As executives at Facebook will attest to, not all news is good news. The company has been pinned as public enemy number one due to its role in disseminating fake news and on Monday, the U.K. newspaper The Guardian ran a story entitled ‘2016: the year Facebook became the bad guy.’ The story looks at examples of ‘unprecedented power’ and ‘digital colonialism’ as it asks questions about Facebook’s growing influence.
However, stories like the Guardian report have push another more damaging report from the headlines. It is a story of conflict of interest by Facebook’s shareholders in connection with Founder and CEO Mark Zuckerberg’s selling most of his shares in the company. The sale included the establishment of a new share class which allowed Mr. Zuckerberg to maintain control in Facebook even though he currently owns very little stock in the company.
Non-owner CEOs are not uncommon. In fact, most of CEO of S&P 500 companies are not the majority owners of their companies. However, the allegation that some of Facebook’s early shareholders colluded to ensure Mr. Zuckerberg maintained control of the Board has raised some eyebrows.
The matter is currently being deliberated in the Chancery Court of the State of Delaware after several shareholders questioned whether this breached the company’s bylaws and Delaware law – the state where Facebook is incorporated.
Another part of the question is whether Mr. Zuckerberg personally used his accumulated voting rights to rig any decision on maintaining control of the company in his favor. While this is unclear, Mr. Zuckerberg currently holds voting control of the shares of a number of large Facebook shareholders.
However, the challenge might be the role of an ‘independent’ committee which was established in 2015 to review the terms of this proposal. This committee included three shareholders who, in theory, were independent from Mr. Zuckerberg and included Susan Desmond-Hellmann, Marc Andreessen, and Erskine Bowles. Mr. Andreessen’s presence on the board is controversial as his venture capital firm, Andreessen Horowitz, was an early investor in Facebook.
Furthermore, documents acquired by the plaintiffs appear to indicate that Messrs. Andreessen and Zuckerberg may have discussed the details of the plan prior to the committee deciding its opinion on the share restructure.
One potential red flag is the appearance that Mr. Andreessen used his position to gain prior knowledge of the questions which board members would pose to Mr. Zuckerberg about the transaction. If this is true, then it would appear that Mr. Andreessen was not representing the best interest of shareholders but rather his own shares and possibly his relationship with Mr. Zuckerberg.
Another red flag was the live texting by which Mr. Andreessen revealed details of the Board’s discussion on the matter with Mr. Zuckerberg.
The matter is still pending the resolution could have a major impact on the makeup of Facebook’s Board as several directors could be shuffled and the company may potentially become a target for activist investors who will fight for transparency. Another potential outcome could be the Court’s decision to void restructure the share deal. While this probably won’t impact Mr. Zuckerberg’s executive role at the company, it may lead to further dilution of his voting rights.