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CALIFORNIA CORPORATE & SECURITIES LAW

Qualification Of Offers And Sales Of Non-Voting Common Stock Is No Snap In California

In March, Snap Inc. announced that it and the selling stockholders had sold of 230 million shares of Class A Common Stock to the public at an initial public offering price of $17.00 per share.  The gross proceeds of the offering to the company and its selling stockholders was $3.91 billion. Even successful offerings have their critics, however.  In this case, the critics have focused the fact that the Class A Common Stock is non-voting:

The absence of shareholder voting rights in Snap Inc.’s recent IPO has large institutional investors and asset managers gearing up for a battle they hope will prevent a war from erupting among future corporate issuers.

 Hazel Bradford, Snap IPO igniting furor; institutions not pleasedPensions & Investments (March 20, 2017).
Although incorporated in Delaware, Snap’s executive offices are located in Venice, California.  Despite this significant tie to California, the Commissioner of Business Oversight had no say in whether the company should be able to offer non-voting shares to the public.  The Commissioner had no voice because Snap’s shares were approved for listing on the New York Stock Exchange and thus state qualification requirements were preempted under Section 18 of the Securities Act of 1933.  Even in the absence of federal preemption, the offer and sale of securities approved for listing on the NYSE is exempt from qualification pursuant to Section 25100(o) of the Corporate Securities Law of 1968.
Had Snap’s offering been subject to qualification in California, then it would have been required to persuade the Commissioner to relax its standard against non-voting common stock:
Common shares and similar equity securities should normally carry equal voting rights on all matters where such vote is permitted by applicable law.
10 CCR § 260.140.1.  This standard, as with the Commissioner’s other standards for qualification, is not an absolute bar to qualification.  Rather, it is a guideline for the exercise of the Commissioner’s discretion. 10 CCR § 260.140.  In my experience, the Commissioner has qualified the offer and sale of non-voting common shares.
Critics of dual class structures have their own critics. UCLA School of Law Professor Stephen Bainbridge has argued that dual class structures do not impose significant risks:

Put another way, the market will price the risk posed by dual class stock, providing investors who buy the lesser voting rights stock with a discount from the price they would have had to pay if they had had full voting rights. Those who buy the stock thus are paying the right price and are fully protected.

Bernard Sharfman has also argued:

The shareholder empowerment movement’s abhorrence of dual-class share structures—based solely on the fact that they reduce or eliminate the voting power of the typical stockholder—is nonsensical. This structure has been used by some of the most successful companies in the world—including Alphabet (Google), Berkshire Hathaway, Alibaba Group, Facebook, Under Armour and LinkedIn—to create enormous wealth for their stockholders.

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