With Facebook Inc (NASDAQ:FB) shares up 37% over the course of the past 12 months. In fact, with a 344% return since its May 2012 initial public offering, owners of FB stock have had little — nothing, really — to complain about.
Or, maybe they did and just didn’t know it. They’ll know for sure later this month.
See, beginning on September 26, a class-action trial opens in Delaware pitting Facebook against a group of shareholders seeking to prevent Mark Zuckerberg from creating a new class of FB stock that would effectively ensure that he remains in firm control of the company for as long as he wants.
How effectively? His control would continue even after he gives the bulk of his fortune away.
It’s worth watching, if only because a handful of other companies including Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) and Snap Inc (NYSE:SNAP) already have similarly unfair ownership structures, and have taken some fire for it.
Not All Shares Are Built the Same
In the not-so-distant past, stock ownership was a relatively straightforward affair. Each share owned gave investors one vote when it came to matters like picking board members and other corporate structure and management-direction matters.
The last decade or so has given rise to new kinds of companies, organizations that are for all intents and purposes interchangeable with their founders. Google — now Alphabet — and CEO Larry Page are one example. Under Armour Inc (NYSE:UAA) and its CEO Kevin Plank are another.
This unique relationship, of course, has inspired initiatives that allow top management and founders to retain commanding control of their companies even though said companies may be issuing new shares or those stock-rich founders are selling shares. Alphabet, for example, is 51% controlled by Page and Sergey Brin even though the pair only own 11% of the company. Their class B shares — which you and I can’t buy — are worth 10 votes each, as opposed to the one vote entitled to each of your shares.
Perhaps inspired by Brin and Page and understanding the risks of losing voting control of his company, Mark Zuckerberg’s spin on the idea was simple enough: Issue a third class of FB stock to current shareholders of class A and class B shares that have no voting rights.
The new class C shares effectively dilute the public shareholders’ voting power as well as that of insiders who own class B shares (10 votes per share), effectively giving Zuckerberg a means of giving away much of his wealth without giving away any of his control of the company itself.
On With the Litigation
To be clear, investors have already approved the plan, albeit with a couple of stipulations. That is, if Zuck dies or quits, his class B shares are converted into regular ol’ class A shares of FB stock — the shares that are up 344% since the IPO. In the meantime though, he’s in charge as long as he wants to be.
As was noted, most shareholders don’t care. After all, why fix what isn’t broken?
The Southeastern Pennsylvania Transportation Authority isn’t as comfortable with the idea of an unremovable chief, however, and asked Chimicles & Tikellis LLP to represent its interests in the class action lawsuit set to begin the last week of September. The suit will attempt to bar the reclassification action before it reaches a stage that’s difficult to undo.
Though a bit offputting to investors, such maneuvers have held up to legal and social scrutiny before. This case is a bit different, however, in that a thread of text messages between Zuckerberg and board member Marc Andreessen has been drudged up, and casts the company’s CEO in an ugly light. In short, Andreessen — who is supposed to be representing the interests of shareholders — was coaching Zuckerberg through his meeting with attorneys who were largely against the idea of giving one insider a perpetually controlling interest in the company.
Bottom Line for FB Stock
While the text messages were clearly ill advised, they won’t inherently torpedo Zuck’s plans to issue a whole new kind of FB stock as a means of retaining control. Still, this is one of the bigger (and maybe the biggest yet) tests of supervoting shares in a court of law. If nothing else, it will be interesting to see what judges and juries really think about the legality and defendability of this and other similar situations.
Broadly speaking, it’s not been a major hot button yet as most of the companies using such capital structures have done well enough that few truly cared.
That’s changing though. Snap, the parent company of Snapchat, has a comparable share structure giving CEO Evan Spiegel 43% control of the company even though he only owns a fraction of the total number of company shares. With SNAP stock now less than half its peak value from the March IPOand Spiegel seemingly not caring, a wide swath of shareholders are getting more frustrated they can’t do much to adjust his attitude.
Ditto for Under Armour. CEO Kevin Plank had a great vision when he founded the company back in 1996, but one can’t help but wonder if him being forced out several years ago would have allowed the stock to sidestep the 80% pullback it’s suffered since September 2015. Though Plank finally stepped aside in June, he arguably waited too long. Had he not been in complete control and someone else stepped in, the past couple of years may have been different.
So far Facebook has dished out nothing but success, but no FB stock investor can afford to assume anything is impossible.
The trial, assuming the suit isn’t dropped, has some pretty serious ramifications not just for Facebook, but for all CEOs and founders using the approach to unfairly retain control of their organization.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
