As nearly everyone knows by now, Facebook, Inc. filed its initial registration statement
yesterday with the SEC, leading toward an initial public offering. As the filing reveals, Facebook’s corporate structure includes some corporate governance provisions that founder Mark Zuckerberg and other insiders are certain to "Like".
In a post on the DealBook Blog, "A Big Bet on Zuckerberg
," Steven Davidoff reports that Facebook, Inc. is structured to give Zuckerberg a lock on controlling the company, now and for the foreseeable future. The existing Class B shares carry 10 votes per share, compared to 1 vote per share of the Class A stock being offered to the public. Because Zuckerberg obtained voting agreements from many other early stockholders, he essentially has complete power to select and remove members of the board of directors. Professor Davidoff points out that investors in Facebook are placing a major bet that Zuckerberg will manage the company effectively.
Zuckerberg’s control even extends past his death. According to the "Risk Factors
" section of the prospectus, " . . . in the event that Mr. Zuckerberg controls our company at the time of his death, control may be transferred to a person or entity that he designates as his successor." Can you say "dynasty"?
Facebook also has other management-friendly governance provisions built into its structure. For example, the registration statement reveals that, once the Class B shares no longer control the company, the board will be classified into staggered terms, and directors will only be able to be removed for cause. Further, at that time, vacancies on the board will only be able to be filled by the board and not by the stockholders, and amendments to the charter or bylaws will require a supermajority vote.
Some of these governance practices, which would be next to impossible for an existing public company to implement, are common for companies doing IPOs in the past few years. As shown in this Conference Board study
(PDF), companies that recently did IPOs have a much higher incidence of practices such as classified board, which are unpopular with many institutional investors. The practices differ even more at “controlled companies” like Facebook, in which a group retains voting control.
All of this seems fine – when a company like Facebook goes public, any investors who don’t like the ground rules can simply refrain from buying the stock. But it’s interesting that this recent trend in IPO companies’ governance is creating a group of companies that, going forward, will feature fewer investor-friendly governance practices than companies that went public in earlier times.
If you are not used to scouring through prospectuses and you want a guide to Facebook’s, check out this great interactive DealBook feature, "Documents: Understanding the Facebook Prospectus
," which includes the editors’ comments on notable parts of the document.
"The Social Network" Shines
Looking at the Facebook prospectus reminded me of how much I loved the film “The Social Network”. And seeing Sean Parker’s name in the prospectus, I can’t help but think about Justin Timberlake’s great performance in that movie, including the following line, which should have been included in the prospectus:
Sean Parker: You don't even know what the thing is yet. How big it can get, how far it can go. This is no time to take your chips down. A million dollars isn't cool, you know what's cool? . . . . A billion dollars.
Try $100 billion, speculated to be the top of the valuation range for the company once it is public.
See "How Do Top Films Relate to the New Shareholder Advisory Votes?
" with some comments on what the film says about the changes in our society.