A Potential Hitch in Zuckerberg’s Stock Plan for Facebook
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, Mr. 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.
If Mr. 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 Mr. Page and Mr. Brin.
Shareholders hated it and only 12.7 percent of the regular shareholders voted for it, but Mr. Page and Mr. 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, Mr. 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 Mr. Zuckerberg, though Mr. Andreessen had done business with Facebook. Each was dependent on Mr. 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 Mr. 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 Mr. 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 Mr. Zuckerberg will have lifetime control over Facebook.
It’s a nice deal for Mr. 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. Mr. Zuckerberg may be a genius and capable of operating Facebook now. But he could live to his 90s, and like Mr. Redstone no longer be as capable, instead preferring to assert control simply because he can.
And, sure, Facebook pumps out cash like a fire hose, but some check on management would be prudent to avoid the temptation to waste that money on foolhardy projects. (Google Glass, anyone?)
To prevent Mr. 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.
This time around, however, the plaintiffs’ lawyers may have hit pay dirt.
As part of discovery in the case, the lawyers have obtained text messages between Mr. Andreessen and Mr. Zuckerberg that appear to show that Mr. Andreessen was leaking information and helping the chief executive while the independent committee was considering this transaction. The text messages were disclosed in a filing made public a few weeks ago.
As the special committee was deliberating, Mr. Andreessen — who was supposed to be representing Facebook shareholders — appeared to be coaching Mr. Zuckerberg in how to deal with the special committee.
According to the filing, Mr. Andreessen texted Mr. Zuckerberg ahead of a meeting to speak beforehand. Lawyers for the shareholders contend that this was to give Mr. Zuckerberg “inside information,” including coaching him on the question of how long he could leave to do government service and still maintain control. And during meetings with the board, Mr. Andreesen sent messages like, “This line of argument is not helping,” ending with a smiley face, and “NOW WE’RE COOKING WITH GAS.”
These are pretty bad text messages, though Facebook’s lawyers will most likely have an explanation along the lines that this is just the way bargaining works in Silicon Valley.
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, if we put aside Mr. Andreessen for a moment, seems to have been doing their job in at least thinking about the big issues, particularly Mr. Zuckerberg’s government service. And in exchange for putting this new plan into effect, Mr. 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 real question here is what Mr. Andreessen was thinking. The committee would probably have come to the same conclusion no matter what, given Mr. Zuckerberg’s importance to and control of the company, but at least there was some back and forth.
One might guess that Mr. Andreessen was trying to curry favor with Mr. Zuckerberg. His venture capital firm, Andreessen Horowitz, did help sell both Instagram and Oculus investments to Facebook, after all.
But given Mr. Andreessen’s great prominence as a venture capitalist, there really was no need to pander like that. And indeed, the more likely explanation is that he thought it was no big deal.
Andreessen Horowitz did not immediately respond to a request for comment.
Such an attitude is all too common in Silicon Valley when it comes to corporate governance and lawyers.
The text messages that have emerged in this litigation may not change the ultimate outcome. The stock plan is something that Mr. Zuckerberg wants, and Facebook will do what it can to make it happen, even if it includes writing a big check to settle with the shareholders.
In addition, the record will most likely show real bargaining by the committee and a real change in governance given Mr. Zuckerberg’s giving up control if he doesn’t work.
And the company can just reconvene the independent committee and try again — or even just move out of Delaware, where Facebook is incorporated, to a friendlier state.
If Facebook were going public today with such a share-class structure, few investors would bat an eye. Let’s see what happens when Snap goes public. No doubt there will be a very firm structure that ensures Evan Spiegel, 26, maintains control for the rest of his life.
That’s too bad. I suppose the foolish view would be that if Mr. Zuckerberg was really good for the long term then he shouldn’t care about share voting control. No one would try to oust him if he were doing a good job. But that is naïve, no doubt.
Instead, the message of Facebook is that in Silicon Valley, founders will keep control of their companies no matter what. Also, don’t email or text.
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