San Francisco - Earlier this year, Facebook’s
Mark Zuckerberg came to his shareholders with a big question: would they
approve him maintaining voting control of the company, even if he sells most of
his stock? The monumental shift would benefit Zuckerberg because it would let
him sell shares to fund philanthropy, but it had the potential to harm
investors by diluting their power over decision making. And before putting the
vote to shareholders, Facebook's board had the power to influence the outcome.
But their
process was flawed, according to investor lawsuits filed in April against
Facebook's board in Delaware's
Chancery Court and recently unsealed. The company went through the motions
of protecting minority shareholders, but one board member seemed more
interested in protecting Zuckerberg himself, investors allege.
Zuckerberg
has voting control among shareholders because his stock has most of the
voting rights. He wanted to sell shares, but didn't want to lose his majority
voting status. So he proposed setting up a new Facebook stock class. The
new shares would automatically dilute the voting power of existing
shareholders, because every share with voting power will split
into three shares -- one that has power, and two that don't. In
the new arrangement, the non-voting shares are less attractive as currency in
acquisitions and may make it harder for the largest social-network provider to
get tax benefits, among other issues.
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The
question was put to a vote by shareholders, but there was never any doubt about
the result. Since Zuckerberg has majority voting control of the company, what
he favours wins the day.
Majority control
Zuckerberg's
proposal won the vote, and he got his way: He can sell his stock and maintain
voting control. The shareholders approved the creation of a new stock class.
The only entity that had any power to affect the outcome was Facebook’s board,
which had already weighed the issue months earlier, in his favour.
In August
2015, with the chief executive's blessing, Facebook's board set up a special
committee, choosing the three directors who were least beholden to Zuckerberg
or financially affected by the decision - Susan Desmond-Hellmann, Marc
Andreessen and Erskine Bowles - to represent shareholders while weighing the
matter, according to a regulatory filing.
But
Andreessen, a venture capitalist at Andreessen Horowitz and a long-time
Facebook board member, is a close Zuckerberg ally. While on the committee,
Andreessen slipped Zuckerberg information about their progress and concerns,
helping Zuckerberg negotiate against them, according to court documents. The
documents include the transcripts of private texts between the two
men, revealing the inner workings of the board of directors at a pivotal time
for Facebook.
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When the time
came for the committee to ask Zuckerberg questions on a conference call,
Andreessen warned the Facebook founder about what he would be asked before
directors posed the questions. While the committee grilled Zuckerberg about why
he wanted a special class of stock, Andreessen sent the CEO text messages
to explain which of his arguments weren't working and why, according to
messages quoted in court filings. During one March 4 call, Andreessen gave
Zuckerberg live updates, both negative ("This line of argument is not
helping. ☺") and positive ("NOW WE'RE COOKING WITH GAS"),
according to texts provided by Facebook’s lawyers and cited in court
filings.
"Andreessen
even told Zuckerberg that he was working to protect Zuckerberg’s personal
interests through the Special Committee process,'' according to the filings.The
plaintiffs suing Facebook's board include pension funds, like the Employee
Retirement System for the city of Providence, Rhode Island, and individual
investors. The cases have been consolidated before Delaware Chancery Court
Judge Travis Laster.
Read also: Facebook continues tax struggle
A Facebook spokeswoman provided a statement saying:
“Facebook is confident that the special committee engaged in a thorough and
fair process to negotiate a proposal in the best interests of Facebook and its
shareholders.” Desmond-Hellmann referred a request for comment to
Facebook. Andreessen Horowitz said Andreessen could not comment on pending
litigation. Through Facebook, Zuckerberg also declined to
comment. Facebook is likely to argue that the texts were not part of a
secret conversation, according to a person familiar with the matter.
Not represented
If
Andreessen played both sides of the negotiation, it means minority shareholder
interests weren't properly represented by the committee, said Larry Hamermesh,
a Widener University
law professor who specialises in Delaware
corporate-law and governance issues. Facebook is incorporated in Delaware.
"The
whole point of setting up a special committee is to be independent from the
controller,'' who in this case is Zuckerberg, Hamermesh said. But in Silicon Valley, sometimes the conventional setups for
companies don't work. Keeping a controlling and visionary founder happy can
lead to the high-risk, high-reward bets that keep companies thriving,
said David Larcker, a legal professor focusing on corporate governance at
Stanford's Graduate School of Business.
File picture: Luong Thai Linh
"Silicon Valley is a pretty networked place,"
Larcker said. "People know each other, have done deals together --
but it doesn't mean that governance is out of control or it's the Wild West or
something. It could be the case that what the board is doing is actually
accretive to shareholders." Zuckerberg's chats with Andreessen may
just be "part of the dialogue" needed to evaluate the proposal, he
said.
Andreessen
has been caught up in conflict-of-interest controversies before.
He stepped off the board of eBay in March 2014 after public
battles with Carl Icahn, an activist investor who pushed for the company to
split with PayPal, its payments unit. Andreessen had invested in companies that
competed with PayPal, but disputed all accusations of a conflict of interest.
In the same year, Facebook bought Oculus, a virtual reality company, that
Andreessen's firm was an investor in, too. Andreessen has said he recuses
himself from both sides of acquisition discussions that involve his
investments.
Long relationship
Andreessen,
45, met Zuckerberg, 32, shortly after the younger man founded Facebook. As
co-founder of Netscape, which made the first widely used web browser,
Andreessen felt a kinship with Zuckerberg, becoming an adviser to him. When
they met, Zuckerberg, new to Silicon Valley, didn't know what Netscape was. The
mentoring relationship evolved into business, with Andreessen taking a board
seat, and his firm picking up Facebook stock before its initial public
offering. Andreessen's messages, as shown in the lawsuit, depict a friendship:
assurances that he has Zuckerberg's back, punctuated by smiley faces.
Most of
Andreessen's texts to Zuckerberg during the negotiations over the non-voting
shares focused on how to talk to the other two committee members. Susan
Desmond-Hellmann, Facebook's lead independent director and chief executive
officer of the Bill & Melinda Gates Foundation, also led the special
committee and discussed the matter on its behalf with Zuckerberg
personally -- a call that Andreessen helped Zuckerberg prepare
for.
Bowles,
former President Bill Clinton's chief of staff and past president of the
University of North Carolina system, was especially skeptical of Zuckerberg's
proposition, as depicted in the suit. Many of Andreessen's texts focused on
persuading him. Among other things, Bowles worried that one of the concessions
Zuckerberg wanted -- to allow the billionaire to serve two years in government
without losing control of Facebook -- would look particularly irresponsible,
according to court filings. Bowles did not respond to requests for
comment.
Andreessen
texted Zuckerberg in early March ahead of a call with the committee,
telling him he would have to figure out "how to define the gov’t service
thing without freaking out shareholders that you are losing commitment.''
Unconvinced
Bowles
remained unconvinced, Andreessen wrote Zuckerberg later that month.
"Erskine is just massively uncomfortable with you getting to low economic
ownership and then going off on leave with no involvement by the board and
retaining control,'' he wrote. "We rediscuss it on every call ... I’m
going to try to drag it over the line one more time. ☺ ''
Andreessen
sought to persuade Bowles that if Zuckerberg went into politics, the government
would likely require him to give up control of Facebook anyway, so the point
was moot, according to the documents. A couple weeks later, Andreessen
prevailed, and the vote was brought to shareholders. (The stock
reclassification is on hold pending the results of the lawsuit, though.)
"The
cat's in the bag and the bag's in the river,'' he messaged Zuckerberg.
"Does that mean the cat's dead?" Zuckerberg texted back, not
understanding the spy speak.
Andreessen
replied: "Mission accomplished ☺"
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