On or shortly after next Tuesday in Delaware’s Court of Chancery, the founder and CEO of Facebook will take the stand for the second time this year. Unlike the intellectual property case against Zenimax that forced Facebook to cough up $US500 million ($631 million), Mark Zuckerberg stands to lose some of the control he’s maintained over his his company over a suit pertaining to the bone-dry topic of stock restructuring. Don’t worry, it’s more digestible than it sounds.
In the simplest possible terms, decision-making power at a public company such as Facebook is held by the controlling shareholder(s) — whoever holds more than half of the voting power. In the case of Facebook, it’s Zuckerberg, with about 60 per cent of vote. While he and his wife Priscilla Chan have promised to divest themselves of 99 per cent of their Facebook shares within their lifetime (for charity), Zuckerberg devised a plan to maintain unilateral control over Facebook’s dealings, while allowing him to sell off a sizeable portion of his stock by creating a new, three-tiered system. Here’s how it breaks down:
- Class A — normal, voting stock
- Class B — 10 votes per share
- Class C — stock with no voting power at all
This “class C” stock is unusual, but not unprecedented. Under Armour and Google both have this arrangement for exactly the same reason it appealed to Zuckerberg — founders retain the class B “super shares”, limiting the control existing shareholders can exercise. To set the plan in motion, Facebook set up a special committee in August 2015 to represent minority stakeholders — pension funds, the Southeastern Pennsylvania Transportation Authority, and many others — headed by supposedly impartial directors Susan Desmond-Hellmann, Erskine Bowles and early investor Marc Andreessen. Ultimately, the board approved Zuckerberg’s plan.
The blockbuster piece of evidence that’s been trotted out so far are a series of texts between Andreessen and Zuckerberg, in which Andreessen backchanneled information to Mighty Mark and coached his pal on how best to sway this supposedly impartial committee. The texts, which were released as part of the lawsuit last December, included key details about the other committee members’ concerns and lines of inquiry, and the now-infamous piece of mid-conference call encouragement, “NOW WE’RE COOKING WITH GAS.”
Broadly, the suit hitting court next week argues that the actions of Facebook’s board represent “breaches of fiduciary duty”, and bolsters that claim with several allegations that the approval process was rigged from the get-go. Andreessen is now a defendant along with Zuckerberg, COO Sheryl Sandberg, board and committee members Susan Desmond-Hellmann and Erskine Bowles, CEO of Netflix Reed Hastings, Managing Director and CEO of WhatsApp Jan Koum, and board member/Trump adviser Peter Thiel.
Part of the restructuring — which remains on hold until the suit resolves — would have given Zuckerberg the ability to hold public office while still maintaining his stake in the social networking giant he founded 13 years ago. If he is planning on campaigning for the US presidency, as many have speculated, he’ll likely want this case resolved as soon as possible. The shareholders suing Facebook, however, are intent on keeping the restructuring from taking place, due to concerns that shares stripped of vote power will be worth less.
According to an official at the Delaware Court of Chancery, proceedings begin at 9:15AM on Tuesday (11:15PM AEST) and the public and press will be kept in an overflow room with a live feed, due to an overabundance of lawyers in the room where the trial will take place. This official did not have access to the witness lists that might hint at when key players would be called to the stand.