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Zuckerberg & May 2012 Facebook IPO - Shareholders Stripped of Power

Author Zizzur Staff. Published on April 14, 2012 - 9:06 am (2166 views — 489 words)

Facebook has a plan to keep Mark Zuckerberg in position to retain majority voting control after the May IPO.

Google (GOOG) will have a new issuance of shares, calling this new class of shares the "class C" issuance.

According to John Melloy, CNBC, "With no voting rights at all, [it] is setting a dangerous precedent that could eventually end very badly for long-term holders, according to several investors and corporate governance experts."

"When you don't have management that is accountable, it leads to problematic behavior or bad management that destroys shareholder value," said Charles Elson, director of the University of Delaware's John L. Weinberg Center for Corporate Governance. "It's a dangerous trend and investors are going to eventually get burned. Our whole system is based on the balance between managers and shareholders."

Thursday, Google (GOOG) was down 4.06% ($26.41). It announced a plan to structure "Class C" which will be distributed to current shareholders of the other two classes, basically forming a stock split.

However, this new class of shares carries no voting power, and it ensures that the co-founders Larry Page and Sergey Brin will continue to hold majority control of the company, a power they were set up to lose if their pre-planned insider selling plans continued.

The Facebook IPO shares offered in May 2012 will only carry with it one vote per share. Zuckerberg, though, will receive stock that has ten votes per share, keeping the 27-year old in majority control.

These moves are legal, under the "controlled company" exemption, created in the 1950's to entice the family-controlled Ford Motor Company into being listed on the NYSE.

Google and Facebook both argue that these structures will keep the control of the companies with the founders, who know better than short-term oriented shareholders. Yet, they are more than willing to accept the capital of these shareholders, without truly giving them a real stake in the company.

If this is all new to you, you might wonder if Apple's (AAPL) Steve Job's held majority control and followed this same path, but the answer is no, he did not.

Potential concerns for future Facebook shareholders is not only the news of being stripped of a voice, but the kind of activity such as spending $1 billion dollars on Instagram, a move that raised eyebrows considering the photo-sharing service has only 13 employees and $0 profit.

Google recently proposed (August 2011), the purchase of Motorola Mobility, the cellphone maker, plunging the software maker into the telecom equipment business and raising possible conflicts with users of its Android mobile operating system.

"At some point people are going to say 'Why did we allow this?'" said University of Delaware's Elson. The problem is, right now, there's no way to stop it (Elson).

"The answer is simple," said Stephen Weiss of Short Hills Capital. "If you don't like the management structure, don't own the stock. There are thousands of other stocks to own."