Facebook Inc. has scrapped a plan to reform its stock structure in a way that would have given Mark Zuckerberg more control over the company, avoiding a trial in a shareholder lawsuit that aimed to put the social network's CEO on the stand this week.
In a regulatory filing submitted on Sept. 22, Facebook said that its board of directors had abandoned the proposed reclassification of the company's common stock following the unanimous recommendation of a special committee, which had initially approved the arrangement.
The move came just days before Zuckerberg was scheduled to appear in the Delaware Court of Chancery to offer public testimony in a shareholder class action challenging the planned creation of a third class of Facebook stock. The share restructuring would have allowed Zuckerberg to retain his 60 percent voting power at the company, even as he sold off his shares to charity.
Both sides refused to call what transpired a "settlement." An attorney for Facebook said in the Sept. 22 court filing that announced the social media company's change of direction that the upcoming trial had been canceled. Meanwhile, Stuart M. Grant, lead attorney for the company's minority shareholders, called the agreement a "total victory" for his clients. He was expected to file a stipulation on Monday to officially withdraw the case.
"We're thrilled that Facebook has dropped the reclassification," Grant, co-founder and managing director of the firm Grant & Eisenhofer, said in a statement. "Stopping the issuance of the nonvoting C shares is all the relief we were asking for at trial."
Facebook's press office did not respond to an email on Monday, and Grant did not return a call seeking comment on the case.
Facebook's board last year approved the reclassification as a mechanism to allow Zuckerberg to maintain control of the company after he had announced that he would donate 99 percent of his Facebook holdings to the Chan Zuckerberg Initiative, a philanthropic investment company run by Zuckerberg's wife, Priscilla Chan.
Zuckerberg holds 60 percent of Facebook's voting control through his ownership of 86 percent of the company's Class B shares, which carry 10 times the voting power of Class A stocks; however, each Class B share Zuckerberg sells is converted into a Class A share, which provides for only one vote.
The planned reclassification aimed to issue a new class of nonvoting Class C common stock, with a dividend of two shares of Class C for each outstanding share of Class A and Class B stock, essentially allowing Zuckerberg to retain majority voting power, despite only owning just 5 percent of Facebook's stock.
The board formally announced the changes last June upon the recommendation of a special committee formed to review the proposal.
But investors quickly lined up to oppose the plan, arguing that it would grant Zuckerberg lifetime control while forcibly converting two-thirds of Class A stockholders' equity interest to nonvoting Class C shares, depriving them of any influence over the company.
In a complaint filed last summer, class attorneys called the plan a "fait accompli" for Zuckerberg and argued that it was a self-interested scheme approved by a conflicted board of directors. Facebook, on the other hand, argued in a pre-trial brief that the pro-rata dividend treated all shareholders equally and thus entitled the company to business-judgment deference.
Vice Chancellor J. Travis Laster scheduled the planned first leg of the trial for Tuesday in Wilmington, where Zuckerberg was expected to testify in open court.
But late Sept. 22, Facebook said in a filing with the U.S. Securities and Exchange Commission that its directors had unanimously adopted the special committee's recommendation that it withdraw the reclassification plan.
"As a result," Facebook said, "the company will not proceed with the dividend of Class C capital stock or enter into a founder's agreement with Mark Zuckerberg as described in such proposal."
A spokesman for Grant said he expected the case to be dismissed and mooted this week. By Monday afternoon, the stipulation had not yet been filed and was still awaiting the appropriate signatures, the spokesman said.
In a post to his Facebook account on Sept. 22, Zuckerberg acknowledged that the proposal to add a new class of company stock was "complicated" and that it "wasn't the perfect solution."
However, he said that Facebook's recent success would allow him and his wife to fully fund his philanthropy and maintain voting control for at least the next 20 years. And he announced that he planned to sell 35 million to 75 million shares in the next 18 months to fund contributions in the areas of education and science.
"This path offers a way to do all of this, and I'm looking forward to making more progress together," Zuckerberg said.
David E. Ross, a partner with Ross Aronstam & Moritz who represented Facebook, did not respond Monday to a request for comment.
The case was In Re: Facebook Class C Reclassification Litigation.
Tom McParland can be contacted at 215-557-2485 or at firstname.lastname@example.org. Follow him on Twitter @TMcParlandTLI.