Lyft became the latest public company to be blacklisted by The Council of Institutional Investors (CII) for issuing dual-class shares.
How big a deal was it?
To a select group of investors comprising pension funds and asset managers, it mattered – so much so they had CII pen a letter to protest the move ahead of the ride-hailing firm’s IPO pitch.
The Power Struggle
Much of the grievances stemmed from the fact that “the co-founders will wield majority voting control despite together owning less than 10 percent of the company’s equity, creating a substantial misalignment between those with control and those exposed to the economic consequences of that control.”
Seen from a different perspective, these investors likely viewed dual-class shares as the antithesis of democratic decision-making, paving the way for autocratic rule.
“The notion is that equity interests should align with voting power, and that super-voting shares can lead to distortions that disadvantage other shareholders,” said CII executive director Ken Bertsche, who expressed his concerns in an interview with IR Magazine.
Bertsche’s fears are not unfounded.
Just before Lyft’s IPO, Smartkarma raised some red flags on the company’s rate of cash burn that would easily make any investor squirm. Here’s an excerpt from our pre-IPO commentary:
“…the company will need at least US$2 billion to make ends meet in the next two years. If it manages to raise roughly that much through its IPO [which it did], chances are it needs to raise more funds in two or three years. That would potentially mean a secondary share offering, diluting existing shareholders’ stakes.”
Read the full article: Lyft’s IPO May Be Oversubscribed but Investors Are in for a Bumpy Ride
But there is a flip side.
Some proponents argue that dual-class shares are a necessary evil, allowing public companies the space to implement long-term plans without having to deal with voter-induced gridlocks. Others contend that it acts as a shield against potential hostile takeovers in the future.
Whichever the case, this fiasco could have been better handled from an investor relations standpoint.
The Heart of the Matter
Was a cold, hard letter really necessary for investors to make their grievances heard? And, did it achieve the desired outcome?
Lyft went ahead and issued dual-class shares, anyway.
In our opinion, the real issue at hand wasn’t so much in making the unpopular decision as it was in failing to communicate openly about it.
For example, when reputable media, such as IR Magazine and the Financial Times, tried contacting Lyft for comment on the letter, the company failed to respond. That kind of attitude surely needs to change if they are to avoid raising suspicion among investors.
Lyft could start by being more approachable, which will go a long way to establishing trust, thus easing investors concerns somewhat.
“Being publicly traded means being responsible to all shareholders, not just the founders and other pre-IPO investors who continue to have the preferential voting class of shares,” notes Dayna Harris, partner at corporate governance consultancy Farient.
“This responsibility and other expectations about good governance are constantly evolving, and a publicly traded company needs to be responsive at some point.”
Take the First Step
The simple act of getting listed on an IR directory can ease frustrations among investors seeking to connect. Smartkarma’s Global Investor Relations Directory helps IROs be more easily accessible. Join now, and add your details for free.
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