They were teasing Giles in a friendly way, Giles wasn't interested in punishing them, obviously, so I don't think disciplinary action was in order. And a school cannot punish a student for making fun of a school event. The most Snyder could have done would be blackmail them, saying if they didn't participate he'd suspend them, but that sounds illegal to me.
There's definitely no way he could have expelled them, they didn't do anything wrong, they weren't being RUDE to Giles either, so the very most they could have been given without the parents being able to do anything about it would be a three day suspension.
Mostly it bothers me because I've never heard of a principal having that kind of power, and stuff like a talent show, like sports, is optional and Buffy easily could have said no. It's just not realistic to me that Buffy would just go along with it if it was something she truly did not want to do, and I think I would have bought it had they made her joining it more believable.
They could have even done something like, Buffy refuses but Willow is scared of Snyder so she says yes, and Buffy just does it so support Willow and Xander.