When we leaked Palantir’s S-1 IPO filing a week and a half ago, one of the more bizarre components that came out of that document was the company’s corporate governance. In a unique three-class voting structure, Palantir founders 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 company in perpetuity — even if they sell the underlying shares.
While founders of startups in recent years have often had special shares with extra votes (typically 10 votes for their special shares compared to one vote for standard shares), those votes dissipate if the underlying shares are sold. Palantir’s model is unique in allowing founders to have a commanding vote even if they were to sell their shares — in other words, voting power without underlying shareholder power, in direct contradiction to modern shareholder theory.
That strange controlling provision has clearly caught the attention of the SEC and the NYSE. In an amended S-1 filing with the SEC submitted this afternoon, Palantir made changes to its documents that made clear that its corporate governance will be more opaque far after its public debut.
First, Palantir has added a new risk factor to its original prospectus, which we will copy here in full because it really tells you a lot about where the company is headed on corporate governance:
Although we currently are not considered to be a “controlled company” under the NYSE corporate governance rules, we may in the future become a controlled company due to the concentration of voting power among our Founders and their affiliates.
Although we currently are not considered to be a “controlled company” under the NYSE corporate governance rules, we may in the future become a controlled company due to the concentration of voting power among our Founders and their affiliates resulting from the issuance of our Class F common stock. See “—The multiple class structure of our common stock, together with the Founder Voting Trust Agreement and the Founder Voting Agreement, have the effect of concentrating voting power with certain stockholders, in particular, our Founders and their affiliates, which will effectively eliminate your ability to influence the outcome of important transactions, including a change in control.” above. A “controlled company” pursuant to the NYSE corporate governance rules is a company of which more than 50% of the voting power is held by an individual, group, or another company. In the event that our Founders or other stockholders acquire more than 50% of the voting power of the Company, we may in the future be able to rely on the “controlled company” exemptions under the NYSE corporate governance rules due to this concentration of voting power and the ability of our Founders and their affiliates to act as a group. If we were a controlled company, we would be eligible to and could elect not to comply with certain of the NYSE corporate governance standards. Such standards include the requirement that a majority of directors on our board of directors are independent directors and the requirement that our compensation committee and nominating and corporate governance committee consist entirely of independent directors. In such a case, if the interests of our stockholders differ from the group of stockholders holding a majority of the voting power, our stockholders would not have the same protection afforded to stockholders of companies that are subject to all of the NYSE corporate governance standards, and the ability of our independent directors to influence our business policies and corporate matters may be reduced.
In other words, public shareholders in the company will likely legally have zero input into the governance of the company. The key line here is “If we were a controlled company, we would be eligible to and could elect not to comply with certain of the NYSE corporate governance standards.”
Will Palantir be a controlled company? The answer is almost certainly yes, given another subtle change the company made in its amended filing today.
In its original filing, the company wrote that the Class F stock given to Karp, Cohen, and Thiel “will give these Founders the ability to control up to 49.999999% of the total voting power of our capital stock” (emphasis mine). Now in its restated filing, the company notes that the shares “will give these Founders the ability to control up to 49.999999% of the total voting power of our capital stock, and the Founders may, in certain circumstances, have voting power that, in the aggregate, exceeds 49.999999%” (emphasis again mine).
The reason of course is that Karp, Cohen, and Thiel own other classes of shares that when added to these special Class F “founder” shares, will give them a controlling stake in the company.
According to the filing, these new Class F shares were approved by existing shareholders on August 24. In the company’s prospectus sent to existing shareholders (a leaked copy of which was obtained by TechCrunch), the company explained across more than a dozen pages the rationale and the timeline for why existing shareholders should approve not having any further say in their company’s governance.
Given the diminished voting power of employee and investor shares, it is possible that these voting provisions will negatively impact the final price of those shares.
The company in its amended filing noted that it has finally determined that Alexander Moore, Spencer Rascoff, and Alexandra Schiff, who were recently hired as new independent directors of the company, are in fact independent.
That said, Palantir also admitted that it doesn’t intend to have independent governance for a while at the company. From its amended filing and changed from its original filing:
Certain phase-in periods with respect to director independence will be available to us under the applicable NYSE rules. These phase-in periods allow us a period of one year from our listing date to have a Board of Directors with a majority of independent directors. Our Board of Directors will have a majority of independent directors within one year of our listing on the NYSE.
It also won’t have independent board governance of its audit committee either:
We intend to rely on the phase-in provisions of Rule 10A-3 of the Exchange Act and the NYSE transition rules applicable to companies completing an initial listing, and we plan to have an audit committee comprised 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 company has only two independent directors on its audit committee, Moore and Rascoff.
The SEC and NYSE seem to be pushing back against Palantir on its corporate governance, but let’s just be clear: we have never seen anything like this before with a startup IPO.