ONE group of Facebook friends that Mark Zuckerberg recently decided were not worth hanging out with were its public shareholders, who expected to cross-examine him (via a lawyer) on September 26th in a Delaware court. At issue would have been Mr Zuckerberg’s plans to refashion the social-media firm’s share-ownership structure more in his favour.

There is not a scintilla of doubt over who controls Facebook. Not only does Mr Zuckerberg, its founder, serve as its CEO and chairman; owning 16% of its shares, he controls 60% of the voting authority through a special class of stock with ten times normal voting rights. A year ago, Mr Zuckerberg decided he would like to sell a large slug of his holdings (worth $74bn) without diluting control. The firm made a plan to distribute non-voting shares enabling him to reduce his economic interest to 3% without affecting control.

That prompted litigation. Shareholder votes can be directly meaningful on many issues, including management pay and acquisitions, and indirectly meaningful, too, because these votes require the release of often important information, says Stuart Grant, a lawyer. He sued Facebook and Mr Zuckerberg on behalf of two of the company’s large investors for a breach of fiduciary duty. But shortly before the trial Mr Zuckerberg dropped the plan, posting on Facebook that he believed he had sufficient control regardless. He also probably wanted to avoid an extra fight amid controversy over Russians using Facebook to meddle in America’s presidential election.

There was a time when ideas surrounding shareholder “democracy” created a vocal constituency for each share equating to one vote on corporate matters. This was a matter of contractual agreement under the rules of the New York Stock Exchange. The exchange’s rise to pre-eminence in the early twentieth century was tied to listing standards that enhanced investor confidence. But its authority has since withered away. It now offers no opinion on the subject of multiple share classes other than that they are permitted by its primary regulator, the Securities & Exchange Commission (SEC). Indeed, because the SEC does not block the issuance of non-voting shares, Mr Zuckerberg could well have won the case.

The NASDAQ, where Facebook is listed, defends multiple classes on principle, arguing that a share need only reflect an economic participation. Various structures are acceptable as long as shareholders know what they are buying, notably at the time of a public offering. If rules were tightened, it believes, firms would forgo listing altogether for less pernickety private markets.

Whatever merits this argument has, it does not quite cover the Facebook case: the change was to be made after the firm had gone public. Other firms have been taking a similar approach to their shares, either limiting investor voting rights, such as Under Armour, a clothing manufacturer, or offering shares with none, such as Snap, another social-media firm. But poor results at both firms have raised doubts about investors’ tolerance for buying into similarly-structured offerings.

Yet it does not amount to a meaningful mood shift on multiple share classes. If Airbnb, a home-sharing giant, wants them if it goes public, for instance, it will likely prevail; then others will. If a line is being drawn, it is not by regulators, but index-providers. Standard & Poor’s and FTSE Russell both said in July they would restrict firms with multiple share classes from their benchmark indices; MSCI is weighing a similar move. So future offerings may be defined not by exchanges or regulators, but by entities that merely describe collections of firms. Until then, shares of common stock, to use a precise though rarely used term, may have less and less in common.

Source: economist
Facebook and the meaning of share ownership