During the recent PLI Seminar on Securities Regulation that took place in New York City on November 8-10, 2017, panelists briefly discussed the recent decisions by major index providers to change their index eligibility rules and limit the inclusion of companies with multi-class capital structures. For example, in July 2017, S&P issued a press release announcing a methodology change for multi-class shares following its consultation published on April 2017 (see our prior blog post available here). The panel noted, among other things, the concern that such actions may discourage private companies from going public and may impose costs on retail investors that can be avoided by larger investors.
On November 9, 2017, BlackRock issued a statement expressing its disagreement with index providers’ decisions to exclude certain companies from broad market indices due to governance concerns. BlackRock noted that the benchmark indices should be as expansive and diverse as the underlying industries and economics whose performance they seek to capture. BlackRock further noted that such exclusions may limit BlackRock’s index-based clients’ access to the investable universe of public companies and deprive them of opportunities for returns. BlackRock, like many other critics, believe that it should be the role of regulators or stock exchanges, rather than index providers, to address the issue of unequal voting structures, including non-voting shares. A copy of BlackRock’s statement may be found here.
A few days earlier on November 2, 2017, MSCI announced that it planned to broaden the consultation on the treatment of shares with no voting rights within the MSCI Equity Indexes, to include a discussion on the treatment of all types of unequal voting structures (the “Consultation”). The Consultation follows an earlier consultation on a proposal to exclude non-voting shares from the MSCI Global Investable Market Indexes (GIMI) and MSCI US Equity Indexes in cases where the company level voting power is less than 25%.
MSCI also announced that it will temporarily treat any securities of companies exhibiting unequal voting structures as ineligible for addition to the MSCI ACQI IMI and MSCI US Investable Market 2500 Index. Specifically, a security will be temporarily ineligible if it belongs to a company that has multiple classes of equity securities and that exhibits any of the following characteristics:
- Shareholder voting rights are not proportionate to their economic interest
- Any share class has restrictions on voting on agenda items
- Voting rights for any share class are conditional upon certain events
The temporary treatment does not affect any current index constituents, and only applies to the potential additions of securities during regular Index Reviews as well as early inclusion of securities. A summary of the temporary treatment may be found here.