Silicon Valley’s proposed new Long-Term Stock Exchange: loyalty shares or power grab?

How investors have reacted to the planned new US exchange

The Long-Term Stock Exchange (LTSE) being proposed by Silicon Valley power players, such as venture capitalists Marc Andreessen and Peter Thiel, LinkedIn co-founder Reid Hoffman, Twitter CEO Dick Costolo, AOL co-founder Steve Case and Groupon founder Andrew Mason, has ostensibly been put forward to fight against the current short-termism in the markets. The new exchange is designed around what it calls ‘tenure voting’. This means that the voting power of shares would grow over time, capped at 10 times the power of ordinary common stock after a decade.
Wait, 10 times the power of an ordinary share? That rings a bell, doesn’t it? Isn’t that what Facebook and Google’s supervoting shares are worth? Could it be that this is a way for tech entrepreneurs, such as those hoping to float Uber and Airbnb, to curry favour with governance hawks at IPO-time, but then slowly accrue power to themselves over time? Of course, tenure voting would also benefit public shareholders in indexed funds who bought in at the time of an IPO and held their shares, but they don’t wield a power block such as that wielded by a group of founders.
According to the Wall Street Journal, LTSE founder Eric Ries does not agree that the LTSE will be good for founders and bad for everyone else. Tenure voting, he asserts, is better than the Snap solution which gave no votes at all to ordinary shareholders.
Ken Bertsch, executive director of the Council of Institutional Investors (CII), was unimpressed by this argument. “While there are positive aspects of the LTSE proposal, the core element seems to be tenure voting, which is problematic. Eric Ries certainly has a point that this is not as bad as the Snap ‘no-vote’ structure, but I am skeptical that ‘better than Snap’ should be the standard. In my view, past experience with tenure voting is not good, in the United States and elsewhere (notably France).”
Bertsch is referring to France’s Florange Act, which institutionalised loyalty voting. Adopted in 2014, it provides for the automatic granting of double-voting rights to stock held by shareholders who have owned it continually for at least two years. These ‘long-term’ holdings are known as loyalty shares.

Companies can either opt out of it through a management or shareholder resolution, or may already prohibit double voting rights in their bylaws; although many French companies already have double voting rights. The two-year holding period triggering automatic double voting rights in the Act started on 1 April 2014 so many of these rights are already in place, unless companies opted out. That said, according to ISS, 74% of the largest French companies either had existing double voting rights or the right to introduce them already.ISS QuickScore also records that a group of 20 companies had loyalty share proposals rejected by shareholders. This group includes Alstom, Electricité de France, Orange, Renault, Vivendi, Aeroport de Paris and Air France KLM. Many of them were already heavily owned by the French government or, such as Renault, saw the government acquire a larger stake in order to prevent proposals against double voting from passing, or they already had controlling shareholders, such as Vivendi.
Reactions to the Act were not favourable. The French financial markets regulator Autorité des Marchés Financiers’ (AMF) and the Association Française de la Gestion Financière, the French asset management association, both wrote to the finance ministry to affirm the one-share, one-vote principle. The Act passed anyway.
Of course, France is not the only European country that has considered preferential voting rights for long-term shareholders. A similar law was also contemplated by Italy, but, investor protest was heeded and the government abandoned plans early in 2015. In addition, MEP Sergio Cofferati proposed introducing differential ownership rights as part of the revised European Shareholder Rights Directive (SRD). Again, this was successfully opposed. But other countries, such as the Netherlands, already allowed the practice; it has become the destination for heavily controlled companies such as Fiat, which moved from Italy, and cable company Altice, where the founder moved the company from Luxembourg to increase voting control.
Bertsch confirmed the CII’s stance on one-share, one-vote: “CII supports one-share, one-vote, and believes that gaps between ownership and control invite problems. Even in a private company setting, the super-voting power of the Uber founder (who held longer-tenured shares, being present from inception) became a liability in the particular circumstances in which the company found itself this year, leading to litigation and dysfunction.”
The International Corporate Governance Network (ICGN) also came out strongly against the Act, saying differential ownership rights is a “flawed tactic” that carries “potentially unintended consequences”.
The ICGN expressed concerns about governance problems and entrenched management where voting rights exceed the economic stake of a shareholder, even though loyalty shares were introduced in the interests of long-termism. These same concerns are being voiced about the LTSE.
BlackRock has already raised several objections to preferential voting rights.

While some of these were concerns over difficulties in actually voting shares in French companies – voting would become a manual process in France because loyalty shares with preferential voting rights could not be taken into account by international voting platforms. But the firm also pointed to a survey of investors which showed that a discount of up to 30% applies to the value of shares of companies with “shareholder control-enhancing mechanisms”.
Again, the same market concerns are expressed over the LTSE. In addition, CalPERS, has frequently affirmed its support for one-share, one-vote in its Global Governance Principles, so it, too, is unlikely to approve of the LTSE.
It should be noted that retaining or gaining one-share, one-vote in France is dependent on the support of a supermajority vote from shareholders of 66.67%, no simple hurdle to pass, unless there is already a founder or controlling shareholder desperate to hang on to voting power.
It would appear also that ISS is also not in favour of anything but one-vote, one-share. In an ISS consultation paper from 2015, the firm indicated that, for French companies that did not currently have a bylaw prohibiting double-voting rights, or that were not in the process of introducing such a bylaw, it may recommend against either or both of the reelection of directors or supervisory board members, or the approval of a company’s annual report and accounts.
The prospects for the LTSE, therefore, do not look good from the view of investors or their advisors.

And, according to Bertsch, the experiment has been tried unsuccessfully before: “A dozen or more US companies adopted tenure voting in the late 1980s or early 1990s, and half subsequently sought to rescind the structure. I understand that in all cases, the structures initially tended to entrench management.“There is longer-term change in ownership power, but not always in good directions. The GC [general counsel] at one of these companies told me that the complicated structure eventually gave outside power to an investor with very particular goals not necessarily consistent with shareholders generally, and that the structure caused challenges in valuation of stock for purposes of doing acquisitions, and so hamstrung the firm’s growth.”
He said France’s Florange Act, making tenure voting the default option, “has tended to give outsize weight to government ownership, with interests in conflict, at times, with the broader shareholder group.”
There are other sops being thrown to governance watchers by the LTSE. For example, incentive pay cannot be tied to financial-performance targets over periods of less than one year and equity pay would not vest for at least five years.

In addition, LTSE-listed firms could still publish quarterly results but would not be allowed to release quarterly earnings guidance.
According to the WSJ, Ries has been in negotiations with the SEC for two years and plans to seek regulatory approval by the end of this year – hoping that SEC Chairman Jay Clayton’s concerns over the drop in the number of public companies will ease the approval process. Clayton’s concerns, though, have been challenged.
Shareholders continue to be unimpressed, however. “I hear strong commitment from many of our members to the principle of one-share, one-vote,” said Bertsch. “The only exception I see gaining some ground is the notion of permitting companies to go public with dual class shares, but only with clear sunset provisions that would collapse the structure in no more than five years, absent a vote of the disadvantaged holders to extend the structure for another term no longer than five years.”
Of course, the LTSE offers exactly the opposite of this.