When we leaked Palantir’s S-1 IPO filing a week and a half earlier, among the more bizarre parts that came out of that file was the business’s business governance. In an unique three-class ballot structure, Palantir creators Alex Karp, Stephen Cohen, and Peter Thiel will be given a special” Class F”share that will ensure they hold 49.999999% of the ownership of the business in eternity– even if they sell the hidden shares.
While founders of startups in the last few years have often had unique shares with additional votes (usually 10 elect their unique shares compared to one elect standard shares), those votes dissipate if the hidden shares are sold. Palantir’s design is special in allowing founders to have a commanding vote even if they were to sell their shares– to put it simply, voting power without underlying investor power, in direct contradiction to modern-day shareholder theory.
That weird controlling arrangement has plainly caught the attention of the SEC and the NYSE. In an amended S-1 filing with the SEC sent this afternoon, Palantir made modifications to its files that made clear that its corporate governance will be more opaque far after its public debut.
Palantir has actually included a new danger factor to its original prospectus, which we will copy here in full due to the fact that it really informs you a lot about where the company is headed on corporate governance:
Although we currently are not considered thought about be a “controlled regulatedBusiness under the NYSE corporate governance rules, we may might the future become ended up being controlled regulated business to the concentration of voting power among our Founders creators their affiliates.
Although we presently are not considered to be a “controlled business” under the NYSE corporate governance rules, we may in the future become a regulated business due to the concentration of voting power among our Founders and their affiliates arising from the issuance of our Class F common stock. See “— The several class structure of our typical stock, together with the Founder Ballot Trust Agreement and the Founder Voting Contract, have the effect of focusing voting power with specific investors, in specific, our Founders and their affiliates, which will effectively eliminate your ability to affect the outcome of crucial deals, including a modification in control.” above. A “controlled company” pursuant to the NYSE corporate governance guidelines is a business of which more than 50% of the voting power is held by an individual, group, or another business. In the event that our Founders or other shareholders acquire more than 50% of the ballot power of the Business, we may in the future have the ability to rely on the “controlled company” exemptions under the NYSE business governance rules due to this concentration of voting power and the ability of our Creators and their affiliates to serve as a group. We would be eligible to and could elect not to comply with particular of the NYSE business governance requirements if we were a controlled company. Such standards consist of the requirement that a bulk of directors on our board of directors are independent directors and the requirement that our compensation committee and business and nominating governance committee consist totally of independent directors. In such a case, if the interests of our stockholders differ from the group of stockholders holding a bulk of the ballot power, our stockholders would not have the very same security managed to investors of companies that go through all of the NYSE business governance standards, and the ability of our independent directors to influence our business policies and corporate matters might be lowered.
To put it simply, public shareholders in the company will likely legally have absolutely no input into the governance of the business. The crucial line here is “If we were a regulated company, we would be eligible to and might choose not to comply with specific of the NYSE corporate governance requirements.”
Will Palantir be a controlled business? The answer is almost certainly yes, provided another subtle change the business made in its modified filing today.
In its original filing, the company wrote that the Class F stock offered to Karp, Cohen, and Thiel “will offer these Founders the ability to manage approximately 49.999999% of the overall ballot power of our capital stock” (emphasis mine). Now in its restated filing, the business notes that the shares “will offer these Founders the capability to control up to 49.999999% of the overall voting power of our capital stock, and the Creators may, in certain circumstances, have voting power that, in the aggregate, goes beyond 49.999999%” (focus once again mine).
The factor obviously is that Karp, Cohen, and Thiel own other classes of shares that when added to these unique Class F “creator” shares, will provide a managing stake in the business.
According to the filing, these new Class F shares were authorized by existing shareholders on August 24. In the business’s prospectus sent out to existing investors (a leaked copy of which was obtained by TechCrunch), the company described throughout more than a dozen pages the reasoning and the timeline for why existing shareholders should approve not having any more say in their business’s governance.
Offered the decreased ballot power of worker and investor shares, it is possible that these ballot provisions will negatively affect the final cost of those shares.
The business in its amended filing noted that it has actually finally figured out that Alexander Moore, Spencer Rascoff, and Alexandra Schiff, who were just recently hired as new independent directors of the company, are in reality independent.
That stated, Palantir also admitted that it does not intend to have independent governance for a while at the business. From its amended filing and altered from its initial filing:
Particular phase-in durations with regard to director self-reliance will be available to us under the appropriate NYSE rules. These phase-in durations allow us a duration of one year from our listing date to have a Board of Directors with a bulk of independent directors. Our Board of Directors will have a majority of independent directors within one year of our listing on the NYSE.
It likewise won’t have independent board governance of its audit committee either:
We intend to count on the phase-in arrangements of Rule 10A-3 of the Exchange Act and the NYSE transition rules applicable to business completing an initial listing, and we plan to have an audit committee consisted of entirely of at least three directors that are independent for purposes of serving on an audit committee within one year after our listing date.
Currently, the business has only two independent directors on its audit committee, Moore and Rascoff.
The SEC and NYSE seem to be pressing back versus Palantir on its business governance, but let’s just be clear: we have actually never seen anything like this before with a start-up IPO.
Article curated by RJ Shara from Source. RJ Shara is a Bay Area Radio Host (Radio Jockey) who talks about the startup ecosystem – entrepreneurs, investments, policies and more on her show The Silicon Dreams. The show streams on Radio Zindagi 1170AM on Mondays from 3.30 PM to 4 PM.