They don’t need to know, Snap says. Tencent rues the day it bought a 12% stake.
Tuesday evening, Snap Inc., parent of Snapchat, reported a very ugly quarter, and its shares tanked in late trading. This morning, perhaps to stem the slide, it disclosed in a separate SEC filing that Chinese internet giant Tencent Holdings had acquired 145.78 million shares of SNAP, the crappy non-voting Class A common stock. This briefly boosted shares in early trading, until people started reading the fine print: The purchases were made in the past, and Snap didn’t notify its Class A shareholders because they were voteless and didn’t need to be notified.
Shares are currently down 16%. Tencent joins those who’re ruing the day they bought these misbegotten shares.
In its filings, Snap regularly lists Tencent as one of its competitors, along with Facebook, Apple, Google, Twitter, and others. Tencent is also a pre-IPO investor in Snap, dating to a 2013 fundraising round.
Today’s disclosure said: “In November 2017, Tencent Holdings Limited notified us that it, together with its affiliates, acquired 145,778,246 shares of our non-voting Class A common stock via open market purchases.”
This would be a 12% state. This stake, as the filing says, was “recently acquired.” Not today. The purchase of the shares may go back further, perhaps to September, according to The Wall Street Journal:
Tencent executives began discussing raising its stake in Snap in September, after the U.S. company’s shares touched several record lows in August, a person familiar with the matter said. Tencent wanted to support its investment in Snap during the U.S. company’s weakened state, the person said.
So Tencent, already worried about is prior investment, bought an additional 12% in the market over the past month or two to prop up the shares, and this indiscriminate buying (around $2 billion was spent, depending on share price) helped prop them up until the ugly earnings report yesterday.
But neither Tencent nor Snap disclosed the massive share purchases in the open market that made Tencent one of Snap’s largest shareholders, though Snap, as it admitted today, was informed by Tencent’s president Martin Lau that this was happening.
Why no disclosure? Snap explains with icy brutality what it thinks about its voteless Class A shareholders:
Because our Class A common stock is non-voting, we and our stockholders are exempt from certain provisions of U.S. securities laws. This may limit the information available to holders of our Class A common stock.
By contrast, the company’s co-founders, Evan Spiegel and Robert Murphy, own all of the Class C shares, which control roughly 90% of the voting rights. Early investors own Class B shares, which have the remaining watered-down voting rights. Class A common shares – the ones being traded and the ones that Tencent recently bought – have no voting rights.
Or as Snap put it:
As a result of our ownership structure, Tencent and Snap are not obligated to disclose changes in Tencent’s ownership of our Class A common stock….
And more technically:
Because our Class A common stock is non-voting, significant holders of our Class A common stock are exempt from the obligation to file reports under Sections 13(d), 13(g), and 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These provisions generally require significant stockholders to publicly report their ownership, including changes in that ownership.
As a result, Tencent and Snap are not obligated to disclose changes in Tencent’s ownership of our Class A common stock, so there can be no assurance that you, or we, will be notified of any such changes.
In other words, we kept you voteless shareholders in the dark, and we’re going to keep you in the dark, because you deserve to be kept in the dark because you were stupid enough to buy these voteless shares that allow us to keep you in the dark.
Thinking about suing? Forget it:
Our significant stockholders, other than directors and officers, are exempt from the “short-swing” profit recovery provisions of Section 16 of the Exchange Act and related rules with respect to their purchases and sales of our securities. As such, stockholders will be unable to bring derivative claims for disgorgement of profits for trades by significant stockholders under Section 16(b) of the Exchange Act unless the significant stockholders are also directors or officers.
Since our Class A common stock is our only class of stock registered under Section 12 of the Exchange Act and that class is non-voting, we are not required to file proxy statements or information statements under Section 14 of the Exchange Act, unless a vote of the Class A common stock is required by applicable law. Accordingly, legal causes of action and remedies under Section 14 of the Exchange Act for inadequate or misleading information in proxy statements may not be available to holders of our Class A common stock.
Why anyone would want to own these misbegotten voteless shares in a company that tramples on its shareholders who, based on a whirlwind of hype and nothing else, dished out an extraordinary amount of money that now is getting burned at an astounding clip, is beyond me.
This is where hype (and money) goes to die. Read… How Can a Company Once Worth $30B Lose $443M on Just $208M in Revenues? Here’s How
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Nonwoting shares, Tencent’s boss might have some explaining to do, not to his shareholders, but the Chinese state. People have been thrown under the bus for less in China during recent years and it is quite serious money that Tencent has gambled in Snap.
Otherwise nonwoting shares seem to be an excellent choise for issunce. No reason to take pesky shardholders into account :)
My guess is Tencent is an arm of the Chinese govt. so no being thrown under any bus. Tencent is up to a lot and they are investing in a lot. Tencent apparently even own 5% of Tesla. ( ChineEconomicReview.com and search Tencent)
Recent months have seen a lot of previously untouchable conglomerates being gently reminded by authorities in Beijing that they aren’t the ones calling the shots.
HNA Group has been forced to sell off some of their overseas assets and return the money to China and Guo Guangchang, the Fosun chairman, was “disappeared” for several days by the police.
So far there is no rough stuff, but authorities are driving home the point that it’s fine to get rich and take some of that wealth out of the country, but there’s a limit.
I am fully convinced Tencent bought those SNAP shares merely as a way for their management to launder money and take it outside the country. In short it’s an alternative scheme to buying houses in Australia and Canada or football teams in Europe.
I believe China exchange controls have yet to be extended to foreign shares (buy with local remnbi via licensed broker transfer ownership to subsidiary in Hong Kong SAR (outside rules) sell off for foreign currency via Hong Kong broker. Soon as the cash lands large payments to Singapore BB company which pays nice tax free salary to director into Singapore account beyond China’s reach.
I don’t understand why TENCENT buys so big s**ts? I do understand Chinese don’t know what to do with their money, but it seems they buy everything what they click without even watching what they click on a broker account.
Thus the expression “a fool and his money are soon parted”.
It appears 16% of Tencent’s $2B ($320,000,000) has already departed. This is weapons-grade foolishness.
About the suing business: unless they’ve powerful connections, they’re a sitting duck for some DA or govt official to launch an investigation into their business, a fishing expedition. I am sure emails exist where the founders poked fun at the suckers that bought it, a la Henry Blodget style back in the dot com days.
Puts did not even go up on it.
Options often more dangerous than slot machines.
Snap did nothing illegal. The class structure and no-voting rights was in their prospectus before the IPO.
10 cent get 10cent worth of money for their 10cent worth of brain.
I don’t like SNAP but admire their audacity and guts to make a fool of both innocent investors and corporate companies alike.
No guts, no glory
ah, the glory of raw capitalism, burning through resources and productivity to enrich a few oligarchs. tough luck, little guy – caveat emptor!
“Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone.”
– John Maynard Keynes
Those who bought SNAP shares are the true believers.
Actually, it is all the Russian’s fault………….
Wonder if Tencent could’ve already sold the shares. Would be hilarious if they put out a press release saying they divested their stake.
And here is another example of why I do not cry qhen Unicorns crash and burn.
What if unicorns did not do an ipo at all but instead chose to do an ico? They’ll still come out on top. Not only that, they’ll be spared the ignominy of having to submit report cards in front of the world. So may be the unicorns will be alright, after all.
I wonder if the shares that the Chinese companies own can be shorted by some somewhere? It always seems like the muddy waters of the world only picks on/ shorts little companies, leaving the big ones alone..
Keep buying those shares. There will be plenty of similiar sn+p type businesses will be eager to do the same thing if they can see sn+p has got away with the kind of business they have pulled off. This world gets more evil by the year.
These shenanigans are why I am completely out of the market and now only invest with individuals who are committed to making their business grow or their ideas come to fruition. I invest right here in my home town. I am helping some bright hard-working young people get started or to expand their businesses and have seen some positive results.
Millennials flocked (apt word) to “invest” in SNAP thinking this would be the next bubble stock to go parabolic despite its abysmal fundamentals. Now these not-so-saavy investors about about to get a valuable lesson on the perils of “investing” in rigged, broken, manipulated markets where the regulators and enforcers are either captured or criminally negligent. It would take a heart of stone to hear Millennials wailing about how they were ripped off, and not laugh. They might finally be motivated to be part of the solution instead of part of the problem.
Keep in mind Goldman, Morgan Stanley, Credit Suisse, Deutsche Bank ect. all had buy recommendations, so that certainly did not help. So there is also a lesson here in doing your own due diligence and tuning out the analysts.
Goldman Sachs has a long and sordid history of making “buy” recommendations for clients and retail investor muppets, then secretly betting against them. Anyone who trusts Goldman or any other Wall Street “analysts” (touts) to give disinterested investing advice is a fool. In addition, since fundamentals don’t matter anymore thanks to Ben & Janet, and non-GAAP reporting allows all manner of financial dodges, doing your own due diligence might not be all that helpful. Best to stay out of these rigged, broken markets altogether given these ludicrous, unsustainable valuations, and wait for the post-crash firesale to pick up selected bargains.
Some millennials were also crypto currency millionaires until about Yesterday:
There’s a lot of hair-pulling among Ethereum alt-coin hoarders today – after a programming blunder in Parity’s wallet software let one person bin $280m of the digital currency belonging to scores of strangers, probably permanently.
No offense, but investing in SNAP had nothing to do with rigged, broken, or manipulated markets. I haven’t heard anyone complaining of being ripped off.
It’s a fundamentally unprofitable company, with no pathway to profits. The company itself stated it may never be profitable.
Younger folks bought the stock because they like the app. Maybe they’ll learn to do due diligence or learn how stock investing is supposed to work, but I highly doubt because they bought a bad stock all of a sudden they’ll be part of some vague solution you have in mind.
“It would take a heart of stone to hear Millennials wailing about how they were ripped off, and not laugh. ”
THAT is beautiful! Thanks,
Bwahahahahahahahahaha. Serves ’em right. Thanks Wolf, I needed a laugh today.
Well, it’s not like the founders haven’t shown their true character from day one by first ripping off the guy that actually had the idea for disappearing messages.
If anything, they are being consistent.
Land of Legalised fraud.
To play devils advocate, SNAP is only responding to the predatory nature of corporate raiders aka private equity. Plenty of companies have been driven bankrupt by PE firms who use cheap wall st money to buy shares and gain control of a company, load it with debt, then sell it off in pieces.
Voting shares are only a good thing *if* the owners have the best interest of the company at heart. As long as it’s institutional investors, that’s generally true. But with PE on the prowl for any healthy company to strip down, with QE-backed war chests of cheap money, the best thing you can do is ensure they can never gain control.
snap will continue to lose money snap has no product no business plan AR is not mainstream yet all AR games are flops.Maybe AR in sporting events or marketing could be a game changer for the industry.Tencent should invest more money in bike sharing with mobike and then merge the company with ofo.Tencent will make much more money when they ipo mobike and ofo then with snap
No one would ever touch non-voting shares with a 10 feet pole. However looking at stock screening tools on Yahoo or Google does not reveal that NYSE:SNAP is non-voting. Scottrade’s stock screener is of no help here either. Is anyone aware of a good stock screening tool that allows filtering non-voting stocks out?
Snap is the only company in the US that has issued only non-voting shares to the public. So this is an exception, and I’m trying to do my best to keep it that way.
Other companies like GOOG and FB have diluted voting rights, and some have voting AND non-voting shares, but no company in US history has ever done an IPO with only nonvoting shares.
In other countries, non-voting shares may be common, but not here.
So I take it that there is no way to avoid trap of buying SNAP-like Class-A shares without digging into their financials.
Interestingly, “Stockholders’ equity” section of their latest 10-Q does look complicated. Complicated to the point that should be avoided by any amateur investor:
Yes, there was a way to avoid buying those shares during or after the IPO: Reading my article about this whole mess, published on Feb 3, a month before the IPO, titled: “There’s a Lot More at Stake in this IPO than Just Toxic Financials”
“In other countries, non-voting shares may be common, but not here.”
Where they are common, as we have discussed before, they are also % ratio controlled, and Dividend guaranteed. Failure to pay divined converts “Non Wrights” shares, automatically to (voting) Wrights shares.
Hence the “Non Wrights” Shares, effectively become small traceable bond’s, for smaller retail investors.
What snap did, is fraud plain and simple. It is just a Legal fraud,
It is most defiantly a loop hole (Fraud Avenue) that needs plugging as the Owners of this snap toilet paper, can do noting about the way the company behaves, and have NO recourse as a bond holder would. And No guarantee of a Dividend.
America the land of legalised Corporate Fraud.