March 12, 2013
Feminist Tough Love, Part One (Sheryl Sandberg)
Posted by Christine Hurt

If my friends' FB posts are any indication, last week was a week where women felt assailed at every turn.  First, it's still unclear whether Seth McFarlane is a sexist pig or an unsuccessful satirist (not a satyr, as I almost typed).  I didn't watch the Oscars, so I'll leave that debate to others.  However, I was more interested in two news stories last week that riled women for and against two of the most powerful corporate women in the country:  Sheryl Sandberg and Melissa Mayer.  This post will focus on Sandberg.

Sheryl Sandberg, has come under fire from certain feminist quarters for her saying, movement and book "Lean In."  If you don't recall (blog post here), Sandberg has given TED talks and commencement speeches urging women in the workplace to "lean in" -- i.e., believe in yourself, fully engage, take on as much responsibility as possible, and throw yourself into your work until you need to pull back because of family responsibilities.  Sandberg's conclusion from being in the workplace is that many women pull back way before they need to in anticipation of exiting, leaving themselves little options.  Sandberg's book hit the shelves yesterday, and seeks to be not just a book but a social movement, complete with Lean In "circles" to help women network, meet monthly, and learn from video lectures.  So, what's not to love about that? 

Sandberg's critics argue that she places no blame on employers, supervisors, or the government for either condoning sexism or not putting family-friendly policies in place.  To Sandberg, this is a multi-front war, and she is tackling "internal obstacles" not "external obstacles," which have traditionally been the target of feminists.  She is not saying that external obstacles do not exist, but is arguing that internal obstacles also exist and are the ones that individuals have the most power to overcome.  Sandberg is also an easy target for feminists concerned with the injustice of external obstacles because she is extremely successful and superwealthy.  As the NYT articles puts it, there is an "awkwardness of a woman with double Harvard degrees, dual stock riches, a 9,000 square foot house and a small army of household help urging less fortunate women to look inward and work harder."  In other words, her words stick in the craw of "earthbound women, struggling with cash flow and childcare."  This argument is of course, an old one, in feminist history, in which some feminists accuse groups or movements ofbeing mostly about white women, or middle-class women, or professional women, etc. 

The NYT article linked to above names Anne-Marie Slaughter as Sandberg's "chief critic," suggesting that the two have created a "notable feminist row" following Slaughter's lengthy piece in The Atlantic, Why Women Still Can't Have it All, which criticized Sandberg for laying workplace issues at the feet of working women instead of employers.  Slaughter reviews Lean In for the NYT Book Review (front page) this week, and the review seems glowing until the very end.  Slaughter compliments the author as a "feminist champion" and as "compassionate, funny, honest and likable" and suggests that Sandberg's exhortations to women seem nagging "taken out of context."  However, at the end of the review she concedes that Sandberg's focus on internal obstacles is "at best half a loaf."  Slaughter reminds us of the working women who, on their way to the top, face a "maternal wall" or "tipping point" where they can no longer balance caregiving and career, even with a full partner-spouse, belief in self and unlimited ambition.  For these women, Slaughter proposes we ask "how can business lean in?"

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September 06, 2012
Absentee Grownups at the Facebook IPO
Posted by Usha Rodrigues

Who's ultimately to blame for the fact that the Facebook IPO was colossally overpriced?  So much so that it's lost $50 billion of market cap in 3 months?  Andrew Ross Sorkin made a compelling case earlier this week for Facebook's CFO, leading with a killer two-sentence paragraph:

It is David Ebersman’s fault. There is just no way around it.

Sorkin's DealBook piece is well worth a read, but left me ultimately unconvinced.  Here's why.  In general, our securities laws view firms wanting to sell stock to the public with suspicion.  What's to keep fly by night companies from lying about their assets, inflating their worth, and then getting while the gettin's good? 1929 and all that. 

The bankers, that's who.  The rather elegant mechanism of the Securities Act of 1933 is to put a deep-pocketed repeat player, with reputational capital as well as cold hard cash at stake, on the hook.  Cue the investment banks.  Sorkin may be exactly right to blame Ebersman because

[h]e signed off on the ever-increasing offer price, which ended up at $38 after the company had originally planned a price range of $28 to $35.He — almost alone — pushed to flood the market with 25 percent more shares than originally planned in the final days before the offering.

But there's at least an argument that he was acting in the company's best interests by pushing for a high stock price, not leaving money on the table, etc.  The fact that the 25% of extra shares came not from the company but from Facebook's investors weakens this argument, but a high price range still benefited the company.  Morgan Stanley was supposed to be the grown-up here, stepping in and saying, "Not so fast, the market might not bear this price, let's look at demand, let's look at the fact that Facebook shares have been trading on the secondary market for a while." 

But Morgan Stanley appeared so delirious over having hooked the IPO of the decade that it forgot its role in the IPO: it was supposed to be the grownup. 

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June 19, 2012
UVa, Facebook, and Me
Posted by Usha Rodrigues

Like many alums (including Steve Bainbridge), I've been increasingly dismayed at the Board of Visitors summary firing of Theresa Sullivan in only her second year as president of the University of Virginia. I won't get into the merits, although I've recently written on a related topic in the context of for-profit boards, and I am kicking myself for not getting a draft up on SSRN. The Washington Post quotes Jane Batton, of the Batton family that is arguably the biggest donor in the school's history (clocking in at a cool $170 million): "There may be good reason to replace President Sullivan — I don’t know — but it was handled in the worst possible way that has caused damage to the university."  That sounds about right.

On the meta-level, what's struck me is how different my experience of this controversy is compared to what it would have been 6 years ago.  Back then, I would have been obsessively following the story, checking the Daily Progress, WaPo, the Richmond-Times Dispatch, and using Google searches to get the latest.  Maybe I would have been cc'd on an email blast from a concerned alum. 

Now, every morning I scroll through my friends' status updates (yes, I'm on Facebook.  No, if you're a current student you cannot friend me) and get up to speed on what's happened.  More than that, by commenting on others' status updates I've talked with people passionately interested in this topic, many of them strangers, engaging in a real back and forth of ideas and questions.  Friends that I'd forgotten or never known had any connection with Virginia shared their thoughts and concerns and conspiracy theories.  Facebook (and Larry Sabato's twitter feed) have connected me to events unfolding 500 miles away to a degree that I find hard to believe.

No, my point isn't just that social media can be transformative.  Yes, I have heard of the Arab spring.  But even in a non-repressive regime, Facebook has its uses.  Facebook scorn is somewhat in vogue now.  Bumbled IPO, no path to profit, who uses it anyway?  Rich Karlaard of Forbes writes: "I have not visited my Facebook page in two months. Almost every professional person I talk to who is over 25 years old has grown bored with Facebook." 

I'm not bored. When something's happening in a corner of the world I care about, Facebook delivers.  On ordinary days there's certainly time-suckage, but I'm not the kind of worker that can go non-stop.  I need breaks between substantive work. 

And Facebook beats the heck out of my old standby, Minesweeper

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June 11, 2012
Am I the Only One Who Feels A Little Sorry for Nasdaq?
Posted by Usha Rodrigues

One of today's WSJ headlines reads "Nasdaq CEO Lost Touch Amid Facebook Chaos," referring to Robert Greifeld's being on a flight from California to New York from 12:14-5:07 without phone or internet service on the afternoon of the Facebook IPO.  What follows is a tick-tock description of  that day, culminating in SEC Chairman Mary's Schapiro's call to Greifeld to ask for explanations on the offering.  She was "surprised" at not being able to get ahold of him.  (She called at 4:03, and he called her back at about 6.) 

Am I the only one who thinks the fuss over Nasdaq's trading glitches is overblown?  I mean, don't get me wrong, mistakes were made.  Nasdaq tested its system with 53 million shares trading, and apparently 70 million shares traded in the opening, "about a third more than the exchange had run in its test."  Order confirmations were delayed, and released problematically:

At 1:50 p.m., Nasdaq released long-delayed confirmations of earlier trades into the market. Some brokerage firms would later complain that a wave of sell orders on Nasdaq made it look as if investors suddenly were turning against Facebook. About 12 million Facebook shares changed hands around 1:50 p.m., and the stock price fell about $2 in minutes.

It's bad that people couldn't complete trades when they wanted to, especially as it became clear the anticipated IPO pop was not going to happen.  I know that people lost money on these sales, and Nasdaq will spend $40 million compensating them, as it should. Still, it seems like Nasdaq is getting a bum rap on this one.

To me the deeper problem with the IPO was that it was fundamentally mispriced, and that Morgan Stanley let Facebook investors flood the market by upping the IPO size at the last minute.  It was "the wave of sell orders" that made it seem like the market was turning against Facebook--the problem was that the price was too high to start with.  Sure, Nasdaq's technology snafus didn't help matters, but  Facebook is trading down more than $10 from its IPO price. The company sold too much at at too high a price.

So what if Nasdaq's CEO was up in the clouds when the sale went down?  He can't repeal the law of supply and demand.  And if your trading strategy is based on being able to trade into and out of stocks fast--well, live by the sword...

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May 23, 2012
An Amalgamation of Facebook IPO Theories
Posted by Usha Rodrigues

The post-mortem on Facebook's IPO is well underway.  Who's to blame?  There's an argument for the answer "no one"--after all, if the IPO's goal is to raise money for the company, Facebook accomplished the mission by not leaving a penny on the table.  Indeed, it reached into investors' pockets and grabbed a few dollars, to boot.

From investors' perspective, however, the IPO was a bust.  The SEC and Congress are investigating.  Without further ado, in no particular order, I present the Facebook IPO theories I've run across. 

1. CFO David Ebersman. Ebersman is faulted for boosting the number of shares by 25% right before kickoff (money that, incidentally, went to investors rather than the company).  According to the WSJ Ebersman did not defer to the bankers as companies typically do. And by letting outside investors get more than half of the IPO proceeds (57% according to WaPo), Ebersman arguably did leave money--Facebook's money--on the table.

2. Morgan Stanley: Lead underwriter, its job was to price at least accurately. Instead, it kowtowed to a heavyweight client and let itself (and its reputation) get used.The WSJ also makes it sounds like Ebersman, rather than the bankers, set the final price of $38.  Normally I tell my students the company plays the role of "concerned spectator" in the final pricing decision.  Facebook was doing a whole lot more.  By the way, did you know that the underwriter discount was only 1.1%?  The underwriter's discount is the cheaper price at which the banks buy the shares from the company.  They then turn around and sell them to the general public at the IPO price.  The spread is their automatic profit, and the compensation they get for the risk of the deal and for providing price support.  Typically the spread is more like 5-7%.  Wow.  Morgan Stanley may have bungled this offering, but am I the only one that feels a little sorry for them?

3. Goldman Sachs. Always a popular villain, Goldman's sin was telling clients earlier this month that they were revising downwards their projections for Facebook's earnings.  Morgan Stanley did the same thing, but Goldman is the perennial favorite if you're going to launch an I-bank conspiracy theory.  Lawsuits have already been filed alleging selective disclosure.

4. The secondary marketsRich Karlgaard of Forbes: "Facebook‘s shares have been dead in the water for the last 12 months. Private investors had already bid up Facebook to a $100 billion value a year ago."

5. Zuckerberg: Christine observed months ago that Zuckerberg has almost secured paranoiac control of the company. And he couldn't be bothered to lose the hoodie. 

6. Nasdaq: Technical glitches, delays in trading, FINRA investigations.  Oh my! 

7. Timing: Rich Karlgaard again:

From Facebook’s shares debuted in a cloudy market. Beyond Europe in 2012, May is a bad time to go public. For the past several decades, nearly all of the stock market’s gains have occurred between October and May. The canard “Sell in May and go away” turns out to be true.

 If you see/have more theories, let us know in the comments.

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May 18, 2012
How Big a Pop for Facebook's IPO?
Posted by Usha Rodrigues

After some hiccups, Facebook shares hit the market late this morning priced at $38, the high end of their target range.  According to the WSJ's Deal Journal, "given the hype and demand the question has largely been “How big a pop is coming?” not “Will there be a pop?”  For the record, two weeks ago I asked if there'd be a pop, and I'm still wondering. 

Facebook shares opened at  $42.05 and "then instantaneously hit $42.99, up 13% from its IPO pricing."  But when I left for lunch shares were trading at a meager $39 and some change--more a bump than a pop.  Now (1:30 EST) they're around $40, and they may well end up by close of business.  Still, early reports characterize the IPO as "more whimper than bang", "fizzling", and "cool."  Underwriters have reportedly been buying to prop up the price.  

I observed regarding the Carlyle IPO "No first day pop means you didn't leave any money on the table. And that's a good thing, right?  But that's not how it's playing in the press."  A similar story seems to be unfolding with Facebook.  Which leaves me with these unconnected thoughts:

1. Facebook's shares traded heavily on the private secondary markets, about which I've had much to say.  Given those trades, there's more information about what Facebook shares are actually worth.  Ergo, more accurate pricing.  Ergo, less pop.

2. To the extent that the conventional wisdom is that the first-day pop is about branding, name recognition, and reputation building--um, Facebook doesn't need that.  This IPO has dominated the business news.  Facebook is the highest valued U.S. company ever at IPO, its $104 billion valuation dwarfing UPS's $60 billion in 1999.  Pop, schmop.

3. There were some investors that were too late to the SharesPost/SecondMarket party.  The last private auction sold Facebook at $44/share.  Those buyers would have been better off waiting for the public sale with the rest of us.  How unhappy are they?  And...will they sue?

4. Zuckerberg, Goldman Sachs, and the other early investors who are cashing out don't really give a damn about a first day pop.  So what if the IPO investors don't see an immediate return?  Zuckerberg & Co. maximized their first-day take by pricing the shares accurately, and they're laughing all the way to the bank.

Update:  FB closed up 23 cents. So no pop to speak of. 

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April 24, 2012
The JOBS Act: Raising the Threshold for '34 Act Obligations
Posted by Robert B. Thompson

Congress has moved the line determining which companies must meet the obligations under the Securities Exchange Act of 1934 (the ’34 Act) for the first time in almost 50 years. The traditional section 12(g) standard of 500 shareholders of record is now four times as large (with a wrinkle for counting unaccredited investors described below). This broadening of the space where companies can stay outside of ’34 Act regulation was part of the very deregulatory JOBS Act signed by President Obama on April 5, 2012. The breadth of impact of the section 12(g) amendment, however, is muted because the 500 record shareholder threshold that was changed is only one of three that trigger ’34 Act obligations. The other two are sufficiently inclusive that they will continue to capture most companies that came under the old standard. However, as the Facebook pre-IPO financing of a year ago illustrates, financial innovation may make it much easier to take advantage of this new deregulatory space.

The statutory changes. The JOBS Act amends section 12(g) in four different ways. First the 500 shareholders of record standard is now bifurcated and will only capture companies with either: a) 2000 shareholders of record; or b) 500 record shareholders not accounting accredited investors. Thus a company could have 1999 accredited investors, or 499 unaccredited investors and 1500 accredited investors or 300 unaccredited investors and 1699 accredited investors as record shareholders and stay outside of the ‘34 Act obligations. Companies that have this number of record shareholders must also have $10 million in assets, which did not change under the recent legislation. Second, the definition of record shareholders will not include shares issued pursuant an exemption to employees under the Securities Act of 1933. Third, the Act requires the SEC to exempt from Section 12(g) securities acquired pursuant to a crowdfunding offering that was created by the JOBS Act. Fourth, and more limited, banks and bank holding companies are provided special treatment as to when they can exit Section 12 status. While companies in general are not able to exit the ’34 Act obligations until after their record shareholder number dips below 300, for banks and bank holding companies they can do so when they are below 1200. Look for an exodus of banks from ’34 Act reporting status.

Motivation for the change. While the definition of who must meet ’34 Act obligations has not changed since 1964, when the 12(g) size limit was added to the prior triggers based on stock exchange listing or a registered public offering, the burden of the ’34 Act obligations that follows from crossing this line have grown substantially. Traditionally, the primary ’34 Act burden has been various disclosures, via periodic reporting, proxy disclosures or tender offer information that must be shared. For this reason companies subject to the ’34 Act are often called reporting companies because that is what they must do. And the disclosures are more intrusive than in prior decades. But the burdens of the Act have broadened beyond disclosure. With the passage of the Foreign Corrupt Practices Act and then Sarbanes Oxley, reporting companies have to satisfy sometimes intense obligations as to internal controls. With the massive securities legislation that followed the last two financial crises, the amount of corporate governance obligations that accrues to reporting companies also has grown- e.g. say on pay, requirements as to audit and compensation committees, and other governance provisions. Put simply, companies have more reasons than ever to avoid or delay having to comply with some or all of these provisions. Facebook in the winter of 2010-11 provided a stark example as it neared the statutory threshold and was said to pursue a plan that would bundle a large number of new investors into one collective entity to count as only one record shareholder so as to stay on the private side of the regulatory line.

Legal constraints on using the new deregulated space. Just because you fall below the 2000 record shareholder threshold or one of the other metrics described above, does not mean that you can avoid the regulations of the ’34 Act. In fact there are three gateways into the Act which operate independently of one another. In addition to the 12(g) threshold, a company is also subject to the Act whenever it has securities listed on a national securities exchange or makes a public offering of securities registered pursuant to the ’33 Act. The reporting company obligations are similar for those coming in through any of the gateways although a company doing a registered public offering, but not a stock exchange listing or meeting the 12(g) shareholder test is not made subject to the proxy rules. Most companies tend to list on an exchange when they go public so this difference does not have high practical effect currently.

Finance constraints on using the new deregulated space. The independence of these three gateways for ’34 Act regulations means that practically the only companies that can effectively prosper in this new deregulated space are those that do not need the liquidity for their shareholders provided by the trading opportunities on a stock exchange and do not need the capital that can be obtained through a public offering. In the time since 1964, that has not seemed to be an especially large number (although reliable information is hard to come by) but financial innovation of recent years has definitively increased the potential number of occupants of this space. For example, the number of years prior to a company’s IPO has increased significantly over the last decade or more. In the interim, companies have found other sources of capital—private equity or venture funds—to meet their growth needs. For liquidity, advances in technology and changes in regulation have made it possible for new platforms to meet the need. SecondMarket and SharesPost represent a trading business outside of exchanges with a volume already past several billion in share traffic. The number of companies outside the ’34 Act coverage is likely to be higher than it has been since 1964 when larger companies with shares traded over the counter were brought within the ’34 Act.

Areas of concern going forward. As the JOBS Act has broadened the deregulated space under the ’34 Act, it has continued to use “record” shareholding to define that line. Thus, the number of shareholders who are counted are those on the books of the company. If shares are held in “street name”, for example, or through any other intermediary, they would not be counted and the potential for evasion should seem evident. Since after the 1964 legislation, the SEC has had an anti-evasion rule to address efforts to avoid the record threshold limit and the JOBS Act calls on the SEC to study whether additional enforcement tools are needed. More generally, there is reason to question whether relying on record shareholder making any sense in our modern electronic economy where use of street names is so easy. Using market capitalization and public float seems to have more potential going forward. More generally, there is reason to worry whether stock exchange listing is a viable metric for ’34 Act coverage going forward giving the changes in trading platforms mentioned above. It is this gap in current views about the “publicness” that Don Langevoort and I explore in our article on “Publicness in Contemporary Securities Regulation” here. A second area of concern that teachers ought to keep in mind is the growing importance that the accredited investor term will have and the impact of coming SEC rule-making on the topic. At the moment, the term is used for determining ability to comet within exemptions under the 1933 Act. The JOBS Act thrusts it into a much broader use in which companies will need to make a count of their shareholders at the end of each of their fiscal years before they go public. This task will be more difficult than it has been in the ’33 Act context and likely will raise questions that are not yet visible to us. This may push us toward a bifurcated public markets, one with just accredited investors where there will be no regulation and the other for unaccredited investors where there will be the traditional regulation of the ’34 Act.

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April 18, 2012
Zuckerberg's Folly
Posted by Gordon Smith

How much will Facebook pay for Instagram? The reported figure is $1 billion, roughly 30 percent in cash and the other 70 percent in Facebook stock. Many observers thought the price was high (read: outrageous), but with today's revelation that Zuckerberg negotiated the deal largely without board input, the price just went up.

The Facebook Prospectus warns investors that Zuckerberg has complete control of the company -- risk factors include "Our CEO has control over key decision making as a result of his control of a majority of our voting stock" and "We have elected to take advantage of the 'controlled company' exemption to the corporate governance rules for publicly-listed companies" -- but most of us assumed that Facebook's board would play an important advising role in the company. Apparently, not so much:

Negotiating mostly on his own, Mr. Zuckerberg had fielded Mr. Systrom's opening number, $2 billion, and whittled it down over several meetings at Mr. Zuckerberg's $7 million five-bedroom home in Palo Alto. Later that Sunday, the two 20-somethings would agree on a sale valued at $1 billion.

It was a remarkably speedy three-day path to a deal for Facebook—a young company taking pains to portray itself as blue-chip ahead of its initial public offering of stock in a few weeks that could value it at up to $100 billion. Companies generally prefer to bring in ranks of lawyers and bankers to scrutinize a deal before proceeding, a process that can eat up days or weeks.

Mr. Zuckerberg ditched all that. By the time Facebook's board was brought in, the deal was all but done. The board, according to one person familiar with the matter, "Was told, not consulted."

Maybe the Instagram purchase will be a great thing for Facebook, but that's not the point. Facebook is gearing up for an IPO, and Zuckerberg is acting like he is running a sole proprietorship. If Zuckerberg is this cavalier about corporate governance on the cusp of the Facebook IPO, imagine how he will run his company after he has the money.

We may never know the true cost of Instagram, but Facebook stock is 70 percent of the consideration, and it just took a hit.

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March 29, 2012
On Friday the Clock Strikes Midnight
Posted by Usha Rodrigues

Sharespost informed its members that it would stop "facilitating transactions in Facebook stock" as of this Friday.  Sources say Facebook is targeting an early May IPO, and it requested that trading in its shares cease in advance of that.

The final Facebook auction will be March 30.  According to Bloomberg:

Facebook’s implied value dropped 5 percent to about $93 billion in a late-February auction of a fund that holds shares of the social-networking company’s stock. The sale set a price of $40 apiece for 125,000 units of the fund, according to San Bruno, California-based SharesPost, which managed the auction. A Feb. 14 fund auction valued Facebook at about $98 billion.

It certainly makes sense for Facebook to stop the trading of its shares on the secondary market in advance of the IPO, especially given the risk of overvaluation

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February 15, 2012
ISS Doesn't "Like" Facebook
Posted by Christine Hurt

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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February 09, 2012
Tax Consequences of Facebook's IPO: Zuckerberg's Stock, Stock Optons and RSU's
Posted by Christine Hurt

Yesterday I told my Corporate Tax class that we could teach a whole course on the tax implications of the Facebook IPO.  I wasn't kidding.  Here are a few of the interesting issues that highlight current debates in the taxation of corporations and their shareholders.  (Gregg Polsky has also covered some of these on The Faculty Lounge.)

Mark Zuckerberg's stock:  CEO Zuckerberg holds almost 414 million shares of stock.  At the time of the IPO, he owes no taxes on that stock until a recognition event, such as sale.  When and how did he acquire this stock?  Most likely, much of it is "founder's stock."  This is friend of the Glom Vic Fleischer's territory (See Taxing Founder's Stock).  Zuckerberg probably contributed the algorithms and code for Facebook in return for stock as a nontaxable event either as a contribution to a corporation by a control group or (as Vic explains), making an election to have the stock distribution a taxable event, with the valuation of the stock as equal to the contribution.  Even though the stock is more accurately described as consideration for Zuckerberg's labor, it will be taxed at some point as capital gains, which is now 15% and considerably less than the ordinary income rate.  Gregg argues that this isn't that bad because the corporation doesn't get a deduction for it, so no deduction plus 15% is better than 35% deduction and 35% taxation, if you look at it from the point of view of the public fisc.  I think Vic is looking at it from the point of view of regular folks who contribute labor for stock versus founders.  Interesting debate.

Zuckerberg's and others stock options:  From reports in the media, it seems that the stock options that Zuckerberg holds (and probably others) are nonqualifying stock options.  The S-1 describes a 2005 stock option plan that issued incentive stock options, but stock options issued before then or under a different plan don't seem to be qualifying options.  Should holders of nonqualifying stock options exercise those options at or after the IPO, they will encounter a taxable event regardless of whether they sell the stock.  Zuckerberg has over 120 million stock options giving as compensation, which he plans to exercise.  His exercise price is 6 cents.  So, at something like $30/share,that's about $3.6 billion (say it like Mike Myers) of taxable ordinary income (the spread between exercise price and price at conversion).  Zuckerberg's tax bill (federal and California) may well be one of the biggest tax bills ever.  Apparently, he plans to sell enough shares to pay his taxes, which may reach $2 billion.  Other holders will also face the same dilemma of having a tax bill even if they don't have any additional cash on hand.  Those who exercise qualifying ISOs will not have a current tax liability if they do not sell.  (I have now wandered away from things I know about, so I will stop.)

But, for each option that is exercised that is taxable as compensation, Facebook gets a deduction, even though no cash is (or has ever) gone out of the company for that expense.  So, Facebook calculates that it will have tax refunds for awhile given the billions of dollars in compensation expense it will enjoy.

Restricted Stock Units:  Starting in 2008, Facebook began granting service providers RSUs instead ot stock options, probably to avoid the 500 shareholder threshold for registration under 12(g) of the Securities Exchange Act.  These RSUs are scheduled to vest six months after the IPO.  The recipients will be taxed at ordinary rates for the difference between the FMV of the stock at the time and the price paid for the grant (if any). (Though, recipients could make an 83(b) election at the time of the grant when valuation is both less and less clear, but this may be a risky move.)  Finally, Facebook has to withhold cash for that.  Facebook has listed this as a risk factor in its S-1:   

We anticipate that we will expend substantial funds in connection with the tax liabilities that arise upon the initial settlement of RSUs following our initial public offering and the manner in which we fund that expenditure may have an adverse effect.


Whew.  That's enough.

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February 06, 2012
Why Aren't There Women or Minorities on Facebook's Board?
Posted by Usha Rodrigues

That's the question Huffington Post asks.  Bloomberg observes the same.  This though 58% of Facebook's users are women and its COO, Sheryl Sandberg, has commented on gender equity issues before (as Christine observed).

Just today I sat in on a discussion about the dearth of women on boards.  Some thought maybe the issue was passe, already solved.  We've come a ways, after all: according to Catalyst 15.7%. of board seats were held by women in 2010. 

OK, that doesn't really sound so good, does it? 

But by my calculations, 15.7% of 7 (the number of Facebook directors) is 1.099, and that's 1.099 more women directors than Facebook has.

Really?  The blockbuster IPO of 2012 doesn't see fit to put anyone but 7 white guys on its board? Really? 

I realize may sound angry, but I really don't mean to.  I'm more incredulous.  This is a the social media company, whose professed mission is "to make the world more open and connected."  Mark Zuckerberg is already serving as both Chairman and CEO and using dual class common to keep control, both of which are corporate governance best practices no-nos.   Basically they translate into 1) letting you as CEO head up the entity that's supposed to monitor you and 2) selling your company to the public without risking that your could ever be bought out, even if the market thinks you're doing a lousy job.  I would have thought Zuckerberg would at least make a gesture towards boardroom diversity, so that Facebook's vision of the world has some semblance of input from the outside.



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February 02, 2012
Facebook's Competition
Posted by Gordon Smith

From the registration statement: Google, Microsoft, and Twitter.

No Pinterest? Still too small to be a threat, but here is some interesting data:

One is Pinterest, which according to Shareaholic’s Referral Traffic Report, is driving more referral traffic than Google Plus, LinkedIn and YouTube combined. Pinterest was responsible for 3.6 percent of referrals, up from 2.5 percent in December and .17 percent in July. Facebook, no big surprise, was responsible for 26.4 percent of referrals.

I finally created a Pinterest account, but, like Christine, I am still struggling to figure it out.

Thanks to Sam Clarke for the tip on the story.

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February 01, 2012
The Facebook IPO !!!
Posted by Gordon Smith

The Facebook registration statement was filed today. If you were Facebook, how would you grab the attention of investors?

Think big: "Our mission is to make the world more open and connected."


The sales pitch is pretty simple: growth, growth, growth!

The first Risk Factor? "If we fail to retain existing users or add new users, or if our users decrease their level of engagement with Facebook, our revenue, financial results, and business may be significantly harmed."  

The purpose of the IPO? "The principal purposes of our initial public offering are to create a public market for our Class A common stock and thereby enable future access to the public equity markets by us and our employees, obtain additional capital, and facilitate an orderly distribution of shares for the selling stockholders."

Their strategy in a nutshell: expand and monetize.

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January 26, 2012
Facebook in 2005
Posted by Gordon Smith

Anticipating Facebook's IPO later this year, I thought it might be fun to look back at Facebook in an earlier time. Below is a video of Mark Zuckerberg speaking to students at Stanford. He observes, "you can't see the profiles of the people at other schools."

That was a design choice: "we realized that the people around you at your school are the people who you are going to want to look up mostly anyway." If they made the base of people who could access a profile too broad, people wouldn't share information, such as their cell phone number, as freely.

Zuckerberg recognizes that the design choice entailed tradeoffs in the utility of the site, but it's fascinating how differently most of us think about those tradeoffs today. It's hard to even remember when Facebook was so limited. Of course, although he doesn't use the word, privacy on Facebook still looms large.

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