Should I buy Robinhood shares if I’m deprived of a shareholder vote?

I’m thinking of buying some Robinhood shares but I’ve learned they have gone for one of those ‘multi-class’ structures where certain shareholders get more voting rights.

This seems to happen more these days, with founders of tech companies wanting to keep control after a float, which I can understand but shouldn’t there be some oversight?

What are the pros and cons of this for ordinary shareholders like me wanting to buy in – does it matter?

Shares launched: Robinhood has now floated and has had a bumpy start, says markets expert Richard Hunter

Tanya Jefferies, of This is Money, replies: There are many examples of companies issuing shares carrying varying or no voting rights, and it is not just a recent phenomenon.

We asked a financial markets experts to explain why this happens, how such arrangements work, and what ordinary investors need to know when buying shares of this type.

Richard Hunter, head of markets at Interactive Investor, replies: Robinhood has now floated and has had a bumpy start.

From the initial float price of $38, the shares dipped 8 per cent on the first day of trading and fell further on day two to around $33, although the price has since recovered to currently stand at around $47.

Richard Hunter:  For many shareholders, the lack of a vote is incidental if they believe in the direction and management team of the company

Richard Hunter:  For many shareholders, the lack of a vote is incidental if they believe in the direction and management team of the company

The stock has a three-class share structure, with Class A carrying one vote per share, Class B 10 votes and Class C none at all.

Although such structures have been well reported of late, the phenomenon of non-voting shares (sometimes called ‘A shares in the UK), is not a new one. 

In the US, these have been around for some time. Perhaps the most famous example is Berkshire Hathaway, the company which is run by the legendary investor Warren Buffett.

For many years, Buffett refused to allow a stock split even after the stock rose substantially, preferring voting power to be concentrated among a relatively small number of investors.

In 1996, however, a Class B stock was created to attract small investors and at the current time the B shares trade at around $290, while the original A stock is priced at $435,000, with the difference also indicting that the B stock has 1/1500th of the voting power of the A as well as the value.

Similarly, when Facebook went public in 2011, chief executive Mark Zuckerberg and some early investors were given Class A shares which carried 10 votes each, as compared to the Class B shares which carried one each. 

In the UK, Daily Mail and General Trust shares are officially entitled ’12 1/2p A non-voting ordinary shares’, which means that ordinary shareholders have no voting rights in the running of the group, leaving the founding family (who own the vast majority of the voting shares) with effective control of the business.* 

What does the difference in voting power mean for ordinary investors?

Non-voting shares do not give the holder any voting rights in the company, but importantly they have the same rights to share in the profits of the company, such as approved dividends.

In normal circumstances and for many shareholders, the lack of a vote is incidental if they believe in the direction and management team of the company.

On the other hand, if the company begins to struggle their voices cannot be heard in forcing change.

Supporters of the dual-class voting structure believe that the concentration of power allows the company to focus on the longer term strategy of the company, without being unduly concerned about having to fend off a hostile takeover, for example.

In addition, they believe that opening up the doors on voting to all investors could lead to attacks by short-term activist investors.

However, research published in 2016 found that companies with unequal voting rights underperformed the rest on total shareholder returns, revenue growth, and return on equity, across a variety of time horizons.

As well as performance, non-voting shares are usually priced lower than their voting counterparts, even though the entitlement to dividends, for example, is the same.

This can be for a number of reasons, such as in the event of a takeover situation, where the bidder will be aiming at control and therefore targeting the voting shares.

Another consideration is that in August 2017, the S&P Dow Jones indices said that it would not include companies with multi-class share structures in its index-tracking funds, although existing constituents, such as Google, Berkshire Hathaway and Facebook, would be able to remain.

As such, firms joining the major indices thereafter would not be able to benefit from the extra flow of capital which makes its way into passive funds, for example.

The final question is one of when or whether a company decides to end the dual-class structure.

This can mean that the company provides for ‘super-voting’ shares to convert to the ordinary in the event of a takeover or if the founder’s percentage ownership drops below a certain level.

It can also be time driven, such as Deliveroo, which stated that its class B ordinary shares would automatically convert to A shares three years after being admitted to the market.

*DMGT is the owner of This is Money

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