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Facebook and dual share classes

By Sheyna Steiner ·
Thursday, May 24, 2012
Posted: 1 pm ET

You may have heard that Facebook's stock debuted last week. After the Nasdaq technical glitches, rumors of shady dealings with regard to earnings projections and quickly filed lawsuits from investors, it's pretty safe to say the IPO went the way no one hoped it would.

Despite the problems, Mark Zuckerberg is a much richer man and retains complete control of the company as a result of the dual share class structure the company adopted in 2009.

The young billionaire owns about 28 percent of Facebook's stock but controls 57 percent of the voting shares, the Los Angeles Times reported on May 20 in the story "Facebook shareholders are wedded to the whims of Mark Zuckerberg."

What about investors?

While that's clearly good for Mark Zuckerberg and other entrepreneurs and business owners who have adopted such strategies, is the dual share class structure good for investors?

That depends on what you think of the corporate governance of the company. There have been scandals recently that highlight the dangers of the dual share class structure, for instance at News Corp. last year.

The Wall Street Journal published this story by John Bussey on Aug. 19, 2011, in the wake of the phone-hacking revelations, "The two-edged sword of dual-class shares:"

Chief Executive Rupert Murdoch and his family control roughly 40 percent of the company's votes. When the long-simmering hacking crisis blew up in July, the stock price plunged, the company's reputation got walloped, and certain shareholders went looking for a scalp. Asked during parliamentary hearings in Britain if he'd resign, Mr. Murdoch said no.

When shareholders have no say in what the company does, management can do whatever they want for better or worse. It seems to me that investors would really need to be committed to the management in order to take on the risk of owning stock with no voting power.

An interesting story of dual share classes

There's a mind bending report from GovernanceMetrics International, a governance watchdog, called "Share class shenanigans: Google, News Corp, Emmis and other companies to watch out for."

It illustrates the case of Emmis Communications and "the elaborate maneuverings (that) are being facilitated by a dual-class capital structure," the report says.

It was posted on The Harvard Law School Forum on Corporate Governance and Financial Regulation on May 21 and is worth a read, though the story is too convoluted to quickly sum up here.

Would you have any hesitation to buy stock in companies with unequal voting rights?

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