SNAP Snap Inc

By Dave Michaels 

WASHINGTON -- Corporate titans who control companies through special classes of stock that give them extra voting power should have to give up the system after a limited number of years, a senior Democratic regulator said Thursday.

Companies such as Viacom Inc., Facebook Inc. and Ford Motor Co. have multiple classes of stock that don't expire until after the founder or longtime controlling shareholder dies. The practice "raises the prospect that control over our public companies, and ultimately of Main Street's retirement savings, will be forever held by a small, elite group of corporate insiders," Securities and Exchange Commission member Robert Jackson Jr., a Democrat, said in remarks prepared for a speech at the University of California Berkeley Law School.

About 16% of companies that have gone public on U.S. exchanges since 2013 had at least two classes of stock, according to data provider Dealogic. Many technology companies have structured their initial public offerings with dual-class stock in recent years to give founders a viselike grip on the business. Snap Inc., for instance, gave new shareholders no voting rights whatsoever when it went public last year.

The founders of the Snapchat parent, Evan Spiegel and Robert Murphy, control the company through class C shares that give them 10 votes per share. The stock only loses its supervoting power nine months after their deaths, according to Snap's corporate charter.

Class B shares held by Facebook founder Mark Zuckerberg, which grant him 10 votes per share, convert to common, one-vote shares three years after his death or -- under more complex circumstances -- if he resigns, according to Facebook's corporate charter.

Such outsize voting power gives controlling shareholders dominance over all decisions, ranging from the election of directors to whether to sell the company someday.

News Corp., the owner of The Wall Street Journal's parent, Dow Jones & Co., has two classes of shares, which allow Rupert Murdoch and his family to maintain greater influence over the media company.

An investor backlash against Snap's deal prompted the keepers of the S&P 500 to say they would block newcomers with multiple classes of stock from joining their flagship index. Barring those companies from prominent indexes could reduce demand for their stock from increasingly popular index funds.

Dual-class stock may benefit investors early in a company's life, when the visionary who launched it needs freedom to build the business without outside pressure from stockholders, Mr. Jackson said. But that benefit wanes over time, he said. His staff's analysis showed that firms with never-ending dual-class stock trade at a discount to ones that retire the structure later in the company's life.

The solution isn't banning companies with dual-class stock from the major indexes, as S&P did, Mr. Jackson said. That would hurt Main Street investors who invest through passive funds and stand to miss out on those companies' growth, he said.

Instead, he said in his first speech since joining the SEC, U.S. stock exchanges should force companies to retire their dual-class share structure after a period of time.

He declined to say how quickly that should happen, saying other critics have proposed ideas. "By giving investors more say in the governance of their companies, we can help protect them from managers who would misuse dual-class to extract value rather than build it," he said.

Exchanges, while regulated by the SEC, don't have to follow the recommendations of a single commissioner. Democratic SEC Commissioner Kara Stein also criticized dual-class shares in a speech this week, saying they disrupt the relationship that should exist between companies and shareholders.

Write to Dave Michaels at dave.michaels@wsj.com

(END) Dow Jones Newswires

February 15, 2018 16:45 ET (21:45 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.