Marc Hodak on Facebook's plan to issue non-voting stock:
I’ve been hearing a lot of angst about Facebook’s decision to issue a new class of non-voting shares for the express purpose of preventing dilution of Mark Zuckerberg’s control over Facebook. Mainly, the complaints are of the nature, “It’s undemocratic!” The best response I can offer: Get over it.
God did not ordain that all companies need to be governed in any particular way. Yeah, I get the benefits of a more diverse shareholder influence over the board. I get that he might abuse the outsized authority he has gained from dual class (now triple class?) shares, and act in ways that hurt minority shareholders. I would be willing to grant all that and ignore that Zuckerberg’s influence has so far been very beneficial to all shareholders, and that his board is as good as one might hope for to restrain his potential excesses.
But here’s the deal with Facebook: Zuckerberg is in control. Every current shareholder bought into that premise. There is no moral principle that says we need to adjust the charter or capital structure to accommodate our personal or collective preferences on what “good governance” ought to look like after the fact.
What about the fact that Zuckerberg has now added another layer of anti-dilution protection that wasn’t there when current shareholders bought into Facebook? Well, they bought into that, as well. They bought into the current change insofar as Facebook is, basically, the charter that enables that change and everything else that Facebook is. When you date a paranoid, you can’t complain when they add another alarm system to the house.
Go read the whole thing.
I tend to agree with Mr Hodak. But I wonder if the Delaware courts would agree. What standard of review would a court apply if a Facebook shareholder challenged the issuance? Would the court regard this as a controlling shareholder conflict of interest transaction subject to entire fairness review?
