A power struggle between Facebook and investors just ended with Facebook dropping plans to issue non-voting shares (FB) [Interesting]
Facebook has dropped plans to create a new class of non-voting shares that would have protected CEO Mark Zuckerberg's control of the company even as he sells 99% of his shares.
The surprise announcement on Friday came just days before a trial seeking to invalidate the plan was scheduled to begin with Zuckerberg's testimony in Delaware court.
The decision means that Zuckerberg will stay in control of the company he founded for the foreseeable future and still be able to sell off millions of his shares to fund his philanthropic efforts, he said on Friday.
"Over the past year and a half, Facebook's business has performed well and the value of our stock has grown to the point that I can fully fund our philanthropy and retain voting control of Facebook for 20 years or more," Zuckerberg said in a Facebook post. "As a result, I've asked our board to withdraw the proposal to reclassify our stock -- and the board has agreed."
"I want to be clear: this doesn't change Priscilla and my plans to give away 99% of our Facebook shares during our lives," Zuckerberg added, referring to his wife Priscilla Chan.
Facebook's stock price has risen over 50% since the company initially proposed to issue nonvoting shares in April 2016. As a result, Zuckerberg said he plans to accelerate his selling of shares to fund his philanthropic organization, The Chan Zuckerberg Initiative. He plans to sell 35 to 75 million shares over the next 18 months totaling between $6 to $12 billion.
The move to drop the proposed reclassification on the eve of trial means that Zuckerberg and other Facebook insiders will not take the witness stand. Zuckerberg was scheduled to testify in Delaware Chancery Court on Tuesday, September 26, marking his second-ever public court appearance. Other Facebook board members, including Marc Andreessen and Erskine Bowles, were expected to testify in October.
“We're thrilled that Facebook has dropped the reclassification,” Stuart Grant, the lead lawyer representing shareholders in the case, told Business Insider in a statement. “Stopping the issuance of the non-voting C shares is all the relief we were asking for at trial. Today’s move is a total victory for stockholders.”
In a regulatory filing on Friday, Facebook said the decision to drop the plan followed the unanimous recommendation of the board's special committee of independent directors.
"I thought it was the only way"
Originally filed in April 2016, the class action lawsuit brought by Facebook shareholders sought to block Zuckerberg's plan to reclassify Facebook's stock structure and create a new class of non-voting shares. The proposed issuing of non-voting, Class-C shares would concentrate Zuckerberg's majority voting rights even as he sold 99% of his holdings over time to fund his philanthropic efforts.
Facebook already has a dual-class share structure in which Zuckerberg and other insiders own special shares that have ten times the voting power of ordinary shares. But as the company issues more stock to compensate employees and to use as currency for acquisitions, and as Zuckerberg cashes out a growing part of his stake for philanthropy, Zuckerberg's majority control would gradually wither away.
"At the time, I felt that this reclassification was the best way to do both of these things," Zuckerberg said on his Facebook page Friday. "In fact, I thought it was the only way. But I also knew it was going to be complicated and it wasn't a perfect solution."
Last December, the lawsuit's discovery process surfaced controversial text messages between Zuckerberg and Facebook board member Marc Andreessen, who the plaintiffs have accused of surreptitiously coaching Zuckerberg through a negotiation process with a special committee to win board approval for the stock change.
Another revelation from the discovery process was that Zuckerberg has seriously considered holding some form of public office. Facebook's reclassification proposal included a clause that would let Zuckerberg serve indefinitely in public office while still maintaining control of the company.
Facebook's board held a meeting to discuss dropping the reclassification proposal on September 21, just five days before the trial was scheduled to kick off with Zuckerberg's testimony on September 26. The lead lawyer representing shareholders against the company, Stuart Grant, told BI in an interview Friday that the last-minute decision on Facebook's part rendered the entire trial moot since the lawsuit was only seeking to block the restructuring.
Facebook's decision to settle follows in the footsteps of Google, which settled a similar lawsuit in 2013 over its plan to issue non-voting shares so that cofounders Larry Page and Sergey Brin could maintain their majority voting rights.
While Zuckerberg will be able to sell at least $1 billion worth of his shares over the next 20 years and still maintain majority voting rights, his pledge to sell 99% of his holdings before he dies means Facebook will likely have to one day revaluate its stock structure again, Grant told BI on Friday. Even if Facebook's stock continues to soar, Zuckerberg will eventually reach a point when selling his shares would dilute his majority voting rights.
“At some point, no matter how well the stock does, he’s going to have to cross that threshold," Grant said.