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Facebook abandons plans to change share structure, avoiding lawsuit

Reversal is the latest about-face for the social media giant as it fends off controversies on several fronts; CEO Mark Zuckerberg says he plans to accelerate sale of shares

Deepa Seetharaman & Sarah E Needleman | WSJ 

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Facebook. Photo: Reuters

Inc. on Friday abruptly abandoned a plan to change its stock structure that would have given Chief Executive more control, the latest in a string of reversals by the social-media giant as it fends off controversies on several fronts.

The about-face heads off a public trial scheduled to start next week for a lawsuit filed against by shareholders who claimed that conflicts of interest and other behind-the-scenes discussions tainted a board decision to approve the creation of a new class of

The share restructuring was aimed at ensuring Mr. Zuckerberg’s continued of even as he planned to give away 99% of his family’s wealth over his lifetime.

Mr. Zuckerberg had been scheduled to take the stand in that trial at Delaware’s Chancery Court on Tuesday, in a hearing that was due to be open to the public.

A lawyer for the plaintiffs, Stuart Grant, said he expects the case to now be dismissed. Facebook’s decision is “all the relief we asked for,” Mr. Grant said. “It’s a complete win.”

The reversal fits an increasingly common pattern for Facebook, which has repeatedly had to alter its position in the wake of public criticism over how it manages its powerful global platform. On Thursday, Mr. Zuckerberg said would provide congressional investigators with details of 3,000 ads bought by Russians during the U.S. presidential election, responding to pressure from lawmakers and others that it wasn’t forthcoming enough about how foreign entities used its platform to influence political discourse during the election.

That came after Chief Operating Officer Sheryl Sandberg this week said the is adding more human reviewers to oversee its ad-targeting system after a report showed it was possible for advertisers to target ads to users interested in anti-Semitic and other hateful topics.

And Mr. Zuckerberg was initially dismissive of concerns about the proliferation of false and misleading news spread on during the U.S. presidential campaign last year—only to reverse himself and announce measures to try to curb such misinformation.

Mr. Zuckerberg, whose fortune is estimated at $71 billion, said he doesn’t need the change in shareholding structure because Facebook’s stock has risen so much that he can fund his for-profit philanthropic organization, the Chan Zuckerberg Initiative, for at least 20 years by selling his existing stock without losing

have risen more than 50% since April 2016, when the plan was first announced.

Mr. Zuckerberg acknowledged that his plan to change from a two-class to a three-class share structure “was going to be complicated and it wasn’t a perfect solution. Today I think we have a better one.”

In a blog post, Mr. Zuckerberg said he plans to accelerate the sale of to fund the Chan Zuckerberg Initiative, an entity that allows him to donate to charitable causes and invest in that further a global mission.

Limiting Mr. Zuckerberg’s ability to gain more over goes against the tightening grip other tech founders have exerted on their Google, now Alphabet Inc., started issuing a third class of nonvoting in 2014. Google was sued over the decision, ultimately settling with investors.

Snap Inc. only issued nonvoting when it went public earlier this year because its founders wanted to stay in for the long-term.

“The fact that shareholders do have the right to sue does limit CEO power,” said Jay Ritter, a finance professor at the University of Florida.

Mr. Ritter said the only other technology he’s aware of with a three-class share structure similar to what was seeking are Alphabet and Snap.

Mr. Zuckerberg holds about 59.7% of the voting of because he controls 86% of the company’s Class B shares, which have 10 times the voting power of Class A Every Class B share he sells is automatically converted to a Class A share, which gets just one vote.

He said Friday he now expects to sell between 35 million and 75 million over the next 18 months “to fund our work in education, science, and advocacy.” At Facebook’s current stock price, that amounts to between $6 billion and nearly $13 billion.

The lawsuit filed by shareholders last year said Facebook’s board showed “stunning” disloyalty in rubber-stamping Mr. Zuckerberg’s proposal to issue nonvoting to help him keep of the The plan would have limited shareholders’ say and cemented Mr. Zuckerberg’s regardless of whether he was financially invested in the company’s success, investors in the lawsuit said.

For example, longtime director Marc Andreessen, who served on a special committee created to discuss the new share structure, was privately coaching Mr. Zuckerberg by text message on how to win over the other two directors on the committee, according to text messages disclosed in court documents last year.

In one instance, Mr. Andreessen texted Mr. Zuckerberg during a March meeting of the special committee with progress reports. “NOW WE’RE COOKING WITH GAS,” Mr. Andreessen wrote.

A spokeswoman for Mr. Andreessen declined to comment.

Andrew Winden, a fellow at Stanford Law School, said likely withdrew the capital-restructuring plan in anticipation of losing the case. “Those communications with Andreessen really messed up the quality of [Facebook’s] special committee process,” he said. “They created a hurdle that was just so high.”

Mr. Grant, the plaintiffs’ lead counsel, said he received a call from attorneys Thursday night informing him that the had withdrawn the capital-restructuring plan at the heart of the case.

An administrator for the Delaware Chancery Court sent an email Friday afternoon saying the trial was “canceled due to a settlement.” Mr. Grant said that is incorrect, and that he plans to file a stipulation Monday to officially withdraw the lawsuit because the reason for it no longer exists.
Source: The Wall Street Journal

First Published: Sat, September 23 2017. 15:56 IST
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