Institutional Investor Calls Out Zuckerberg’s Plan to Dilute Facebook Stock

(CN) – A pension fund hit Facebook Inc. and Mark Zuckerberg with a derivative action, claiming the social media giant wasted large sums of money on a stock reclassification plan.

The complaint, filed in the Delaware Chancery Court by the United Food and Commercial Workers Union, seeks to challenge an attempt to restructure a stock plan that would maintain Zuckerberg’s majority interest in the company.

The fund claims Zuckerberg made a “costly, yet failed attempt to improperly maintain outsized voting control over Facebook while selling the vast  majority of his Facebook stock to pursue his personal philanthropic agenda, all without Facebook receiving any significant value in return.”

The complaint alleges the reclassification program was designed to appease the whims of executives within the company.

“Zuckerberg orchestrated a flawed process, which was effectuated by Facebook’s Special Committee, whose members either deliberately sabotaged the negotiations, were hopelessly biased, or otherwise woefully disregarded their Facebook fiduciary duties,” the complaint states. “The special committee’s corrupted process and disloyal members guaranteed approval of a stock reclassification plan lacking in any legitimate business purpose and which was manifestly unfair to Facebook’s Class A stockholders and the company.”

Though the reclassification plan eventually failed, the fund argues that Facebook should still be accountable for the large sums of money spent to attempt the reclassification.

When Facebook went public in 2012, it offered a dual-class stock which gave extra voting control to Zuckerberg by offering special “Class B” stock options which grant ten votes per share, according to the complaint. The class option gave Zuckerberg over 60 percent of Facebook’s voting power while controlling less than 17 percent of the company’s shares.

Zuckerberg’s philanthropic pursuits posed a problem for the 34-year-old multibillionaire as extra monetization of his shares could drop his controlling interest in Facebook, and allow voting control to the standard “Class A” stockholders, the 41-page complaint states.

“Zuckerberg concocted a plan to liquidate massive portions of his Facebook stock without relinquishing company control,” the complaint alleges. “ This reclassification plan called for the creation of a new class of publicly listed, non-voting Class C capital stock.”

Shareholders argue that the creation of “Class C” stock would triple the current number of Facebook shares. Dilution of the shares would give Zuckerberg more control within the company, according to the complaint.

“The effect would skew control further in Zuckerberg’s favor, re-inflating the voting weight of his Class B share holdings and allowing Zuckerberg to liquidate stock for his personal goals without surrendering his hold on Facebook voting power,” the complaint states.

The United Food and Commercial Workers Union and Participating Employers Tristate Pension Fund is represented by P. Bradford deLeeuw of Rosenthal, Monhait & Goddess in Wilmington, Del., Robert C. Schubert of Schubert, Jonckheer & Kolbe in San Francisco and James E. Miller from Shepherd, Finkelman, Miller & Shah in Chester, Conn.

 

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