The Institutional Shareholder Services (ISS), an organization that provides corporate governance services, has complained that Facebook is employing a dual-class stock structure when it goes public sometime in May. Facebook plans to have two types of stock: Class A (worth one vote, and available to those who want to buy the company’s stock on the open market) and Class B (worth 10 votes, and only available to select individuals and investors). More specifically, the ISS has criticized the world’s largest social network for giving co-founder and CEO Mark Zuckerberg too much control.
As I noted when Facebook filed for its $5 billion initial public offering (IPO) earlier this month: the numbers published by the U.S. Securities and Exchange Commission show Zuckerberg has a 28.4 percent stake in the company. That being said, he also has voting control over at least 57.1 percent of Class B shares through a chain of agreements with other shareholders. Zuckerberg bought voting control shares from multiple parties for $100 apiece.
“Facebook appears to have taken the same outdated dance lessons as many other recent tech sector debutantes,” the ISS wrote in its report titled “The Tragedy of the Dual Class Commons,” a copy of which was obtained by The Wall Street Journal. The firm calls the dual-class structure “an autocratic model of governance” that makes Facebook “less viable if a competitor whose governance gives owners a voice proportionate to the economics they have at risk.”
The ISS has criticized other companies, such as LinkedIn and Zynga, for having dual-class stock structures, but it doesn’t have any power to convince them otherwise. Facebook will thus likely ignore the group’s disapproval. With more than 50 percent of the power, Zuckerberg can single-handedly make all board decisions, acquisitions, and merger approvals, regardless of what other Facebook shareholders want.
For its part, Facebook has acknowledged that Zuckerberg’s voting control is a risk factor. Here’s the relevant excerpt from its SEC filing:
Our CEO has control over key decision making as a result of his control of a majority of our voting stock.
As a result of voting agreements with certain stockholders, together with the shares he holds, Mark Zuckerberg, our founder, Chairman, and CEO, will be able to exercise voting rights with respect to an aggregate of shares of common stock, representing a majority of the voting power of our outstanding capital stock following our initial public offering. As a result, Mr. Zuckerberg has the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation, or sale of all or substantially all of our assets. In addition, Mr. Zuckerberg has the ability to control the management and affairs of our company as a result of his position as our CEO and his ability to control the election of our directors. Additionally, in the event that Mr. Zuckerberg controls our company at the time of his death, control may be transferred to a person or entity that he designates as his successor. As a board member and officer, Mr. Zuckerberg owes a fiduciary duty to our stockholders and must act in good faith in a manner he reasonably believes to be in the best interests of our stockholders. As a stockholder, even a controlling stockholder, Mr. Zuckerberg is entitled to vote his shares, and shares over which he has voting control as a result of voting agreements, in his own interests, which may not always be in the interests of our stockholders generally. For a description of these voting agreements, see “Description of Capital Stock—Voting Agreements.”
Just last week, the California State Teachers’ Retirement System (CalSTRS) told Facebook that a board of directors of seven members is unacceptable, not only because it is small but because it only features men. Facebook did not comment on my last article regarding CalSTRS and likely won’t comment on this one regarding ISS, but I have contacted the social networking giant and will update you if I hear back.
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