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New Facebook Stock Lawsuit Concerns

July 6, 2016

In April, Facebook announced that it would be issuing shareholders two new shares of Class C non-voting common stock for each share held of either Class A or Class B stock. Both Class A and B have voting rights, and Facebook Chairman and CEO Mark Zuckerberg already controls the company through his 76% ownership of Class B common stock (10 votes per share).

The move would effectively allow Zuckerberg to sell or give away his shares while still retaining control of the company indefinitely. Facebook’s board approved the stock proposal on June 6, raising concern among shareholders and analysts regarding control of the company and risks associated with the stock.

Kessler Topaz Co-Leads Facebook Lawsuit

Prior to the board’s approval of the stock proposal, a lawsuit was filed against Facebook. The lawsuit alleges that:

  • Class A common stockholders will suffer economic harm because the non-voting Class C shares will likely be traded at a discount to Class A shares. This in effect will diminish the value of their holdings in Facebook.
  • The committee that approved the deal did not bargain hard enough with Zuckerberg to obtain “anything of meaningful value” in exchange for the additional control he received.

Thus, issuing the new Class C stock is almost the same as granting Zuckerberg billions of dollars in equity, for which he will not pay anything. Facebook has agreed not to issue the Class C stock in question until the court officially rules on the case (likely to be set for January 2017).

In May 2016, the Delaware Chancery Court appointed Swedish pension fund Sjunde AP-Fonden (“AP7”) and Kessler Topaz to act as co-leaders of the litigation, along with Amalgamated Bank and the law firm of Grant & Eisenhofer.

Critical Opinions and Responses to Facebook’s Class C Stock

The board’s approval of the Class C stock has raised several concerns and responses from shareholders and corporate governance experts. For instance, some corporate governance experts feel that the stock split provides Zuckerberg with competitive advantages that come at the expense of the wider investing public.

Furthermore, Christine Jantz, chief investment officer at Northstar Asset Management, says that shareholders “expressed concern regarding governance risks” as the company would be relying on only one person’s vision and predictions. Northstar Asset Management currently holds more than $5 million in Facebook stock. Similarly, Santa Clara University School of Law associate professor Steven Diamond cited a “lack of accountability, because the outside shareholders have no ability to leverage or police what’s happening to their investment.”

While the approval by Facebook’s board did not come as a surprise, it is clear that not all shareholders are on board with the company’s new direction.

Other Related Social Media Legal News

Within the space of less than a decade, social media has become one of the most massive and influential industries, with companies experiencing quick growth and international reach. While there are many social media outlets, Facebook still dominates the online social media landscape.

Earlier this year, the company reached $328 billion, surpassing ExxonMobil’s $315 billion and landing it fourth overall behind No. 1 Apple, No. 2 Alphabet, and No. 3 Google.

In other related social media legal news:

  • Twitter will not be repricing stock options without prior consent from shareholders, even if the company were to be sold.
  • Facebook shareholders have also voted to keep Peter Thiel, co-founder of PayPal, on the board of directors. This decision comes only one month after Thiel acknowledged funding lawsuits against Gawker Media in efforts to run it out of business.
  • Parties involved in legal disputes with social media companies continue to experience difficulties during the discovery process, particularly with regards to turning over and preserving evidence. These challenges are similar to discovery problems with other forms of electronic evidence, such as text, e-mails, and chats.

Social media litigation will further expand and globalize as the industry continues to grow and surpass other fields in the market. Keeping pace with these unique stockholder developments is a priority for shareholders and board members alike. If you have any questions or legal concerns regarding shareholder rights, corporate governance, or other areas, contact Kessler Topaz today. Our team of attorneys is dedicated to staying on the forefront of important shareholder litigation issues and developments.