As Uber sets about cleaning up its culture and its image, its board voted last week to remove its dual class share structure, reducing the power of former CEO Travis Kalanick.
Newly appointed Uber CEO Dara Khrosrowshai has kickstarted a reforming era for the ride-hailing giant, winning a series of unanimous votes for governance changes at September’s board meeting.
Key amongst the moves was a bid to reduce the influence of certain Uber shareholders including former CEO and co-founder Travis Kalanick, by adopting a one-share per vote policy, removing the company’s dual class share structure. Dual class share structures decouple economic rights and voting rights, giving a certain class of shares disproportionate say in the company’s affairs.
Kalanick had resigned as Uber CEO in June under pressure from five of Uber’s major investors after a series of scandals had shone light on the company’s festering corporate culture.
What are the changes?
Khosrowshahi and investment bank (and Uber investor) Goldman Sachs had circulated the governance proposal to the Uber Technologies Incorporated Board prior to the 3 October meeting, according to the New York Times (NYT). Japanese conglomerate SoftBank had stipulated the reforms as a condition of a deal to invest more than a US$1 billion investment in Uber.
According to meeting attendees who requested not to be identified in media reports, the approved governance changes include:
- Removing special voting power for Uber’s two stock categories: ‘Class B’ common stock and ‘preferred’ shares. Class B previously had 10-to-one voting power while the ‘preferred’ class also carried special voting rights for early investors like venture capital firm Benchmark. Benchmark reportedly dropped its legal suit against Kalanick for fraud, on the conditions the SoftBank deal proceeded and the governance reforms passed;
- Adding six new seats to the 11-person board. Of the new seats, two will go to SoftBank, another will go to an independent chairman and chairwoman and three new independent directors. The new 17-member board would be twice the size of the “average private company” in the USA, its National Association of Corporate Directors said. These changes to the Board’s structure modify Kalanick’s control over three seats giving one to SoftBank, and requiring another to be filled by a ‘CxO’ level executive at a Fortune 100 company; and
- Setting a deadline for taking Uber public by 2019. Bloomberg reported if the company does not go public by 2019, Uber has committed to lift some restrictions on shareholders from selling their stakes.
Why did the board agree?
Media reports allege the proposal was borne out of Kalanick’s lingering influence at Uber despite his resignation in June this year. On 29 September, after the proposal was circulated, Kalanick appointed two new directors to the Board: former Xerox CEO Ursula Burns and former Merrill Lynch CEO John Thain. Changes to Uber’s corporate charter last year gave Kalanick control of three Board seats including his own, allowing him to make these appointments.
Current Class B shareholders Shervin Pishevar, co-founder and managing director of Sherpa Capital (which invests in Uber and Airbnb), and US Congressman Steve Russell spoke out against the one-vote per sharechange, callingthe reform “unfair and illegal”.
Khosrowshahi attended the Board meeting remotely from London where he is attempting to hold meetings regarding the company’s ability to operate there. On 22 September, Transport for London (TfL) ruled the company was not “fit and proper” to operate in London and declined to renew its license, which expired 30 September. TfL said it considered Uber’s “approach and conduct demonstrate a lack of corporate responsibility in relation to a number of issues which have potential public safety and security implications”.
Dual class share structures have been commonly used by tech giants like Facebook and Google and startups as a means of maintaining founder control, though they are rare among listed entities in Australia.
ASX Listing Rules stipulate a company may have only one class of ordinary shares (unless the ASX approves the terms of an additional class) and that each ordinary shareholder must be entitled on a poll to one vote per fully paid security.
Dual class structures have been controversial because they are seen as lessening accountability of a company’s senior leaders and founders by shareholders.
Dan Primack, business editor at startup news website Axios, argues the dispute marks end of venture capital firm’s “founder friendly” approach that had led to provisions like dual class share structures, while influential tech website TechCrunch said the “founder-friendly” approach had increasingly seen boards “look the other way at founder indiscretions or mismanagements”.
The US Council of Institutional Investors came out in support of the Uber move because it stripped Kalanick of what it called his “unchecked power to do as he pleases because of his holdings of shares with super-voting rights.”
Conversely, though, some capital markets experts argue that dual class structures give companies more flexibility in raising capital. Russell Phillip, a partner at law firm Corrs Chambers Westgarth, has called on the ASX to introduce non-voting ordinary shares, arguing the “premise that voting power should be proportionate to the economic interest… is outdated.”
“Australia’s equity market would be more attractive if entrepreneurs and start-up companies could raise equity capital without necessarily having to cede control of decision-making,” Phillip contends.
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