Facebook, Inc. Class Action Litigation
On May 6, 2016, Chimicles & Tikellis LLP and its client Southeastern Pennsylvania Transportation Authority filed a class action against the members of the Facebook, Inc. (“Facebook” or the “Company”) Board of Directors (“Board”). The action, filed in the Delaware Court of Chancery, alleges wrongdoing by the members of the Board, and, most significantly the founder, CEO and controlling stockholder of Facebook, Mark Zuckerberg (“Zuckerberg”).
On April 27, 2016, Facebook announced that it will reclassify the Company’s shares (“Reclassification”). Facebook and its Board openly acknowledge that the Reclassification effort intends to entrench the Company’s founder, Chairman and Chief Executive Officer, Zuckerberg, as controlling stockholder of Facebook by creating a non-voting class of Facebook stock (“Class C”) in order to preserve his voting power in perpetuity. Facebook currently has two classes of stock: Class A common stock and Class B common stock. Class A shares entitle stockholders to one vote per share and Class B shares carry ten (10) votes each. Zuckerberg owns nearly 4 million Class A shares and 468 million Class B shares, giving him overall voting power of 60.1%.
Under the terms of the Reclassification, the Board will declare and pay a dividend of two shares of non-voting Class C stock for each outstanding share of Class A common stock and Class B common stock. The Company stated that it expects the market price for the shares of Class A common stock to reflect the effect of a three-for-one stock split. The Class C shares will trade separately on the NASDAQ, which analysts believe will likely trade at a discount to the Class A stock due to the lack of voting rights. This distribution of non-voting stock will allow Zuckerberg to fulfill his personal goals and will allow Facebook to purchase other companies or issue stock to employees without diluting Zuckerberg’s voting power or diminishing his iron-clad grip over Company management and operations (which includes the ability to appoint the entire Board). The Reclassification will be submitted for a stockholder vote, however, with Zuckerberg’s 60.1% voting stake and without the benefit of a majority-of-the minority condition, the Reclassification is a fait accompli.
The Action awaits scheduling by the Court of Chancery.