Market Overview

S&P Snubs Snap Due To Its Dual Class Shares

S&P Snubs Snap Due To Its Dual Class Shares

Snap Inc (NYSE: SNAP), which is trading well below its IPO price of $17, was in the news recently, as the lock-up period following its IPO expired Monday.

The fact that early investors and insiders are now free to sell their shares, up to an upper ceiling of 400 million, triggered a slide in Snap shares. After being down over 5 percent intraday, the stock recouped some of the losses to end down about 1 percent.

The negative run has extended into Tuesday's session, with the parent of the ephemeral photo and video sharing platform Snapchat down over 2 percent amid the news that it may not make its way into the prestigious S&P 500 club.

Shutting Out

S&P Global Inc (NYSE: SPGI) said in a release on Monday that companies with multiple class structures are no longer eligible for inclusion in the S&P Composite 1500 and its component indices.

The Logic

S&P indicated that companies with multiple class structures have corporate governance structures that do not treat all shareholders on equal footing, with respect to voting rights and other governance issues.

See also: When Will Marketers Embrace Snap?

Why Multiple Class Share Structure?

Companies with multiple class share structure usually have two categories of shares, namely Class A shares and Class B shares. The purpose is to give founders, early investors and insiders more control over the company, with the category of shares issued to them carrying more voting right.

For example, Google parent Alphabet Inc (NASDAQ: GOOGL) (NASDAQ: GOOG) has three categories of shares. The Class A shares trading under the ticker symbol GOOGL have one voting right. The ones listed under the ticker GOOG are Class C shares, which do not have any voting rights and were issued through a split in 2014. The Class B shares of Alphabet aren't publicly traded and are held by insiders, with each share of this category carrying 10 voting rights.

What Could Befall S&P 500 Components With Multiple Share Structure?

Are we going to see blue chips such as Alphabet, Berkshire Hathaway Inc. (NYSE: BRK-A) (NYSE: BRK-B) and Facebook Inc (NASDAQ: FB) booted out of the index due to the new diktat. The answer is no.

The release indicated that existing S&P Composite 1500 constituents are grandfathered in and would not be affected by this change.

Meanwhile, those companies outside of the index but having multiple share structure have the consolation of joining the S&P Total Market Index (TMI) and other indices.

However, those companies which are part of the S&P Composite 1500 Index, if issuing another publicly traded class of share to index share class holders, the newly issued share category could be considered for inclusion, if the event is considered mandatory.

At time of publication, shares of Snap were down 3.04 percent at $13.26.

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