Tech Companies Have Killed the Poison Pill, and Dan Loeb Is at SNOW. It Appears That Nothing Interesting Is Going to Happen, but Something Interesting Could Happen (and Not Just in Seven Years)
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Do the best companies have the best takeover defenses, or the best investors? The answer to that question may come to define proxy contests for the foreseeable future.
Snowflake is a cloud-based data warehouse company. Its pitch is that its platform solves the problem of data silos and data governance. Competitors include Amazon (Web Services), Microsoft (Azure) and Google (Cloud Platform). Like other growth-oriented companies, it does not plan on paying any cash dividends in the foreseeable future.
SNOW recently made headlines by leaving a ton of money on the table in its IPO and from private placement investments by Warren Buffet and Salesforce, who I guess took the money off the table[1]. On its first trading day SNOW closed at $253.93, more than doubling its initial offering price of $120. SNOW bucked the SPAC and direct listing trend and took the IPO route – and ended up showing us the inherent uncertainty in pricing before going public[2].
But Buffet and Benioff are not the only notable investors. Bloomberg recently reported that Dan Loeb has taken a passive stake in Snowflake. Dan Loeb is an activist investor, perhaps the activist investor, who made a name for himself with his searing letters to the Board. Here’s a particularly savage passage from his letter to Irik Sevin, then-CEO at Star Gas (15 years ago):
“We further wonder under what theory of corporate governance does one’s mom sit on a Company board. Should you be found derelict in the performance of your executive duties, as we believe is the case, we do not believe your mom is the right person to fire you from your job…I have known you personally for many years and thus what I am about to say may seem harsh, but is said with some authority. It is time for you to step down from your role as CEO and director so that you can do what you do best: retreat to your waterfront mansion in the Hamptons where you can play tennis and hobnob with your fellow socialites. The matter of repairing the mess you have created should be left to professional management and those that have an economic stake in the outcome.”
But, Loeb has mellowed out a bit (at least publicly) over the last few years and sometimes Loeb just comes and goes[3]. Take for example recent investments in Visa, Fidelity National Information Services, and Alibaba, where Loeb said nothing (at least publicly). And now, here we are with another report that Loeb has invested in SNOW and that it will be a “passive” investment[4]. And we should take Loeb at his word because an activist campaign at SNOW right now would be impossible[5].
But, just for fun, let’s think about how an activist campaign might shake out at Snowflake. First off, their takeover defense is as impregnable as it gets for a Delaware company[6] – staggered board, directors removed only for cause, shareholders restricted from acting by written consent or calling a special meeting, and a supermajority vote is required to amend bylaws.
If you’re an activist and you look at that staggering takeover defense, you know your opportunity will only come once a year – at the annual meeting. But, alas, SNOW has something else up its sleeves – a dual class stock structure[7]. Class B in total represent 98.5%[8] of the total voting power of SNOW shareholders, while Class A (the publicly traded common shares) represents 1.5% of the total voting power[9]. But there is something here that we haven’t really seen from the legacy tech companies – a sunset provision that will melt away the 10:1 voting power[10] in seven years.
What does that mean if you’re an activist (looking to effect change) and your primary legal tools are: (i) nominating board members or make a shareholder proposal at an annual meeting; (ii) seeking to effect change through an action by written consent; or (iii) calling a special meeting to either remove and replace directors? Well, it means you have to think outside your legal box. You might want to take a different route and look at your existing shareholders.
If we peek into SNOW’s prospectus the shareholder base looks unassailable. In aggregate, all directors and officers hold 29.5% of the voting power. That’s pretty tough. And SNOW points out that when you combine the voting power of D&Os with their 5% shareholders, that comes out to 70.2% of the voting power. But who are the 5% holders?
Altimeter Partners Fund – a hedge fund, holds 14.9%
ICONIQ Strategic – holds 13.8%, a VC fund that’s a multi-family office[11]
Redpoint Ventures – holds 9.0%, a VC fund
Sequoia Capital Growth – holds 8.4%, a VC fund
Sutter Hill Ventures – holds 17.2%, a VC fund
So 48.4% of your voting power consist of 5% shareholders who are VC funds, who will almost certainly cycle out of SNOW at some point as that is their business model, and 14.9% of your voting power is a hedge fund who may or may not be long term holders who will likely have similar incentives, although cost basis will be important[12]. There are no legacy voting agreements with the VC funds governing what rights they have and how they can vote, just the charter that grants the Class B shares their rights. And once the VC funds seek to exit their investment, that Class B stock will automatically convert into Class A common on a one-to-one basis, thereby increasing the voting power of all Class A shareholders (including Buffet, Benioff, and Loeb)[13]. Look, am I saying Loeb is waiting for these investors to get out? No, that’s probably not even on his radar.
But clearly if we are looking at the tactical roadmap here, SNOW is a clear example of the kind of a company where poison pills[14] have zero use against an activist investor or a hostile acquirer, as long as the Class B is in place. You have to do what Jeff Ubben says he is doing as an ESG activist, and you have to find new shareholders as the old VC funds cycle out. There will have to be something more than just bad governance (and there is certainly shareholder unfriendly governance). So, that can’t happen right now with SNOW popping, but if you are patient and you wait for your moment – well, as they say, timing is everything.
[1] Both Salesforce and Buffett agreed to purchase $250 million of Class A common at the initial offering price of $120. As of the close of 10/6/20 (less than a month from the date SNOW went public) that price is now $245.10. Not bad.
[2] Pros and cons for all three.
[3] At least publicly. There are plenty of times when activists will engage at a private level and decide that their issues are not worth taking publicly. When you see a headline pop that “x” activist is taking on “y” company, there’s a 95% likelihood that the two have already been in private talks.
[4] This means that he will be an investor that won’t seek to change or influence control over SNOW.
[5] Compare this to Loeb’s recent actions at Disney telling them to redirect their dividend payments from shareholders to their streaming service, Disney + ((this (theoretically) runs counter to the short-term activists vs. long-term institutional holders argument championed by Marty Lipton of WLRK… (if Lipton were a basketball player he would be Jimmy Butler, Lebron, Jordan, Bird, Magic, Kareem, and Russell rolled into one… ok ok you can take Jimmy out)…am I writing that because the poison pill is dead? Well, maybe).
[6] Balancing takeover defense with ESG considerations (particularly the corporate governance part) is something that lawyers should be embedded into in the IPO process… finding ESG focused shareholders might be the new finding the CEO for activists (as Jeff Ubben so eloquently put it)
[7] Class A has 1 vote per share, Class B has 10 votes per share
[8] “On the closing of this offering, our authorized capital stock will consist of 2,500,000,000 shares of our Class A common stock, $0.0001 par value per share, 355,000,000 shares of our Class B common stock, $0.0001 par value per share, and 200,000,000 shares of undesignated preferred stock $0.0001 par value per share.”
[9] That’s 36,208,709 shares of Class A and 240,486,119 shares of Class B outstanding following the closing of the offering. With Class B having a 10:1 voting ratio to Class A, that means that Class B has 98.5% and Class A has 1.5% of the voting power.
[10] Sunset provisions are a mitigating factor in ISS’ view if they are reasonably-based.
[11] Includes Mark Zuckerberg, Sheryl Sandberg, Reid Hoffman, Dustin Moskovitz and Jack Dorsey.
[12] They got in pre-IPO, it appears Loeb got in post-IPO. Big difference in price.
[13] The Class B has to automatically convert into Class A after seven years.
[14] Well, if it had an acting in concert provision that might be a different story. My old boss Steve Wolosky is going after Williams for including that acting in concert provision, which may be ready to go…at least in Delaware. Stay tuned. https://www.reuters.com/article/us-williams-activist/activist-lawyer-wolosky-sues-williams-cos-over-poison-pill-idUSKBN25O35N
