Facebook filed its S1 yesterday afternoon after the markets closed, ending years of speculation about when the company would do so.
Plenty of fodder remains for the rumor mill, of course, as this was Facebook’s first S1, and many of the details have yet to be revealed.
While Facebook hasn’t chosen an exchange or set a range for its IPO stock price, it has revealed a wealth of information about its approach to corporate governance. In many ways, Facebook is following in the footsteps of Groupon, Zynga and the other internet companies that have gone public over the past year – a sign corporate governance is not a priority for this sector. The use of Class B shares with disproportionate voting rights and founder control of the board, for example, will make it difficult for shareholders’ voices to be heard.
In the end, Facebook will be public, but it will remain Mark Zuckerberg’s company for as long as he sees fit. Let’s take a look at the chief corporate governance issues in Facebook’s S1 filing:
1. One-man majority rule: Zuckerberg holds 28.2 percent of the voting power ahead of the IPO, and he controls another 30.6 percent. That’s the majority he needs, although there are some restrictions, including the ability to vote for an issuance of stock that is more than 20 percent of what is outstanding already. Some of the voting rights end with the sale of the stock by its owners, the death of Zuckerberg or his giving up active management of Facebook.
2. The back-up plan: even if Zuckerberg loses or surrenders some control of his majority, Facebook continues to be heavily influenced by all owners of Class B shares. As long as these shares represent 9.1 percent of all shares outstanding, this group will control a majority of the votes. According to the S1: ‘This concentrated control will limit your ability to influence corporate matters for the foreseeable future.’
3. Board dependence: Facebook is taking the ‘controlled company’ exemption to corporate governance rules. As a controlled company, it won’t have to maintain a majority of independent directors on its board, and it won’t need to have a compensation committee or an independent nominating function. Zuckerberg’s designees have voting control, and if director Peter Thiel gives up his board seat, the board itself will decide who should fill it, increasing Zuckerberg’s control further.
4. Special situations: Facebook has taken specific measures to protect itself from acquisition. A transaction that would lead to a change in control of the company requires a majority of Class B votes (with these shareholders voting as a separate class). If Class B shareholders lose their overall majority, some ‘certain amendments to our restated certificate of incorporation or bylaws’ will call for a two-thirds majority of Class A and Class B shares. Simply put, the Class B shareholders – mostly founders and early employees – will retain majority control in certain situations with only a third of the votes. Also, when Class B shareholders lose their majority voting rights, the board will fill its own vacancies.
5. Meeting lock-down: what else happens when Class B shareholders lose their majority? Well, shareholders will only be able to ‘take action at a meeting of shareholders’, not by written consent. And only the CEO or a majority of the board can call a special meeting of shareholders – so any change would have to come with Zuckerberg’s consent.
While the corporate governance limitations at Facebook are not as severe as those at the Carlyle Group, and the voting structure isn’t as favorable to Zuckerberg as Zynga’s, the net effect is straightforward: shareholders are surrendering themselves to Zuckerberg’s genius.
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