forcing them to take actions that are very short
term. Preferential shares actually prevent that from happening, which is
great.

This is a new dimension in that struggle. I don't know how this will pan
out...

One thing I don't understand is why don't index funds take preferential shares
into account when deciding which ones to buy/sell? Couldn't that be factored
into the decision engine's rules/algorithms?

~~~
HappyTypist
Passive funds should have consistent and binary rules. Either you're in, or
you're out.

Anything more than that is "smart index" aka active.

