Snap, Inc. May Face Challenges Getting Included in Market Indexes

By Evan Niu, CFA Markets Fool.com

The most controversial aspect of freshly public Snap's (NYSE: SNAP) capital structure is the fact that public investors trading the Class A shares will get no vote whatsoever in how the company is run. It's not uncommon for companies, particularly of the tech variety, to consolidate voting power among insiders and founders, but most of the time investors at least get a token vote. Snap's decision to not even provide investors with that must have corporate governance enthusiasts fuming.

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There's now a new inadvertent consequence that Snap may potentially be facing: Activists are attempting to get Snap barred from index inclusion, according to Reuters.

Snap Spectacles. Image source: Snap.

No index for you

The Council of Institutional Investors, which represents large institutional investors like pension funds, is asking S&P Dow Jones Indices and MSCI, Inc. not to allow Snap to be included in major market indexes like the all-important S&P 500 or the lesser-known MSCI USA Index, according to the report. At issue is the non-voting shares. Council of Institutional Investors deputy director Amy Borrus told Reuters, "What we would like to see at the least is for the indexes to exclude new no-vote companies."

Both S&P Dow Jones Indices and MSCI have been reviewing Snap for potential inclusion at a later time; S&P Dow Jones Indices generally has a rule against including freshly public stocks for at least 12 months following the IPO, while MSCI said Snap doesn't currently meet the requirements for index inclusion but will revisit the topic in a few months.

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If Snap were to theoretically get added to any market index, any funds that track that index would be required to purchase and hold shares, along with the prestige associated with being added.

Don't let this become a trend

Snap's decision not to allow investors any votes should not be taken lightly, and investors need to push back. There should be some negative consequence to discourage other companies from following suit going forward, as it would be downright scary if this practice gained traction and became a trend.

It should be obvious that voting rights have value, if you look at the price discrepancies between other companies that have multiple publicly traded share classes. For example, Alphabet Class A shares, which are entitled to one vote, currently trade at a $20 premium compared to the non-voting Class C shares. Although investors might as well save that $20 and buy the cheaper non-voting shares since the search giant is still controlled by insiders that maintain majority voting power, at least investors have a choice and voting shares are available.

Of course, the strongest signal that investors could send to Snap is to simply abstain from buying shares based on lack of votes, which would hurt Snap's valuation in the long run. That could potentially send a powerful message to co-founders Evan Spiegel and Bobby Murphy, who are now each paper billionaires following the IPO (they each cashed out about $272 million worth of shares in the offering).

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Evan Niu, CFA has no position in any stocks mentioned. The Motley Fool owns shares of and recommends GOOG and GOOGL. The Motley Fool has a disclosure policy.