What are Non-voting Shares?

This post explains what non-voting shares are and why a corporation might want to authorize them. This is part of Dana Shultz’s Canonical Questions on the Law® series of questions and answers about legal issues, concepts and terminology.

In this post, I will focus on non-voting common shares. Preferred shares raise issues that go well beyond voting rights. (See What Is Preferred Stock?)

When you receive shares, you probably assume that, as a shareholder, you will have the right to vote on matters such as election of directors. Indeed, that normally is the case.

Non-voting Shares = Founder Control

However, it is possible for a corporation to issue shares that do not have voting rights. For example, founders of an early-stage company might wish provide equity-based incentives to employees, yet maintain control by the founders.

Snap Inc.’s initial public offering in 2017 was an extreme case of this phenomenon. Here is part of Snap’s Registration Statement (emphasis added):

This is an initial public offering of shares of non-voting Class A common stock of Snap Inc.

Snap Inc. is offering to sell 145,000,000 shares of Class A common stock in this offering. The selling stockholders identified in this prospectus are offering an additional 55,000,000 shares of Class A common stock. We will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.

We have three classes of common stock: Class A common stock, Class B common stock, and Class C common stock. The rights of the holders of Class A common stock, Class B common stock, and Class C common stock are identical, except with respect to voting, conversion, and transfer rights. Class A common stock is non-voting. Anyone purchasing Class A common stock in this offering will therefore not be entitled to any votes. Each share of Class B common stock is entitled to one vote and is convertible into one share of Class A common stock. Each share of Class C common stock is entitled to ten votes and is convertible into one share of Class B common stock. The Class C common stock, which is held by our founders, each of whom is an executive officer and a director of the company, will represent approximately 88.5% of the voting power of our outstanding capital stock following this offering.

Both S&P Dow Jones and FTSE Russell considered this so extreme for a publicly held corporation that they excluded Snap from their major indexes!

Rights Beyond Voting

Even if shares do not have voting rights, they may have other rights under applicable law. Most prominently, such rights typically include:

• Economic rights, such as to receive any dividends that the corporation may declare;
• Inspection of accounting books and records and the shareholder list; and
• Directors’ fiduciary obligation to look out for all shareholders’ best interests.

Photo credit: Kristen Price via FreeImages

Dana H. Shultz, Attorney at Law +1 510-547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.