In the wake of Lord Jonathan Hill’s review of the UK listing regime, which was published last week, dual-class shares could become a bigger thing in London.
Hill recommended that companies on the London’s Premium segment be allowed to have dual-class structures, subject to a few important limitations, such as a five-year sunset and restricted circumstances when the additional power can be used.
It is a controversial area, since it goes against the purist approach to corporate governance, something that London has long touted as a defining characteristic of its regime.
And as I reported recently, dual-class shares have been a divisive topic for at least 100 years in the US, and all the more so in recent years as fast-growing companies have leapt at the chance to retain control in spite of listing.
The most aggressive give ordinary shareholders no voting rights at all, as in the case of Snap. Often there is no sunset, meaning founders and their families can control a company forever. And often the extra voting rights are able to be used in any vote submitted to shareholders, with no restrictions.
[The removal of the dual-class structure would be] ‘operationally beneficial to the company and our shareholders’
Michael Scarpelli, Snowflake
So, it is heartening to see someone taking a different track.
Snowflake, a data-cloud company that listed in New York in September, raising $3.4 billion in a deal that saw its shares more than double on debut, is now going in the opposite direction.
When it listed, its class A shares – which ordinary folk bought in the IPO – had one vote per share, while its class B shares had 10 votes each.
As the company noted in the S-1 filing for its IPO, that set-up meant that the shares would not be eligible for inclusion in indices run by FTSE Russell or Standard & Poor’s, which both decided in 2017 that they would stop including most new listings with dual-class stock.
On March 3, Snowflake reported mixed annual earnings for the year to January 31, with a loss of 70 cents per share that was much worse than consensus expectations of 43 cents – and was more than double the previous year’s loss.
But the fourth quarter had been strong, annual revenue of $190.5 million was a beat, and revenue guidance for the year ahead was in line with expectations.
The company also announced it was scrapping its dual-class share structure, with all class B shares converted to class A as of March 1. That doesn’t happen often.
‘Operationally beneficial’
In a call to discuss the results with analysts, Snowflake CFO Michael Scarpelli said that the removal of the dual-class structure would be “operationally beneficial to the company and our shareholders”.
The analysts didn’t mention the change at all in their questions, although some noted it approvingly in their reports, but it merits attention.
Was the structure a drag on the stock price? Certainly, the shares had sold off in 2021, and were down about 11% during that time when the company reported earnings, compared with a small rise in the S&P 500. The stock bounced in early trading the day after the announcement, although it is still down from pre-earnings levels.
It is early days, but Snowflake will be closely watched for the impact of its decision to do without the protection of management’s ability to fulfil its vision that is the usual justification for dual-class structures.
Most notably, it removes a barrier for any would-be acquirer, but it also paves the way for index inclusion.
It would be a stretch to assume that the clock is now ticking on dual-class shares, particularly at a time when London may well make it easier to list such structures.
Time will tell if Snowflake remains an outlier or is the start of a trend, but it has laid down an intriguing marker for its peers.
