When Facebook announced its first quarter results this week, it also announced that it created a new class of stock. The non-voting Class C stock proposed would enable Mark Zuckerberg and his wife Priscilla Chan to more easily fund their philanthropic ventures, whilst keeping Zuckerberg himself firmly in control of Facebook.
In response to this, a lawsuit has been raised that says the proposed deal is unfair. The shareholders raising the class action lawsuit said the deal would grant Zuckerberg even more control and that the board committee didn’t do enough “to obtain anything of meaningful value” in return. The lawsuit accuses him of wanting “to retain this power, while selling off large amounts of his stockholdings, and reaping billions of dollars in proceeds”.
Filed in the Delaware Court of Chancery, the lawsuit is highly critical of the proposed share restructuring which is described as “effectively a 3-for-1 stock split”. The aim is to issue two shares of new Class C shares (which would be traded under a new symbol) for every current Class A and Class B share owned by shareholders. The lawsuit says: “The issuance of the Class C stock will, in effect, have the same effect as a grant to Zuckerberg of billions of dollars in equity, for which he will pay nothing”.
Earlier in the week, when revealing its results for Q1 2016, Facebook said:
We also announced today that our board of directors has approved a proposal to amend and restate our existing certificate of incorporation to create a new class of non-voting capital stock, known as the Class C capital stock. If the proposal is approved, we intend to issue two shares of Class C capital stock as a one-time stock dividend in respect of each outstanding share of our Class A and Class B common stock. This proposal is designed to create a capital structure that will, among other things, allow us to remain focused on Mr. Zuckerberg’s long-term vision for our company and encourage Mr. Zuckerberg to remain in an active leadership role at Facebook.
The 2016 Annual Meeting of Stockholders is due to be held on June 20, 2016, and at this meeting Facebook stockholders will be given the opportunity to vote on the proposal. The lawsuit brought against Facebook is comparable to what happened to Google back in 2013 which did nothing to stop the company from going ahead with similar plans.