Looks like Facebook CEO and co-founder Mark Zuckerberg won't be allowed to bake his own social network cake, go public, have it all to himself—and still give away most of his fortune to good causes.
Facing a class-action lawsuit that was causing plenty of consternation among shareholders, the social network on Sept. 22 killed a plan to create a new class of non-voting stock shares that would have enabled Zuckerberg, 33, to maintain control of the company despite selling many of his public shares last year to fund philanthropic endeavors.
The new stock shares, insulated from those sold on the public market, would have weakened stockholders' power irreparably within the company.
Investors would have received two shares of this new non-voting stock—known as Class C shares—for each Class A or Class B share, which have voting rights. Zuckerberg would have been able to maintain control of the company over his lifetime by selling shares with non-voting rights.
Shareholders Say Plan Was a 'Recipe for Disaster'
Shareholders filed the lawsuit last year against the company and claimed in the court filing that allowing a founder to have this type of control over the company is "a recipe for disaster." Shares with no voting rights would likely have been traded at a discounted value, and the plan would have benefited Zuckerberg far more than investors, the lawsuit alleged.
On Sept. 22, a few days before he was scheduled to appear in court about the case, Zuckerberg said he and the board will drop the idea.
"Over the past year and a half, Facebook's business has performed well, and the value of our stock has grown to the point that I can fully fund our philanthropy and retain voting control of Facebook for 20 years or more," Zuckerberg said on his Facebook page. "As a result, I've asked our board to withdraw the proposal to reclassify our stock -- and the board has agreed."
Shareholder attorney Stuart Grant of Grant & Eisenhofer, representing several institutional investors, including Facebook shareholder Amalgamated Bank, was preparing to cross-examine Zuckerberg at trial.
Plaintiffs 'Thrilled' With Action
"We're thrilled that Facebook has dropped the reclassification," Grant said in a media advisory, adding that shareholders were not seeking economic or other damages against the company. "Stopping the issuance of the non-voting C shares is all the relief we were asking for at trial. Today's move is a total victory for stockholders."
One of the plaintiffs, Lee Rudy, a partner with Kessler Topaz Meltzer & Check, said in the advisory that "we are extremely pleased at the decision by Facebook not to proceed with the share reclassification–the board has seen the wisdom of acting equitably on behalf of all shareholders.” Rudy's firm represents co-lead plaintiff AP7 Safa, a fund managed by Sweden's state pension fund.
The lawsuit (Consolidated C.A. No. 12286-VCL) is now expected to be dismissed as moot sometime next week, Grant said.
In December 2015, Zuckerberg and his wife, Dr. Priscilla Chan, vowed to give away 99 percent of their Facebook shares to fund philanthropic causes throughout their lives.
Zuckerberg Explains Himself
Here is Zuckerberg's full statement from his Facebook page:
"I want to share some important news about Facebook and how Priscilla and I are funding our philanthropy.
"I've often said Facebook was not originally founded to be a company, but to accomplish a social mission. To help us focus on our mission and make decisions that don't always pay off right away, Facebook has always been structured as a controlled company. This has helped us serve our community best.
"At the same time, Priscilla and I also feel a responsibility to do our part to address global challenges–like curing all diseases in our children's lifetime and personalizing education for every student.
"That's why, last year, I shared a proposal announced by Facebook's board of directors to create a new class of Facebook stock. The idea was that it would allow me to keep voting control of Facebook so we can continue to build for the long term, but also allow Priscilla and me to fund the work we're doing through the Chan Zuckerberg Initiative.
"At the time, I felt that this reclassification was the best way to do both of these things. In fact, I thought it was the only way. But I also knew it was going to be complicated and it wasn't a perfect solution.
"Today I think we have a better one. Over the past year and a half, Facebook's business has performed well and the value of our stock has grown to the point that I can fully fund our philanthropy and retain voting control of Facebook for 20 years or more. As a result, I've asked our board to withdraw the proposal to reclassify our stock–and the board has agreed.
"I want to be clear: This doesn't change Priscilla and my plans to give away 99 percent of our Facebook shares during our lives. In fact, we now plan to accelerate our work and sell more of those shares sooner. I anticipate selling 35 million to 75 million Facebook shares in the next 18 months to fund our work in education, science and advocacy.
"We have a lot of work ahead at Facebook to help build community and bring the world closer together. We also have a lot of work at the Chan Zuckerberg Initiative working with amazing scientists, educators, and doctors around the world who need support today, not decades from now. This path offers a way to do all of this, and I'm looking forward to making more progress together."
If Zuckerberg sells 35 million to 75 million Facebook shares in the coming 18 months to fund projects in education, science and advocacy, that works out to about $6 billion to $13 billion at current stock values.