Deliveroo – Corporate governance blues.

The dual share distribution causes problems.

• Deliveroo may already be regretting its decision to list in London as a number of big funds have decided to skip the IPO on the grounds that allowing dual share distributions leaves minority shareholders open to unfair treatment by management.
• While I strongly disagree with dual share distributions, investors still have the option not to buy the shares meaning that as long as the appropriate warnings are in place, there is no real reason why the practise should not continue.
• Legal and General (UK’s biggest investor), M&G, Standard Investments, Aviva and a number of smaller investors have all stated that they will avoid the listing of Deliveroo.
• Legal and General has also approached the regulator to request that it is not included in the indices which would then force it to buy the shares for its index funds.
• This is not a new issue and in fact, is common practice in the USA and has also recently been allowed in Hong Kong and now the London Stock Exchange.
• NYSE, HSE and now the LSE allow companies to sell shares to investors that do not give them a fair say in how their company is run.
• This most often manifests itself as multiple classes of shares where one class has many more votes than another.
• This allows founders to control the company despite having sold far more than 50% of the economic interest.
• This practice is common in small start-ups where speed and the ability to quickly pivot a strategy can be critical, but I have long believed it has no place in large public companies in which anyone can invest.
• I find that these distributions are more often than not detrimental to shareholder value.
• This is because founders have emotional attachments to their companies meaning that their judgement over long-term strategy is often skewed by emotion rather than rational judgement.
• GoPro and Ericsson are great examples where holding onto a losing strategy for too long destroyed large amounts of shareholder value.
• On top of this, a super-voting distribution allows a founder to spend other people’s money with no checks or balances.
• For example, a founder who owns 5% of the economic interest but 55% of the vote will only incur 5% of the losses that result from his bad decisions.
• Minority shareholders, who have no say in decision making, bear 95%.
• I have long believed that this imbalance amounts to bad corporate governance and unfair treatment of minority investors.
• In the case of Deliveroo, the CEO and Founder, Will Shu, will have around 5.6% economic interest in the company but will control 57% of the votes almost completely shielding him from the consequences of any bad decisions he makes.
• However, as much I dislike this practice, it is not obligatory to own the shares but anyone who does so should be aware of the issue and take this added risk into account.
• When I look at a company, I take this into account by applying up to a 30% discount to the fair value of the shares depending on the degree to which smaller shareholders are being disadvantaged.
• Companies like Google, Facebook and Baidu get the full 30% discount.
• I would also apply the full 30% to Deliveroo.
• If the company is still attractive after that discount, then I am happy to own it knowing that I am being properly compensated for being unfairly treated.
• I think that this is a better way to deal with this practice as opposed to banning it outright, but it means that more than ever, caveat emptor.