Facebook’s plan to have Mark Zuckerberg retain majority voting control after its May IPO and Google’s issuance of a new class of shares with no voting rights at all is setting a dangerous precedent that could eventually end very badly for long-term holders, according to several investors and corporate governance experts.
“When you don’t have management that is accountable, it leads to problematic behavior or bad management that destroys shareholder value,” said Charles Elson, director of the University of Delaware’s John L. Weinberg Center for Corporate Governance. “It’s a dangerous trend and investors are going to eventually get burned. Our whole system is based on the balance between managers and shareholders.”
Thursday, Google announced a plan to create a third share structure called Class C, which will be distributed to current shareholders of the other two classes, effectively forming a stock split.
The catch, however, is that these new shares have no voting power and their issuance ensures co-founders Larry Page and Sergey Brin will retain majority control of the company, a power they were set to lose if their pre-planned insider selling plans continued.
Facebook’s IPO prospectus states that the shares they will offer to the public in May will have just one vote per share. Zuckerberg, however, will receive stock that has ten votes per share, ensuring the 27-year-old majority control.
These moves are completely legal under the “controlled company” exemption to corporate governance rules for publicly-listed companies, which dates back to the 1950s when the NYSE was trying to lure the family-controlled Ford Motor Company to list on the exchange, according to Elson.
“The planned structure makes it more difficult for activists or potential acquirers to exert influence on the company,” wrote Keith Moore, an event-driven strategist at MKM Partners, in a note to clients about Google’s new move. “Should management use the C shares for large acquisitions, the discount could be larger than what is normally experienced in class shares.”
Google and Facebook argue that these structures will keep the control with the founders, who know better than short-term oriented shareholders. Yet they are more than willing to except the capital of these so-called short-minded stakeholders, without giving them a true stake.
While many investors probably wouldn’t have cared if the late Apple founder Steve Jobs had this kind of supreme voting power (which he did not), they may start to grow concerned if recent moves made by Zuckerberg and Page are any indication of what’s to come.
Facebook this month paid $1 billion for Instagram, a move that raised eyebrows given the photo-sharing service has just 13 employees and no profit.
With Page as chief executive, Google proposed last August the $12.5 billion purchase of cellphone maker Motorola Mobility, plunging the software maker into the telecom equipment business and raising possible conflicts with users of its Android mobile operating system.
“At some point people are going to say ‘Why did we allow this?’” said University of Delaware’s Elson. The problem is that right now there’s no way to stop it, said Elson.
Well there may be one way.
“The answer is simple,” said Stephen Weiss of Short Hills Capital. “If you don’t like the management structure, don’t own the stock. There are thousands of other stocks to own.”
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