Ripping a page right out of the playbooks of Alphabet Inc (GOOGL, GOOG), Under Armour Inc (UA) and a handful of other companies, Facebook Inc (FB) is issuing a whole slew of non-voting shares.
The planned Facebook C shares will allow CEO Mark Zuckerberg and his management team to retain full control of the company.
Effective? Yes. Fair? Maybe. Common? Increasingly so.
Although the move may seem a irrelevant right now, sooner or later the new capitalization structure will become a point of contention. A closer look through reality-colored glasses is merited.
Can Facebook Do That?
Plans for the new category of Facebook stock were unveiled Wednesday along with the company’s first-quarter earnings.
The planned Facebook C shares (there are already B shares only held by key insiders) must still be approved by the majority of shareholders, the individuals and groups such a plan serves best happen to make up a huge portion of the shareholder base.
A statement from Facebook explains:
“For each outstanding Class A and Class B share held by our stockholders, Facebook intends to issue two new Class C shares as a one-time stock dividend. The Class C shares will have the same economic rights as the existing Class A and Class B shares. The primary difference is that the Class C shares are non-voting.”
At first glance it seems like a wash; major shareholders and insiders are losing (proportionally) as much voting power as smaller shareholders. That’s not quite the case, however. While it would dilute the voting power for all owners of FB stock, the B shares — which aren’t publicly traded — control ten votes for every vote apportioned to a FB share. Zuckerberg owns 419 million B shares, effectively giving him 54% control of the company.
In other words, the proposal doesn’t dilute the voting power for common shareholders, because that voting power was already diluted by all those B shares. The creation of C shares simply facilitates charitable giving and acquisitions; they’ll be used like currency, without chipping away control of the company.
And to answer the obvious question, yes, it’s perfectly legal as long as most shareholders agree to the plan.
Sooner or Later…
Facebook has made no bones about it — the endgame of issuing C shares is to make sure Zuckerberg remains in complete control while allowing him some financial flexibility. He himself stated:
“I’ll be able to keep founder control of Facebook so we can continue to build for the long term, and Priscilla and I will be able to give our money to fund important work sooner.”
The concentration of control doesn’t seem to be terribly alarming even to those with the biggest stakes. Synovus Trust Company portfolio manager Daniel Morgan (Synovus owns about $40 million worth of FB shares) opined, “[Zuckerberg] staying intact and moving forward and guiding the company is critical. This is his baby.” Morgan’s statements seem to echo the general consensus.
Still, the perceived risk of such an arrangement isn’t an unmerited one — what’s the recourse if it becomes clear Zuckerberg needs to go, but refuses to step down?
It’s tough to envision such a worst-case scenario in the shadow of persistently outstanding quarterly results from Facebook. While Alphabet, Twitter Inc (TWTR), LinkedIn Corp (LNKD) and a handful of other names recently posted disappointing results doing business on the web, Facebook continues to hit home runs. Just bear in mind that Apple Inc. (AAPL) was hitting nothing but home runs too … until last quarter.
Whatever can happen will eventually happen. When it happens to Facebook, will Zuck step aside gracefully or insist on helming the sinking ship to its ultimate doom? You never know until the time comes.
Bottom Line for Facebook
Be that as it may, the prospect of what might happen in the future doesn’t change the fact that Facebook is a growth machine in the present. Until that changes — and it’s not like such a change would happen out of the blue — FB remains one of the market’s bright spots.
The voting rights associated, or not associated, with the shares held in portfolios won’t matter until they do; and rather than grumble about it, if and when the time comes those diluted voting rights matter, an investor could do the much simpler thing and just sell those shares.
In other words, don’t pass up a good opportunity just on principle.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
