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From Securities Regulation Daily, August 4, 2017

CII lauds MSCI proposal to limit no-vote shares on indexes, urges further action

By Amy Leisinger, J.D.

The Council of Institutional Investors has issued a response to MSCI’s consultation on the treatment of non-voting shares in its equity indexes, applauding MSCI’s efforts to exclude companies with only non-voting listed shares and to place limitations on other companies to ensure that securities with low voting rights compared to other share classes are excluded from eligibility. Index providers are uniquely positioned to limit the separation of voting rights from ownership, CII stated.

MSCI proposal. With no effect on shares with voting rights, MSCI’s proposal would exclude non-voting shares of prospective index constituents from the MSCI Global Investable Markets Indexes and US Equity Indexes if the voting power of listed shares is less than 25 percent of the total voting power. Existing index constituents would be excluded if the calculation for non-voting shares falls below 16.67 percent. Of note, the proposal would exclude Snap Inc. from the MSCI All Country World Index (ACWI) and the MSCI US Equity Index, and, after one year, six companies’ non-voting shares would be deleted from the MSCI ACWI, unless those companies modify their capital structure to satisfy the required threshold.

CII response. CII stated that MSCI should exclude completely companies with only non-voting listed shares but noted that this approach alone would be insufficient, as companies would need to publicly issue only one share with voting rights to avoid the prohibition. The proposed thresholds are preferable to solely excluding companies with only non-voting listed shares, but MSCI should go further and exclude all new non-voting share classes, according to CII. Securities with very low voting rights compared to other share classes also should be subject to exclusion from the indexes if the company fails to satisfy the appropriate threshold, CII explained, as should the company’s other classes of securities. Existing constituents should not be indefinitely grandfathered from the threshold test, CII stated, and the proposed one-year compliance period for existing constituents could be lengthened to three years. A three-year grace period would limit disruption and afford sufficient time for adaptation, according to CII.

In addition to these suggestions, CII also urged MSCI to add further provisions to its proposal. According to CII, in the absence of a prohibition on all new multi-class structures, MSCI should, at a minimum, prohibit new no-vote share classes from index eligibility to prevent no-vote equity from "flooding" the indexes. Moreover, CII suggested that MSCI exempt companies with "one-share, one-vote" structures for the proposed voting rights thresholds, as other rules (including those on required minimum float) are the means by which to address problems with regard to these companies. It would be best if no company adopts a dual-class stock structure, even in the short-term, CII explained, but it may be necessary for some private companies considering public markets for protection.

In any case, MSCI should take strong measures to protect the "one share, one vote" principle followed by most publicly traded companies, CII concluded.

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