Facebook Inc.'s surprise decision to spike a controversial stock plan was viewed as the little-guy shareholders standing up to Mark Zuckerberg when the company’s compliant board would not. But Facebook directors -- with a notable exception -- actually did a good job in tough circumstances.
Facebook said on Friday that it would not proceed with the planned creation of a type of stock intended to solidify Zuckerberg's control over the company. A shareholder lawsuit that contended the new stock was unfair to them was set to go to trial this week. Facebook settled the litigation at the last minute and killed the new stock before it went into effect.
Zuckerberg’s explanation for the change of heart was that Facebook’s stock has climbed since the stock plan was proposed 18 months ago and that his shares are worth enough to both sell billions of dollars in stock to fund his charitable foundation and still maintain control of the company. It’s also sensible for Facebook to avoid potentially more negative publicity given the scrutiny the company is under for its role in spreading election-related propaganda.
To be clear, this now-deceased stock plan was absolutely a case of Zuckerberg seeking to change the rules of a public company to his own benefit. But that’s inherent when shareholders agree to grant founders like Zuckerberg near-absolute power. The founders make the rules, and they can change them when they like.
Given the circumstances, then, Facebook directors deserve credit for squeezing notable concessions from Zuckerberg before they agreed to hand over a new type of stock. They weren’t necessarily dealt a strong hand in these negotiations. Yes, Zuckerberg wanted the stock restructuring to ensure his voting power could stay in comfortable territory. But in theory he had the power to approve his share-creation plan by decree.
The biggest trade-off the board won from Zuckerberg was an assurance that he would stay committed to the company. As undesirable as it might be for a public company to be controlled by one man, Facebook directors also know Zuckerberg is the company’s best asset. If he got bored one day and walked out the door, Facebook’s stock would crater.
According to the details of negotiations outlined in a Facebook securities document last year, the group of directors responsible for negotiating the new stock made sure Zuckerberg would lose what he wanted most -- command over a majority of Facebook’s stock -- if he were to quit as CEO, was fired for cause or died. Yes, under the rules Facebook set when it went public, Zuckerberg gets to pick who assumes his voting power when his news feed goes dark for good.
Those were substantive negotiations hashed out over months. Facebook directors deserve credit for looking out for shareholders not named Mark Zuckerberg. Fear of getting sued for giving into Facebook's powerful founder was probably useful motivation, too.
There were exceptions to Facebook's board independence. Marc Andreessen, a prominent technology investor and longtime Facebook director, sent Zuckerberg a series of text messages that kept the CEO updated on fellow directors’ objections to the proposed new class of stock and advised how to win over reluctant board members.
These cozy communications were outlined in the lawsuit filed by some Facebook shareholders seeking to block the new type of stock. No doubt these were selective disclosures of board communications, but they fed into the worst fears of founder-led companies, namely that Facebook’s board was in Zuckerberg’s pocket.
Whatever happened is moot now. Facebook's stock structure stays the same. That is, Zuckerberg will continue to control the company, for now. And shareholder democracy also won. The stockholders' litigation did the seemingly impossible and got a Silicon Valley king to give up what he wanted. And a group of corporate directors still come off looking as if they did their job. This was not a case of a board rolling over for the company’s powerful CEO.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
In theory. Zuckerberg said he wouldn’t have gone ahead with a new type of stock without board approval, and if he had it would have been an invitation to litigation. As my Bloomberg View colleague Matt Levine wrote at the time, "In practice controlling shareholders can't just vote themselves more control. Courts tend not to like that."
It’s worth noting that at this year's yearly election of Facebook stockholders, about 79 percent of ballots cast by stockholders other than Zuckerberg voted for a proposal to end Zuckerberg’s voting power over the company. That was a pretty loud protest vote.
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