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Twitter's IPO Filing Shows Simple Governance Structure
"Twitter's IPO Filing Shows Simple Governance Structure," ONSecurities.com, October 9, 2013

(The following post originally appeared on ONSecurities, a top Minnesota legal blog founded by Martin Rosenbaum to address securities, governance and compensation issues facing public companies.)

October 09, 2013
Twitter has created a governance structure so simple that it can be described in 140 characters or less. Maybe something like, "$TWTR has single-class stock but staggered Board. #notpushingtheenvelope."

Last week, Twitter filed the first publicly available version of its Form S-1 registration statement for its long-awaited IPO. I was anxious to see whether Twitter used a dual-stock class structure, like Facebook, Google, Groupon and other social media companies whose IPOs represented hot investments. In contrast, Twitter has chosen a simple structure that doesn’t necessarily lock the founders into a control position. As described in this DealBook post, Twitter does have a staggered board and other antitakeover protections. However, those protections are still fairly common for public companies, unlike multiple voting classes of stock.

As noted in "Facebook IPO Includes Insider-Friendly Corporate Governance Provisions," Facebook used a fairly elaborate dual-class structure in connection with its 2012 IPO to make sure Mark Zuckerberg maintained control, even after his death. The shares held by the founders carry 10 votes per share, compared to 1 vote per share for the class of shares sold to the public. There were other built-in protections that allow Zuckerberg to control the fate of the company, even after his death. Google started with a more basic dual-class structure in 2004, but as described by Professor Steven Davidoff in this 2012 DealBook post, Google went so far as to create a third class of stock last year when it looked like even the dual-class structure might not keep the founders in control.

Investors and commentators were critical of the Facebook arrangement, as indicated in "Facebook Ownership Structure Should Scare Investors More Than Botched IPO" by Dan Bigman in Forbes. But they had only two choices – accept the founders’ unfettered control, or don’t buy the stock. But before Twitter made its filing, there were indications that investors were starting to raise their voices against the dual class structure – as Gina Chon phrased it in a post on Quartz, "Investors are tired of giving money to tech founders with strings attached."

Therefore, even though Twitter is likely to be a hot stock, investors won’t be faced with the choice of accepting a dual-class structure or skipping the investment. As Davidoff put it in this DealBook post yesterday, "the fact that Twitter is simply pursuing an I.P.O. on relatively friendly shareholder terms rather than trying to transform the markets" is a sign of "a start-up that has matured."

Following my recent post about the SEC’s proposed pay ratio disclosure rule (PDF), Colin O’Keefe of Lexblog Network (LXBN TV) asked for my thoughts in a video interview on the proposed rule. In my six-minute commentary titled "The SEC's CEO Pay Ratio Disclosure Rule: Does It Accomplish Anything?" I explain the significant challenges the rule will present for public companies, including the exercise of finding the median compensated employee of a large company, which I call a game of "Where's Ralph." I also discuss why the proposed rule is controversial, and I comment that the required disclosures likely will not be very helpful to investors.

By the way, we recently updated the ON Securities Cheat Sheet (PDF) to include information on the proposed pay ratio disclosure rule. The Cheat Sheet provides up-to-date information on the latest compensation and governance rules and listing standards.

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