With the Sunset of Its Dual Class Arriving, Veeva Systems (VEEV) Decides to Embrace Stakeholder Governance and Become a Public Benefit Corporation

Disclaimers: https://www.transactionaldelights.com/disclaimers

VEEV is no small fry – it’s a $45 billion dollar company as measured by market cap[1]. Increased digital interactions in the covid economy have been good for VEEV, and shareholders have seen the share price jump from $120.93 in March to $302.35 as of Tuesday’s close. So, it’s good times now for the cloud-computing company that focuses on pharma and life sciences applications, and for Peter Gassner, VEEV’s co-founder and CEO. Gassner also wears another hat as the majority shareholder of VEEV and currently holds 51.8% of the voting power[2].

But, Gassner’s majority power won’t last forever. In 2023, VEEV will lose its dual class status pursuant to VEEV’s charter which requires a mandatory conversion of all outstanding Class B[3]. Gassner will still have a significant stake, but it won’t be the same deterrent that the Class B affords. 

With the loss of its dual class, VEEV has decided to act proactively by calling a special meeting proposal to adopt an amendment to its Charter to become a Public Benefit Corporation (PBC)[4]. What are some well-known PBCs? Well, there really aren’t any. Etsy talked the talk for a while, and maintained B corp status for five years until it finally gave up that status when it decided not to convert into a PBC, which was required to maintain B corp certification[5]. In many ways, this is a first for a company of this scope.     

In Delaware, a PBC is still a for-profit company. The difference between a PBC and a regular corporation is that a PBC is structured to benefit not just company shareholders, but also other persons and communities whose interests are affected by the PBC (i.e., the company’s stakeholders). Accordingly, the PBC’s fiduciary duty is expanded from focusing solely on the interests of shareholders (remember Shareholder Primacy) to including and balancing the interests of all stakeholders affected by the PBC’s actions and pursuit of the PBC’s purpose[6].  In this case, VEEVA’s guiding principle is “do the right thing.[7]”

Now if this all sounds familiar to you, then maybe that’s because it is. It was only last year that The Business Roundtable put forth a proposal to redefine the purpose of a corporation, and Blackrock began to articulate the concept of a corporation’s sense of purpose. The Roundtable’s proposal was to promote “an economy that serves all Americans”, by expanding the corporation’s constituent base to all of its stakeholders (i.e., customers, employees, suppliers, communities, and shareholders). The difference between VEEV and The Roundtable is that The Roundtable was trying to put forth a normative view for all corporations, whereas VEEV is adapting a legal structure that actually exists. But, the goals are the same in that both are seeking to expand their constituency to go beyond the shareholder model. And, some of the negatives are the same as well. One of the objections to the stakeholder model is that if you are accountable to everyone, you are accountable to no one[8].

That’s a valid critique, and one way to look at VEEV’s transition from a dual class structure to a PBC. Consider how that could be applied in the M&A context and Delaware case law. How does one measure the obligation of the board to obtain the best price in a sale for a company when the company is a PBC? What happens if the stakeholder base begins to diverge and you have competing interests, for instance if one stakeholder prefers a financial buyer who is offering a higher price, but another stakeholder prefers a strategic buyer with a lower price, but the buyer promises to keep the company’s employees, and business local?

Yet, despite that critique and uncertainty from case law, this also has the patina of improving governance. Even if a PBC could be a useful defensive structure from a shareholder activist in the future, it’s less of a defense than the invulnerability of Gassner’s majority power in a dual class structure[9]. And, in addition to the sunset of the dual class structure, VEEV is also getting rid of its classified board[10]. It will be interesting to see if the questions get played out, and whether it is possible to take care of VEEV, and also take care of the world at the same time[11].

[1] Like other tech companies, its share price has doubled since March of this year when it was trading at $133.45.

[2] Gassner holds 89.3% of the Class B, and the Class B has ten votes per share. Interestingly enough, Vanguard holds 9.5% of the Class A, but less than 1% of the voting power. If it held as much voting power as it had dispositive power, its voting power would be ~4.5%. The difference may be due to Vanguard loaning its shares, but this shows how sometimes the ETFs do not have as much voting power as economic power and it’s an important thing to watch in proxy contests.

[3] This was a 10-year sunset provision. CII recommends a seven-year sunset. SNOW recently used a seven-year sunset provision in its governing docs.

[4] Because Gassner is the majority holder the proposal is a sure thing.

[5] B corp certification is conferred by a third-party nonprofit company called B Lab. B corps are required to maintain a certain score level on social and environmental performance. Patagonia is an example.  

[6] From the charter amendment: VEEV “is to be managed in a manner that balances our stockholders’ pecuniary (financial) interests, the best interests of those materially affected by the corporation’s conduct (including customers, employees, partners, and the communities in which we operate), and the public benefits identified in this certificate of incorporation.”

[7] “Don’t be evil” – Google circa 2004.

[8] Gassner, who also sits on the Board of Zoom, commented that the management team at Zoom is “taking care of Zoom, and taking care of the world at the same time”. Is it possible to take care of the company, and take care of the world at the same time?

[9] Besides, the real best defense is stock price, and VEEV is soaring on that front…for now.

[10] Sometimes this is not an easy thing to do even if the company puts forth the proposal. In this case getting rid of the classified board requires 66 2/3rds vote of the outstanding… a very high standard that will not be an issue due to Gassner’s voting power.

[11] Plaintiff’s lawyers note that any action to enforce the balancing requirement of stakeholders may not be brought unless the plaintiffs own at least the lesser of: 2% of the voting power of VEEV’s outstanding shares or $2 million worth of shares. The former will be difficult to meet until 2023.