Just as the initial public offering market revs up again, the providers of stock market indices are taking a stand against new issuers that trample on shareholder voting rights.
According to announcements in the past week, both S&P Dow Jones Indices and FTSE Russell will bar companies from some of their indices that either issue multiple classes of shares or have a very small percentage of voting rights in the hands of non-restricted shareholders.
The actions come in the wake of IPOs of companies like Snap in which investors are issued shares that have little to no voting rights.
“This is a huge win for investors and a blow to companies that deny shareholders any say in how the company is run,” according to a statement from Ken Bertsch, executive director of the Council of Institutional Investors.
“Multi-class structures, especially those with non-voting shares, rob shareholders of the power to press for change when something goes wrong, which happens sooner or later at most if not all companies,” Bertsch said. “Shareholders at such companies have no say in electing the directors who are supposed to oversee management.”
FTSE Russell was the first to make the move, announcing last week that 68% of index users and other stakeholders it surveyed agreed that “some minimum hurdle for the percentage of voting rights in public hands should be imposed.”
FTSE Russell proposed that starting in September companies that have 5% or less of their voting rights in the hands of unrestricted shareholders will have their securities rendered ineligible for index inclusion.
The hurdle will apply to all standard FTSE Russell indexes, including the Russell U.S. indexes, the FTSE Global Equity Index Series (GEIS), and non-cap weighted indexes including the FTSE and Russell RAFITM Index Series.
For existing constituents of those indices, the rule will take effect in September 2022. This will allow “a five-year grandfathering period to allow constituent companies to change their capital structure if they so wish,” FTSE Russell stated.
On Monday, S&P Dow Jones Indices joined FTSE Russell by saying that the S&P Composite 1500® and its component indices will no longer add companies with multiple share class structures. The decision takes effect starting Tuesday, and includes the S&P 500, S&P MidCap 400, and the S&P SmallCap 600. Existing index constituents are grandfathered in and are not affected by this change, S&P Dow Jones said.
“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.
The new rules will assuredly affect the IPO plans of some companies, because inclusion in an index usually attracts money from passive funds that are trying to mimic an index’s performance.
FTSE Russell said some index users were in favor of a higher hurdle rate, as much as 25%. But in setting “a low threshold for the minimum percentage of a company’s voting rights that can be held by unrestricted shareholders, future IPOs of companies that confer few if any voting rights will be discouraged without there being any untoward impact on long-standing existing index constituents such as Facebook and Alphabet, which have securities with differential voting rights.”
FTSE Russell said it would review the hurdle rate annually.
It also released a spreadsheet containing a list of issuers in the Russell 1000 and Russell 2000 that have less than 25% of their voting power in public ownership.
Nearly 40 issuers in total do not meet the 5% minimum, and they include include Clear Channel Outdoor, SecureWorks, Terraform Global, VMWare, Virtu Financial, Hyatt Hotels, and U.S. Cellular. In addition, another 148 issuers have at least 5% but less than 25% of their voting power in public ownership.
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