By Steven Davidoff Solomon
Mark Zuckerberg wants to give away nearly all his stake in Facebook, and yet still keep control of the company he helped found. What’s a tech billionaire to do?
The neat solution to this problem—creating a new class of shares—is par for the course for Silicon Valley, but often gives other shareholders short shrift.
Now details that have recently emerged in litigation challenging Facebook’s stock plan indicate a more troubling disregard for shareholders.
With the birth of his daughter last year, Zuckerberg wanted to transfer 99 percent of his wealth to a company he controls with his wife, which would later donate that money to charity. In giving away his shares, however, he would have to confront the issue of giving up his voting control over Facebook.
Zuckerberg owns about 15 percent of Facebook, but because most of his stock is Class B shares with 10 votes apiece, he has voting control of the company with 53.8 percent of the votes, a number brought up to about 60 percent of the votes since he also has the ability to vote the shares held by Dustin Moskovitz.
If Zuckerberg fulfilled even part of his giving pledge, which included the donation of $1 billion a year over the next three years, it would mean coming close to losing his control of the company he founded.
So he turned to a tried and true strategy: Follow Google.
A few years ago, Google authorized a nonvoting Class C stock to cement the control exercised by the founders Larry Page and Sergey Brin through their 10 votes per share Class B shares. The idea was that Google would use this stock to make acquisitions and award employee incentive compensation without diluting the interests of Page and Brin.
Shareholders hated it and only 12.7 percent of the regular shareholders voted for it, but Page and Brin used their control to push it through.
The gain for other shareholders is not immediately obvious. The best you could say is that it continues bonding the two founders to Google’s success.
At Facebook, Zuckerberg proposed the same structure to his board.
Given the clear conflict, a special committee of independent directors was formed, made up of Marc Andreessen, Erskine Bowles and Susan Desmond-Hellmann. These directors were technically independent of Zuckerberg, though Andreessen had done business with Facebook. Each was dependent on Zuckerberg to elect them to the board each year. The committee hired their own law firm, Wachtell Lipton Rosen & Katz, and the investment bank Evercore.
This independent committee approved the new stock structure. Under the plan, both Class A and Class B shareholders will receive a dividend of two nonvoting Class C shares, which have equivalent economic value to the Class A and Class B.
At face value it appears that everyone is being treated equally, but the deal really benefits Zuckerberg. With a dividend of over 900 million Class C shares, he can now sell his Class C shares and not reduce his voting control. The net effect of the transaction is that Zuckerberg’s Class B shares will account for only 5 percent of Facebook’s equity but will have voting control over Facebook. It ensures that Zuckerberg will have lifetime control.
It’s a nice deal for Zuckerberg, but there are potential risks for shareholders. One need only look at Viacom, where the share voting power is held by Sumner Redstone, who is 93 and apparently in poor health. Zuckerberg may be a genius and capable of operating Facebook now. But he could live to his 90s, and like Redstone no longer be as capable, instead preferring to assert control simply because he can.
To prevent Zuckerberg from further cementing his grip on Facebook, shareholders have sued in a Delaware court, seeking to block the stock plan. A similar legal effort was tried against Google’s new class of shares, but that lawsuit was settled on terms that I described as providing little benefit to shareholders.
As part of discovery in the case, the lawyers have obtained text messages between Andreessen and Zuckerberg that appear to show that Andreessen was leaking information and helping the chief executive while the independent committee was considering this transaction.
As the special committee was deliberating, Andreessen—who was supposed to be representing Facebook shareholders—appeared to be coaching Zuckerberg in how to deal with the special committee. Lawyers for the shareholders contend that this was to give Zuckerberg “inside information.” And during meetings with the board, Andreesen sent messages like, “This line of argument is not helping,” ending with a smiley face, and “NOW WE’RE COOKING WITH GAS.”
A representative of Facebook declined to comment but referred me to a statement given to Bloomberg that said, “Facebook is confident that the special committee engaged in a thorough and fair process to negotiate a proposal in the best interests of Facebook and its shareholders.”
There are a few lessons here even for internet titans.
First, do we really have to say in 2016 that you should assume anything you text or email is public? Really?
Second, the committee seems to have been doing their job in at least thinking about the big issues, particularly Zuckerberg’s government service. And in exchange for putting this new plan into effect, Zuckerberg did give up something gigantic: He no longer can pass along control to his heirs or simply retire and keep his high vote stock. Now he will have to work at the company to keep control, an important get for the independent committee.
The message of the Facebook is that in Silicon Valley, founders will keep control of their companies no matter what. Also, don’t email or text.
© 2016 The New York Times
Image credits: Jim Wilson/The New York Times