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.

And this:

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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