I'm sure that the Facebook IPO will spawn at least as many legal articles as the Google IPO. (In fact, I began blogging as a guest blogger on Gordon's Venturpreneur site that summer of 2004 specifically to blog about the Google IPO.) The new piece of meat that has been thrown to academic lions is a negative report by the ISS entitled "Tragedy of the Dual Class Commons." The ISS does not seem to like the corporate governance structure of the Facebook IPO.
Like Google (and Zynga, LinkedIn and Groupon), Facebook has a dual-class structure, which ensures that the founders (in this case, founder) have voting control even after the IPO. ISS seems very skeptical of this method of disenfranchising shareholders, even though shareholders understand this situation before purchasing the shares. Of course, the interesting question is whether shareholders demand a discount for dual class common. I looked on SSRN and found several dual-class common papers, but it seemed from the abstracts that investors don't actually require much of a discount. Of course Google was oversubscribed by retail investors and the share price has done very well, but we don't have a basket of firms like Google without dual class common to compare Google to over time.But it will be interesting to analyze whether investors will be turned off by how little "voice" they are getting in the FB IPO. As even the ISS admits:
While good corporate governance practices, by increasing board and management accountability, can provide a robust framework to drive shareholder value, this IPO event itself presents a Hobson’s choice: accept governance structures which diminish shareholder rights and board accountability, or miss out on what appears to be one of the hottest business models of the internet age.
But Facebook has adopted more corporate governance belts and suspenders to preserve Zuckerberg's control than even seem rational. In its registration statement, Google lists as many risk factors the fact that its corporate governance structure is as pro-management as you can possibly imagine (except maybe Carlyle). Even though Facebook considers itself a "controlled company" for listing purposes, it seems almost paranoid that it will lose control. In case you haven't seen them, here are a few:
• any transaction that would result in a change in control of our company will require the approval of a majority of our outstanding Class B common stock voting as a separate class;
• we have a dual class common stock structure, which provides Mr. Zuckerberg with the ability to control the outcome of matters requiring stockholder approval, even if he owns significantly less than a majority of the shares of our outstanding Class A and Class B common stock;
• when the outstanding shares of our Class B common stock represent less than a majority of the combined voting power of common stock, certain amendments to our restated certificate of incorporation or bylaws will require the approval of two-thirds of the combined vote of our then-outstanding shares of Class A and Class B common stock;
• when the outstanding shares of our Class B common stock represent less than a majority of the combined voting power of our common stock, vacancies on our board of directors will be able to be filled only by our board of directors and not by stockholders;
• when the outstanding shares of our Class B common stock represent less than a majority of the combined voting power of our common stock, our board of directors will be classified into three classes of directors with staggered three-year terms and directors will only be able to be removed from office for cause;
• when the outstanding shares of our Class B common stock represent less than a majority of the combined voting power of our common stock, our stockholders will only be able to take action at a meeting of stockholders and not by written consent;
• only our chairman, our chief executive officer, our president, or a majority of our board of directors will be authorized to call a special meeting of stockholders;
• advance notice procedures will apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders;
• our restated certificate of incorporation will authorize undesignated preferred stock, the terms of which may be established, and shares of which may be issued, without stockholder approval;
• certain litigation against us can only be brought in Delaware ; and• Our board of directors will not initially be classified. Our restated certificate of incorporation and restated bylaws provide that when the outstanding shares of our Class B common stock represent less than a majority of the combined voting power of common stock, our board of directors will be classified into three classes of directors each of which will hold office for a three-year term. In addition, thereafter, directors may only be removed from the board of directors for cause. The existence of a classified board could delay a successful tender offeror from obtaining majority control of our board of directors, and the prospect of that delay might deter a potential offeror.
Moreover, FB has not opted out of Section 203 of the Delaware code, which would effectively bar most hostile takeovers. And, for the sake of completeness, FB as a controlled company is exempt from either NASDAQ or NYSE listing requirements regarding independent directors, which means that FB does not have to have any independent directors, either on the whole board or on a nominating committee or audit committee. These are all things that might give the ISS or other "good governance" monitors some pause. Particularly because the public float is going to be so low, as low as 5% of the shares available. So, if you are only offering such a small percentage, and your founder has the majority of the shares, why do you need so many anti-takeover provisions? Does Zuckerberg worry that his (nonindependent, insider) board may turn against him a la Adlerstein v. Wertheimer?
If I were teaching Corporations, and I was trying to show students how a founder could raise capital, diversify her economic interest, but retain total control, the FB IPO would be the hypothetical way to go.
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