Facebook's Zuckerberg and board of directors are caught up in investor lawsuit
AP Photo/Paul Sakuma
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One of the independent board members, Marc Andreessen was accused of secretly cooperating with Mark Zuckerberg and helping him accumulate stronger control of the company while diminishing investors' say.

Earlier this year, Facebook (NASDAQ: Facebook [FB]) CEO Zuckerberg proposed the company's shareholders to set up a new class of shares, non-voting class C, that would be used to raise funds for company's charity projects. But the big question was: will shareholders allow Zuckerberg to sell most of his stake while still retain the same degree of control over the company? However, asking the shareholders to express their opinion on the proposal was merely a formality, as Zuckerberg already had 60% of voting rights, meaning that his decision was overruling any of shareholders. That is why it was no surprise that his idea was directly approved by the shareholders and a new class of shares was to be created.

The only official body that had the power to block Zuckerberg's decision was Facebook's independent 3-member board that was meant to represent the interests of the shareholders. The board was set up last year and consisted of Susan Desmond-Hellmann, Erskine Bowles and Marc Andreessen - members most independent from Zuckerberg's influence and financial interest in the issues, says Bloomberg. The latter one, Marc Andreessen, was accused of favoriting Zuckerberg's decision and neglecting the interests of class A investors that he was supposed to protect. And, some days ago, new details of the case were revealed by the court.

The lawsuit was initially filed back in April, when investors claimed that adding new class of shares was nothing but a “self-interested agglomeration of power”, reports Financial Times. They said that the process of approval by the independent board was manipulated by Andreessen that secretly served as an advisor to Zuckerberg and shared internal information about the boards' negotiations with him. Delaware Court of Chancery has recently uncovered a series of text messages and phone call transcripts the two men exchanged in the period of the proposal's approval, where Andreessen was telling the Facebook CEO how to convince the board.

"Zuckerberg wishes to retain this power, while selling off large amounts of his stockholdings, and reaping billions of dollars in proceeds. The issuance of the Class C stock will, in effect, have the same effect as a grant to Zuckerberg of billions of dollars in equity, for which he will pay nothing," said the lawsuit, as reported by Reuters.

Andreessen and Zuckerberg communicated with coded sentences like “The cat’s in the bag and the bag’s in the river” and "Now we're cooking with gas" and separate emojis. Next to that, Andreessen constantly updated Zuckerberg on the board's internal negotiations, saying that he tried to push the other two members towards giving an approval. Andreessen played on both sides and Zuckerberg did receive this approval.

Deal of a lifetime

But what this approval gave Zuckerberg was unlimited preferential voting rights on the board while the power of other investors in the company's decision-making was diminished even further. The new class C shares were decided to be non-voting, meaning that every new share minimizes the voting power of an existing share as it splits its power into three, two of which are non-voting, explains Bloomberg. On top of that, the class C shares are normally sold at a discount because they are considerably less attractive as acquisition currency in deals and further complicate tax benefitting. Most importantly, the shareholders that already had a weak voice in Facebook's decision making lost even more of their power by "approving" the proposal.

Facebook lawyers claimed that the allegations had no grounds and “will not withstand exposure to the evidence”.

“Facebook is confident that the special committee engaged in a thorough and fair process to negotiate a proposal in the best interests of Facebook and its shareholders,” said Facebook's spokesperson, as reported by Bloomberg.

Financial Times adds that the plaintiffs mentioned that a similar decision previously made by Google (NASDAQ: Alphabet Class A [GOOGL]) led to a number of shares with fewer voting rights traded at a discounted price. That is why, Facebook should issue financial compensation to the affected shareholders because the shares they own would be likely to diminish in value. On top of that, they said that the information provided to the independent board was adjusted in such a way as to present Zuckerberg's proposal in a more positive light. However, the social network still rejects all claims that Andreessen had any influence on the decision.

Facebook said in April that the decision to issue C class shares was "in the best interests of the company and all stockholders."

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