OK, but who was the legal eagle or director who gave him the wrong form? I would expect that somebody besides Zuckerberg had a job to get it right, and probably should be on the hook for screwing up one way or another.
Yes.I would imagine Z. just signs whatever the lawyers produce for him to sign after the meeting. I wonder what the outcome will be now? Doesn’t this ruling just give the lawyers the right to sue and they now have to prove the compensation was excessive?
The excessive compensation argument has already been dropped. There's no scenario under which a few hundred thousand dollars in compensation is going to end up being considered excessive for being a director of a $300 billion corporation. It simply will never happen.
"Espinoza had sued alleging breach of fiduciary duties, waste of corporate assets and unjust enrichment. Bouchard tossed Espinoza’s waste claim, saying he couldn’t prove the directors’ compensation was unjustified. He allowed the other two claims to proceed."
I'm not sure if they gave him the wrong form. As long as they didn't get sued for paying their directors too much, there was nothing wrong with signing as a director. I guess that they just didn't considered the option of getting sued over that.
It wasn't a wrong form, it was right back then, If he signed as a shareholder it may spread a bad message too. It's only a better clickbait title of an article.
More surprising to me than this article was the fact that Bloomberg has spiraled off a completely different brand for editorials/commentary/opinion. It amazes me that Bloomberg View which bears the Bloomberg brand has no clear explanation of what it is, and that it is only commentary.
There is an entire cottage industry of firms that will do nothing but look for ways to use these types of procedural errors to extract money from companies.
There are law firms whose sole form of income is to have hedge funds send them their daily trades so they can cross reference them against companies who had to restate earnings, the implication being that if hedge fund A owned some stock during the period where the firm had released the improper numbers and when the firm refiled then the fund can claim they were fraudulently mislead into buying the shares even though the refiling might not have mattered at all.
As to the second part of the story about private companies, this is something that alot of people are trying to figure out.
The last 5 years have been defined by private companies "disrupting" things where they try to have their cake and eat it to.
- Want to be a taxi when it works for you but don't want all the rules, regulations, laws and taxes taht go along with it? No problem, just pretend there are no such thing as taxi laws.
- Want the benefit of people to work and the ability to define how they do their job for you but don't want to bother yourself with things like payroll taxes, workers comp payments, no problem just declare that you don't have contractors or employees but some new form of worker. The IRS just ins't smart enough to see your vision...
Now we have companies who want the benefits of being public
- access to capital as they need it
- ability for founders to cash out their shares
- rising share prices to entice employee's with so they won't focus on the below market wage you pay.
but don't want to petty baggage that goes along with it:
- how dare someone short my company and point out its flaws
- I and only I will pick my share holders,
- I don't want to release earnings of any kind to my shareholders, I only want true believers who won't worry about things like profit.
- Why are people asking about earnings, just look at my growth numbers and those numbers only.
I think most people agree that there needs to be some reform to make it easier for companies to go public but if companies think that being "disruptive" is a technique that will work with the SEC, then that's one battle I don't think silicon valley will win.
Or put another way, for all of Silicon Valley's impact over the past 50 years, its had about zero impact on the process of companies going public. When companies go public they all play ball by Wall Street and the SEC's rules.
I really like your point on the Unicorns "having their cake and eating it too" in regards to public funding.
I am very worried that the technology industry is creating this new capital market that reserves access for the super rich and is completely free from goverment oversight. Are there any points in history that had similar market structure? And if so, how did those markets respond to successes and failures?
It's turned that way because of onerous regulations (Sarbanes-Oxley). We made it way too painful to go public, and now we can't benefit from most of the tech growth
How is average defined? If it's aggregateDollarsCompliance / aggregateRevenue for all companies then small companies are going to pay a much higher percentage versus big companies. Apparently it can be as much as ~1.5% of revenue (http://www.sec.gov/info/smallbus/acspc/appendi.pdf Table 10 shows audit through 2000-2004)
Definitely not an insignificant cost for small companies, especially when you factor in the enormous management overhead
> companies who want the benefits of being public - access to capital as they need it
While traditionally this is the purpose of IPO's and secondary stock issuances, if you look at corporate financing in 2015, this has become such a miniscule percentage of how capital is raised, even for public companies, that it is almost irrelevant. So the standard reason given for a stock issuance, raising money, is really no longer the reason for stock issuance.
There is a startup plan that is basically a cookie cutter plan that a lot of startup follow.
1. Invent new technology/software/website.
2. Get VCs to invest in it.
3. Sell ads on the website and use ML to target people with those ads.
4. IPO to go public to raise up the stock price.
5. Issue yourself a different type of stock that has different voting rights so you retain control of your company.
6. Keep investing new stuff for growth and sell off shares to raise more money.
The problem is people who become CEO without ever taking a business management class or understanding how a business or the laws that effect it work. Steve Jobs found it hard and resigned from Apple in 1985 and had to go back to college to learn business management to learn how to manage a company better. It paid off when Apple merged with Next and Jobs knew how to manage Apple better than he did in 1985.
We haven't seen Bitstock companies yet that trade on Bitcoin instead of the US Dollar. Nobody ever thought to make a Bitstock market based on Bitcoin. You just modify Bitcoin to issue shares of stock called Bitstock and you have issues the company puts that Bitstock can vote on based on what type of Bitstock it is, and then you avoid the lawsuits of signing the wrong document because Bitstock replaces that old system with a new one. Zuck just votes with his Bitsock on each issue and makes it official no need to sign documents anymore.
1. facebook did not "invent" anything, especially compared to Google, they copied text entry boxes and messaging, which anybody could easily duplicate from myspace and reworked the design. Google invented something.
Facebook was very innovative, just not technically innovative. Their two big innovations were the real name policy and only letting in elite uni students to create social demand. Both seem obvious in hindsight, but nobody else at the time implemented both of these policies.
Well if you are the first to introduce something then I think it is fair to say you are being innovative. They were both critically important to the success of Facebook so I think we have to give credit where credit is due.
A real name policy cannot possibly be an innovation, or if it were it predates all modern technology. FWIW, Usenet culture was overwhelmingly based on people communicating under their real names. Ergo, not the first to do so. The second - initially limiting your userbase to an exclusive demographic, is but a restriction or marketing maneuver at best, and again hardly the first to do such a thing.
You have to be intensely desperate to list these two trivialities as innovations.
The application of an old idea to a new domain is what most innovation is. The real name policy had an important effect on the early Facebook in discouraging trolling. This made it a far more friendly environment for most users. I am a strong believer in the importance of using real names online - after all I am using my real name here even though I do not have to.
I personally think that limiting the early user base to elite universities was the more important innovation for Facebook’s success. It allowed them to control their growth while creating an “aspirational” platform that could be scaled out later. I am surprised that more companies haven’t tried the same approach - it would be hard to do now, but the value in targeting this community is still there.
I don't know about you, but I find Facebook an extremely efficient way of keeping up to date with my family and organising events with them. Certainly beats long email threads trying to work out Christmas plans or group trips. Facebook is a social network, and that's what it's good at, if only for the reason that everyone is on it so there's none of the friction involved in getting people to use some other tool.
You can't dismiss Facebook for copying myspace then in the same breath credit Google without respecting all internet entities that tested the waters before it. I was using Netscape Navigator, mapquest, yahoo, hotbot, lycos, and altavista before any of this Google Chrome/maps.google.com/ Google Search/Gmail stuff came along.
So if Facebook loses the lawsuit, what happens? They pay the shareholders some relatively small amount and have to pay the directors less... until Mark signs the right document then they can pay them whatever they want?
I would imagine the courts would place an injunction that would set what amount should be paid and for what period of time. The court may even end up setting the same amount as the original agreement.
This article was really hard to read because of bizarre font choices:
http://imgur.com/MvCW9RP on windows phone 8.1, oddly the footnotes were totally fine, just everything else was missing several pixels on the right. Can we go bad to normal fonts please?
Yes please. I'm aware this comment itself is contributing to the off-topic problem but the constant avalanche of complaints about readability belong in the comment sections and mailboxes of the sites in question.
It may seem like splitting hairs, but the Chancery court's decision makes sense. Corporate governance sounds boring and technical, but it is an important sounding board for valuation and consent.
Imagine a company where two people collectively owned 51% of a public company, one of them more "in charge" than the other. If they start making all kinds of ad hoc decisions without shareholder consent, then they will never hear some important feedback from their fellow owners. What if 48% of the other shareholders don't like how they're doing x? It might just change how things are run.
Minority votes and feedback are important, especially when you consider that the majority of shareholders of public companies are institutional investors they have every right to make sure their feedback is taken seriously by their executives, whether or not those executive happen to be majority shareholders or not.
Facebook did not want to go public, they were forced to do so because of an obscure SEC investor rule. There was quite a bit of coverage on this when they announced their IPO.
An interesting issue here is if the 2-voting-class design is sustainable for new companies. The bottom of the article notes the issue with the legal docs "took place in 2013." I wish the author would have spent more time grappling with 2-class voting (which TBH the major focus of the article) rather than Zuck's clerical error.
The problem with 2-class voting is that it dilutes the inherent value of non-voting shares in a way that is not reflected in the price. Shares without voting power increase inflation, right? Furthermore, a lot of tech companies have put only a small number of shares on the open market (likely at the recommendation of banks who want demand to support the share price). I guess the company will gradually become more publicly available as employees sell.
I'd be curious to know what portion of public companies have multi-class voting and which ones have only about 10% available as public shares. If these practices are new and rare... something to think about.
Fortuitously, The Information published an article about multi class voting structures today. You can read it at http://go.theinformation.com/9e6aa6 (I think this should work for non subscribers).
There are a ton of reasons for the price to be "wrong" if a particular practice is unusual or new. Markets only function as well as the people involved in them. If the people are all acting (unwittingly) on incomplete, incorrect, or insufficient information, then one would expect there to be risks that haven't been "priced in".
Unknown risks are priced in. You just can't really tell how much you should discount because the risks are, well, unknown. If that DNA company from last week would have been public, with one class of shares, and I had bought shares two weeks ago - well, I price them with one of the components being 'there might be some colossal skeleton in the closet' (or take Enron two weeks before the SHTF). It's not like I 'priced it wrong', at least not in any common meaning of the term; because it would basically redefine 'correct pricing' to 'higher realized profit at some point' and would make the concept of 'price' something that can only be assessed ex post.
It doesn't mean that the non (or lesser) voting shares are priced wrong; in fact, by definition, they are priced at what the market values them.
Also, different classes of shares aren't exactly 'new' or 'unusual'. http://www.slideshare.net/nimishhalkar/a-brief-history-of-pr... claims that the first preferential shares were issued in 1836 (yes, it's a different kind of 'preferential' than what we're talking about, but it's still a species of the genus 'share differentiation') E.g. they're a very common vehicle for structuring profit sharing in several civil law jurisdictions I happen to know of.
People like Warren Buffet talk about things being "mis-priced" all the time, that's how people like him make money. So yes, some risk might be priced in, but how much, and how accurately? In some cases, investors may have a very good idea of how much risk a venture entails, in other cases they may think they have a good idea but be completely wrong. The market price is, yes, the market price, that's a tautology. Whether the market price reflects a sustainable reality is an entirely different matter.
The parenthetical in my original comment was important. If everyone thinks they know what is going on, and they're all wrong, then the price isn't a good reflection of reality.
Dual-class voting structures have been around forever. Ford and Berkshire Hathaway are two prominent examples. Historically, they've been relatively rare, and the non-voting shares don't trade at much of a discount. It's rare that individual shareholders get to exercise their voting rights anyway.
The interesting trend now is that so many tech companies have dual-class supervoting shares. It sends the message that a few titans of industry basically make all the decisions, and everybody else is along for the ride. Which is probably where we are, economically, right now, but seems disheartening.
They are not allowed in many countries eg most of Europe. Shares are considered common ownership by capital committed. Well other than debt which doesn't vote but gets to own the company if not paid back.
The New York Stock Exchange, back when it had a Board of Governors, did not allow companies with more than one class of stock to trade on the NYSE.[1] That rule was in effect from 1928 to 1988. The NYSE gave it up because companies were listing on the NASDAQ instead, which allowed multiple classes of stock.
Ford was grandfathered in. Berkshire Hathaway only created a second class of stock in 1996, and that was just because Buffett refused to split the stock, and the current price of $215,000 per share (up from $290 in 1980) was inconvenient for small investors.
The Google and Facebook founder-for-life arrangements are unusual, and they're going to lead to trouble for companies whose stock drops and whose management can't be replaced.
>and they're going to lead to trouble for companies whose stock drops and whose management can't be replaced.
That will be both the problem and solution. Eventually a situation will arise in which the shareholders get burned, and it will be restricted from that point on, either by fiat or refusal of common investors to partake in any offering with this sort of structure.
> I invest in companies run by MBAs all of the time.
So do I. But not if it's a tech growth startup. If you'd replaced Zuckerberg with an MBA in 2006 they would have exited at $1B, pocketed the cash, and moved on.
>If you'd replaced Zuckerberg with an MBA in 2006 they would have exited at $1B, pocketed the cash, and moved on.
Well, this is all bizarre speculation..but so what? Then what would have happened to the company? What would the purchaser have done with it? What would Zuckerberg have gone on to build?
Maybe our difference of opinion lies in what we think of Facebook. Personally, I think it's a successful, well-run (so far) company that makes a product that's a vehicle to sell advertising. From that perspective, I don't think it's exactly earth-shattering stuff. I don't even use it.
If a share barely gives you voting rights, and the company does not, and does in the foreseeable future plan to, issue dividends, then what is the inherent value of the stock? Is it just my portion of the proceeds in case of a firesale?
The right to sell it when the price rises. You own a part of the company which you acquired at a price that you presumably considered below fair value. Even though there is no premium for voting rights nor expected dividends, but you still own a fraction of the company.
A firesale, or buyout, or merger, or nationalization. It's strange, because few of those terminal events will get you a very high valuation, yet this doesn't seem to have a depressing effect on current values.
But if no-one thinks too much about it, there is still plenty of liquidity, and that's really all the evidence the liquidity providers need.
Dividends are definitely the primary way of rewarding shareholders but another way a company can reward its shareholders is by doing a buyback. Owning a share gives you ownership over a portion of a companies profits so it is very tangible even if it only exists for you on paper for the time being.
The structure of the company gives you the right to future dividends at the same rate as other classes of stock. So as long as they think they're creating something of value and the marketplace does you own an equal equity share of that entity.
Google finally paid a dividend (although a one-time dividend) and also announced a stock buyback so these companies may start returning capital. As of right now facebook thinks that capital is best put to use inside the company. I think there's a pretty good chance they're right on that.
Bottom line, you have the same rights to payments per share as Zuckerberg. Also technically Zuckerberg will at some point (might be 30-50 years from now) start divesting his shares and at some point your stock might be valuable for someone who does want to change the structure of the company or take it private.
Another defense is "internal arbitrage". So the company has value, and a different owner might decide to sell off assets or pay dividends to realize that value. But even without the stock changing hands, let's say it started trading at $20 a share. This would encourage Zuckerberg to work with a PE firm to take the company private again.
When stocks trade near, at, or above fair value you wont' really see any of these things happen, but if they started trading way below fair value, you would.
Isn't there also a difference between voting stock, non voting and privileged? Just asking since it might be different than my country and seems you rolled them all togheter.
Bottom line, you have the same rights to payments per
share as Zuckerberg. Also technically Zuckerberg will at
some point (might be 30-50 years from now) start divesting
his shares
Why would he issue a dividend, where he has to share the money with other shareholders, when he could approve himself a bonus, and not have to share the money with anyone?
I'm not sure if issuing himself a sufficiently large bonus to compete with the value of his shares is feasible. And giving yourself a billion dollar bonus probably does not inspire confidence in the stock markets. He'd probably end up losing as much in stock value as he gained in the bonus.
In short, yes. It's your claim to the assets less liabilities of the company. Since Google is trading at around 30x equity, the value equity holders get in case of a sale would be about 1/30th of their market cap. I didn't look at their 10k, but debtors would have claim on any assets before equity.
If you're an investor in Google, you're betting either someone will buy the stock higher from you in the future or they will eventually pay dividends when growth slows.
Here's a discussion on an internet forum on the topic [1].
People speculate on worthless commodities all of the time under the "there's always a bigger sucker" principle. As long as you aren't the last person left holding the bag you can make a bunch of money.
Besides, Apple started paying dividends again back in 2012.
I'm not sure about the inherent value, but here's an argument that shows that it can't be valueless:
If any company's stock is trading too low, you could take a loan and buy out the company using its own profit to pay the loan. So you would expect the stock price to track profits, even if existing shareholders are only in it waiting for a buyout.
That idea ensures the stock is valued somewhat accurately(say, within 35% of the 'true' value on the private market), but I wouldn't think it ensures that the market prices are tight down to the cent.
I wonder the same thing. For the little guy investing in a big company, it seems like owning stocks isn't any different than owning baseball cards.
Most shareholders in a big company don't have any where near enough stock to vote meaningfully. And most companies don't pay dividends with and regularity (or ever, for the most part). When dividends are paid, I'd bet that they're isolated and small - not enough to justify the price of the stock.
Is there some other mechanism that actually _links_ a company's real worth with its stock prices? If I owned 1% of Google, could I just walk in and demand to exchange my stock for 1% of the company's current assets?
> But the law sees him as just another shareholder, whose large shareholdings and job as CEO are coincidental, whose control of the company can be measured purely by numbers and without reference to his personal relationships and history.
Not being totally ignorant about this, but the strawman example would be "just because you are the President of the United States of America doesn't make you invincible; you are still a citizen in front of the law, you may get away with some immediate legal charges, but you still have to face the Congress for any misconduct."
However, I argue, while the law is supposedly being above all, the framework which gives the President the power to govern the Executive branch is exactly what makes him nearly invincible until someone yelling at him in the newspaper.
Mark can be a total prick, fire someone he doesn't like, make up evidences, as long as no one talks and proves that he is forging evidence. This sounds like a Hollywood plot? You bet it is, because he totally can do that as the Emperor of Facebook. He can lead the product to toilet. He can say he likes to own the entire floor alone and have everyone work from a cubicle instead of open-floor plan. Fine. You can sue him, challenge him, but he owns the company. Sounds cynical, you bet. The laws can take him away from the company, but it requires humans to actually make the laws or changes to replace him.
The "investors" suing are just working with/for attorneys that extort massive legal fees and damages from public companies for a living. This case has nothing to do with the underlying conduct, which was merely a clerical error. These attorneys are one of the big reasons that unicorns are staying private.
The most famous of these bottom-feeding attorneys, Bill Lerach, built an estimated net worth of $700 million [1] by creating exactly these kinds of nonsensical shareholder lawsuits against public companies. He also earned a short prison stint and a $7.5M fine for bribing shareholders to become plaintiffs in 150 of the cases he filed. Here is a fascinating video [2], entitled The Rise and Fall of Bill Lerach.
There's a great footnote to the article making a very similar point:
> I should say, nothing in the actual court opinion here has anything to do with public markets: It's a decision of Delaware corporate law, applicable to public and private companies alike. But! The thing is, if Facebook was still private and controlled by its founder and a handful of venture capital firms, no one would have sued. It is not the law that is a feature of being a public company; it's the litigious shareholders.
It's interesting, reading your comment I was of the impression that Lerach must be universally disliked for his slimy methods, exploitation of the system and oppressiveness in the free market (unicorns scared to go public). Reading the first comment on the linked youtube video(i know) reminded me once again to be sceptical of everything i read though:
"Bill Lerach, the former #1 enemy of corrupted corporations. He may not have acted out of personal values but at least for a while corporations had the fear in the back of their minds that if they were going to act unethically it might cost them millions of dollars in security class actions and corporate derivative suits. Where as now they are able to act in a fraudulent manner without fear of consequences.
Larach is the most sincere lawyer I have ever seen. He also seems like a really likable guy."
I'm unsure what to believe now, though I don't feel signing the wrong paper by accident is evidence of a "corrupted corporation". Of course, could also be the youtube commment was very sarcastic.
To be sure, his work was a mixed bag. His firm ran the shareholder case against Enron, which clearly was not baseless litigation (his personal share of the legal fees awarded in that case alone was rumored to be $80 million). However, having read a few things about him, the majority of the cases he brought were designed to extort quick settlements out of the companies. He was/is reviled by corporate America, and he probably appeals to the anti-corporate crowd that likes to see large corporations suffer simply because they are successful. That is why you see varying opinions.
He might also appeal to people who are generally pro-corporate but also like to see anyone (individual or corporation) brought to justice if they misbehave?
Can you really "extort" money through the court system in the US?
Unless it is mandated or endorsed by the Government - which by proxy of the Patent & Trademark office, patent trolling is.
We might think of it, feel that it is or fully believe that it is extortion, but the Government feels that this is okay because "Fuck what we think. Lobbyists said this is fair, so it must be so." <end of cynical rant />
Actually, that's a good example - thanks. I guess you could argue that problem is how silly patents are though rather than the problem being with the court system itself.
It's a good example because even if you know you can win to a high degree of certainty, the cost of fighting is much higher than the cost of settling. This applies to a great many kinds of litigation. Patents are not special in this regard, just a clear example.
No one is really "brought to justice" in lawsuits since they're not criminal. Its simply a transfer of wealth from shareholders (e.g. anyone who invests in this company through a 401k or market index) to litigants.
No one is really "brought to justice" in lawsuits since they're not criminal. Its simply a transfer of wealth from shareholders (e.g. anyone who invests in this company through a 401k or market index) to litigants.
It's relevant because his entire scheme was fueled by personal greed. It also displays the scale at which he operated and the reason that he is a notable example of the kinds of lawyers bringing this type of litigation.
As to the greed factor, he invented plaintiffs in 150 cases - in fact he used the same paid plaintiff in over 70 cases. He knew he was breaking the law by doing this and simply didn't care because there was money to be made. In the video I referenced, it explains that he was only caught because it just so happened that this particular plaintiff got caught in a $17 million insurance scam involving the staged theft of some rare art. When he was caught, he rolled over on Lerach.
He employed criminals to extort companies and made hundreds of millions of dollars doing it. His actions were seen as so repugnant that the federal government passed a tort reform law that many Congressional staffers referred to as the "Get Lerach Act," although the law unintentionally added jet fuel to his business. The whole thing just smacks of seedy, greedy criminals (Lerach among them) that were out to soak companies for every dime they could get.
Here is an old article that details some of Lerach's firm's settlements in the 1998-2003 timeframe: http://www.forbes.com/free_forbes/2004/0216/082.html. The firm was making multiple nine-figure settlements per year. Nobody settles meritless strike suits for that kind of money. Learch's firm recovered $45 billion over 30-40 years. It's simply impossible to do that with meritless lawsuits designed to extract a quick settlement.
It was likely a clerical error, in this instance. But that was only after discovered after the law suit. Should we give these corporate boards the benefit of the doubt? That's funny.
>by creating exactly these kinds of nonsensical shareholder lawsuits against public companies
It isn't "non-sensical".
There are rules and laws that govern public companies, and public companies are obligated to follow them. Someone has to keep people honest, and in the US that's often done through the courts.
I'm sure Facebook and Mr. Zuckerberg will learn a lesson to be more diligent in such matters. That's the point.
I'm not sure I fully understand this. Perhaps someone can explain.
What the fuck does which piece of paper he signed change? If I understand this correctly, the bare facts are:
1). Zuckerberg is a director, this doesn't seem to be in dispute.
2). Zuckerberg makes up the shareholder majority with 60% of the shares, this also doesn't seem to be in dispute.
3). Zuckerberg believed that the salaries awarded to the board of directors were fair, I guess this could be argued except for...
4). There is paperwork that proves he believed this prior to commencement of this lawsuit... it may be the wrong paperwork, but it is still indisputable evidence that he held this belief at such a time as which this lawsuit would be unfounded.
5). The law states that so long as the shareholder majority (which is proven by number 2) decides the awarded salaries are fair (which is assumed by 3 and proven by 4), then they are fair.
No amount of paper shuffling or hypothesizing that will change this conclusion.
The judge should point out the clerical error, tell him to fix it and throw the case out.
This kind of bullshit is the reason why the court system is under so much pressure and can't try real cases; and also why bottom feeding lawyers are making so much money just to be giant pains in the ass to society while extorting a shit ton of money, endorsed by the legal system to fuel future bullshit lawsuits.
Has the legal system/department of justice taken leave of its senses?
> 2). Zuckerberg makes up the shareholder majority with 60% of the shares, this also doesn't seem to be in dispute.
Nope, he has 60% of the voting power, but not 60% of the shares. He simply owns shares that give him more votes per share. He isn't owning the majority of Facebook anymore, so he is considered a "regular" shareholder. But because of his voting power, he can act like he owns the place most of the time.
If he owns >50% of the company, no one can sue him over this matter, because there is no way that >50% of the shareholders have a different opinion about payment.
AFAIK he owns <20% of the company, so there are about >80% of shareholders who can have a different opinion about payment.
In this case Zuck could not be part of the disinterested majority since it was his salary up for vote. Consequently, his shares (and the accompanying votes) should have been ignored.
The article says that the vote only concerned the salaries of the six directors who are not employed by Facebook in some other capacity, so Zuckerberg wasn't voting on his own salary.
One of the footnotes implies that your point 5) is not completely true:
Notice the words "fully-informed disinterested majority." Even if Zuckerberg had formally voted for the pay packages, shareholders could have claimed that he wasn't fully informed or disinterested in his vote, and then Facebook would have had to litigate that.
On page 16, why do these formalities matter at all?
"This Court has recognized more broadly that, “[b]ecause Section 228 permits
immediate action without prior notice to minority stockholders, the statute involves great
potential for mischief and its requirements must be strictly complied with if any
semblance of corporate order is to be maintained.”"
And then on page 33: "If Zuckerberg does not need to provide written consents to ratify the
2013 Compensation, why require written consents for any other action he takes? Such a regime would essentially negate most requirements under Delaware law to notify
stockholders of meaningful events."
I still think this lawsuit is stupid, but it goes a little deeper than "rules are rules". And I think the problem is not really that he "signed the wrong document" like the article implies, but that he didn't sign any document at all to notify the shareholders and indicate their approval.
I think the answer is this: the law requires the exact document - a shareholder consent.
It's binary. Either you have the consent or your don't. The judges don't want to be bothered with shades of gray. Allowing an exception for docs that are "close enough" would lead to long and expensive arguments about whether something was "close enough" or not.
Sure, the rule is harsh, but there's an upside. You can look at a corporate doc and know right away whether it's sufficient. No debate. It's either 100% correct, or else it doesn't pass muster.
On balance, is it a good rule? I don't know! It's just one way to write a rule, and there are some upsides (certainty) and downsides (harsh results for a clerical error).
114 comments
[ 4.7 ms ] story [ 100 ms ] thread"Espinoza had sued alleging breach of fiduciary duties, waste of corporate assets and unjust enrichment. Bouchard tossed Espinoza’s waste claim, saying he couldn’t prove the directors’ compensation was unjustified. He allowed the other two claims to proceed."
http://www.bloomberg.com/news/articles/2015-10-28/facebook-a...
https://en.wikipedia.org/wiki/Bloomberg_News
There is an entire cottage industry of firms that will do nothing but look for ways to use these types of procedural errors to extract money from companies.
There are law firms whose sole form of income is to have hedge funds send them their daily trades so they can cross reference them against companies who had to restate earnings, the implication being that if hedge fund A owned some stock during the period where the firm had released the improper numbers and when the firm refiled then the fund can claim they were fraudulently mislead into buying the shares even though the refiling might not have mattered at all.
As to the second part of the story about private companies, this is something that alot of people are trying to figure out.
The last 5 years have been defined by private companies "disrupting" things where they try to have their cake and eat it to.
- Want to be a taxi when it works for you but don't want all the rules, regulations, laws and taxes taht go along with it? No problem, just pretend there are no such thing as taxi laws.
- Want the benefit of people to work and the ability to define how they do their job for you but don't want to bother yourself with things like payroll taxes, workers comp payments, no problem just declare that you don't have contractors or employees but some new form of worker. The IRS just ins't smart enough to see your vision...
Now we have companies who want the benefits of being public
- access to capital as they need it
- ability for founders to cash out their shares
- rising share prices to entice employee's with so they won't focus on the below market wage you pay.
but don't want to petty baggage that goes along with it:
- how dare someone short my company and point out its flaws
- I and only I will pick my share holders,
- I don't want to release earnings of any kind to my shareholders, I only want true believers who won't worry about things like profit.
- Why are people asking about earnings, just look at my growth numbers and those numbers only.
I think most people agree that there needs to be some reform to make it easier for companies to go public but if companies think that being "disruptive" is a technique that will work with the SEC, then that's one battle I don't think silicon valley will win.
Or put another way, for all of Silicon Valley's impact over the past 50 years, its had about zero impact on the process of companies going public. When companies go public they all play ball by Wall Street and the SEC's rules.
I am very worried that the technology industry is creating this new capital market that reserves access for the super rich and is completely free from goverment oversight. Are there any points in history that had similar market structure? And if so, how did those markets respond to successes and failures?
Definitely not an insignificant cost for small companies, especially when you factor in the enormous management overhead
While traditionally this is the purpose of IPO's and secondary stock issuances, if you look at corporate financing in 2015, this has become such a miniscule percentage of how capital is raised, even for public companies, that it is almost irrelevant. So the standard reason given for a stock issuance, raising money, is really no longer the reason for stock issuance.
1. Invent new technology/software/website.
2. Get VCs to invest in it.
3. Sell ads on the website and use ML to target people with those ads.
4. IPO to go public to raise up the stock price.
5. Issue yourself a different type of stock that has different voting rights so you retain control of your company.
6. Keep investing new stuff for growth and sell off shares to raise more money.
The problem is people who become CEO without ever taking a business management class or understanding how a business or the laws that effect it work. Steve Jobs found it hard and resigned from Apple in 1985 and had to go back to college to learn business management to learn how to manage a company better. It paid off when Apple merged with Next and Jobs knew how to manage Apple better than he did in 1985.
We haven't seen Bitstock companies yet that trade on Bitcoin instead of the US Dollar. Nobody ever thought to make a Bitstock market based on Bitcoin. You just modify Bitcoin to issue shares of stock called Bitstock and you have issues the company puts that Bitstock can vote on based on what type of Bitstock it is, and then you avoid the lawsuits of signing the wrong document because Bitstock replaces that old system with a new one. Zuck just votes with his Bitsock on each issue and makes it official no need to sign documents anymore.
Are we really going to describe these things as "innovations"?
You have to be intensely desperate to list these two trivialities as innovations.
I personally think that limiting the early user base to elite universities was the more important innovation for Facebook’s success. It allowed them to control their growth while creating an “aspirational” platform that could be scaled out later. I am surprised that more companies haven’t tried the same approach - it would be hard to do now, but the value in targeting this community is still there.
Everyone on Facebook's board is already quite wealthy and is not serving on the board for the purpose of getting a salary.
If he's annoyed about it, there will be a new job opening in the Facebook legal department.
http://imgur.com/MvCW9RP on windows phone 8.1, oddly the footnotes were totally fine, just everything else was missing several pixels on the right. Can we go bad to normal fonts please?
Imagine a company where two people collectively owned 51% of a public company, one of them more "in charge" than the other. If they start making all kinds of ad hoc decisions without shareholder consent, then they will never hear some important feedback from their fellow owners. What if 48% of the other shareholders don't like how they're doing x? It might just change how things are run.
Minority votes and feedback are important, especially when you consider that the majority of shareholders of public companies are institutional investors they have every right to make sure their feedback is taken seriously by their executives, whether or not those executive happen to be majority shareholders or not.
Don't like the rules? Then don't go public.
The problem with 2-class voting is that it dilutes the inherent value of non-voting shares in a way that is not reflected in the price. Shares without voting power increase inflation, right? Furthermore, a lot of tech companies have put only a small number of shares on the open market (likely at the recommendation of banks who want demand to support the share price). I guess the company will gradually become more publicly available as employees sell.
I'd be curious to know what portion of public companies have multi-class voting and which ones have only about 10% available as public shares. If these practices are new and rare... something to think about.
It doesn't mean that the non (or lesser) voting shares are priced wrong; in fact, by definition, they are priced at what the market values them.
Also, different classes of shares aren't exactly 'new' or 'unusual'. http://www.slideshare.net/nimishhalkar/a-brief-history-of-pr... claims that the first preferential shares were issued in 1836 (yes, it's a different kind of 'preferential' than what we're talking about, but it's still a species of the genus 'share differentiation') E.g. they're a very common vehicle for structuring profit sharing in several civil law jurisdictions I happen to know of.
The parenthetical in my original comment was important. If everyone thinks they know what is going on, and they're all wrong, then the price isn't a good reflection of reality.
The interesting trend now is that so many tech companies have dual-class supervoting shares. It sends the message that a few titans of industry basically make all the decisions, and everybody else is along for the ride. Which is probably where we are, economically, right now, but seems disheartening.
Ford was grandfathered in. Berkshire Hathaway only created a second class of stock in 1996, and that was just because Buffett refused to split the stock, and the current price of $215,000 per share (up from $290 in 1980) was inconvenient for small investors.
The Google and Facebook founder-for-life arrangements are unusual, and they're going to lead to trouble for companies whose stock drops and whose management can't be replaced.
[1] http://articles.latimes.com/1986-07-04/business/fi-648_1_vot...
That will be both the problem and solution. Eventually a situation will arise in which the shareholders get burned, and it will be restricted from that point on, either by fiat or refusal of common investors to partake in any offering with this sort of structure.
I invest in companies run by MBAs all of the time. I don't fear them or think they're inherently stupid.
I mean, "tech people" have never failed at running companies, am I right?
So do I. But not if it's a tech growth startup. If you'd replaced Zuckerberg with an MBA in 2006 they would have exited at $1B, pocketed the cash, and moved on.
Well, this is all bizarre speculation..but so what? Then what would have happened to the company? What would the purchaser have done with it? What would Zuckerberg have gone on to build?
Maybe our difference of opinion lies in what we think of Facebook. Personally, I think it's a successful, well-run (so far) company that makes a product that's a vehicle to sell advertising. From that perspective, I don't think it's exactly earth-shattering stuff. I don't even use it.
I think the SEC should be much harder on this gaming of the system its undemocratic and is not in the publics best interest.
So, in an event where Mark passes away, decides to sell, etc, then the rest of the shares will have more voting power, relatively.
Google finally paid a dividend (although a one-time dividend) and also announced a stock buyback so these companies may start returning capital. As of right now facebook thinks that capital is best put to use inside the company. I think there's a pretty good chance they're right on that.
Bottom line, you have the same rights to payments per share as Zuckerberg. Also technically Zuckerberg will at some point (might be 30-50 years from now) start divesting his shares and at some point your stock might be valuable for someone who does want to change the structure of the company or take it private.
Another defense is "internal arbitrage". So the company has value, and a different owner might decide to sell off assets or pay dividends to realize that value. But even without the stock changing hands, let's say it started trading at $20 a share. This would encourage Zuckerberg to work with a PE firm to take the company private again.
When stocks trade near, at, or above fair value you wont' really see any of these things happen, but if they started trading way below fair value, you would.
If you're an investor in Google, you're betting either someone will buy the stock higher from you in the future or they will eventually pay dividends when growth slows.
Here's a discussion on an internet forum on the topic [1].
[1]http://money.stackexchange.com/questions/51976/if-a-stock-do...
Besides, Apple started paying dividends again back in 2012.
If any company's stock is trading too low, you could take a loan and buy out the company using its own profit to pay the loan. So you would expect the stock price to track profits, even if existing shareholders are only in it waiting for a buyout.
That idea ensures the stock is valued somewhat accurately(say, within 35% of the 'true' value on the private market), but I wouldn't think it ensures that the market prices are tight down to the cent.
Most shareholders in a big company don't have any where near enough stock to vote meaningfully. And most companies don't pay dividends with and regularity (or ever, for the most part). When dividends are paid, I'd bet that they're isolated and small - not enough to justify the price of the stock.
Is there some other mechanism that actually _links_ a company's real worth with its stock prices? If I owned 1% of Google, could I just walk in and demand to exchange my stock for 1% of the company's current assets?
Not being totally ignorant about this, but the strawman example would be "just because you are the President of the United States of America doesn't make you invincible; you are still a citizen in front of the law, you may get away with some immediate legal charges, but you still have to face the Congress for any misconduct."
However, I argue, while the law is supposedly being above all, the framework which gives the President the power to govern the Executive branch is exactly what makes him nearly invincible until someone yelling at him in the newspaper.
Mark can be a total prick, fire someone he doesn't like, make up evidences, as long as no one talks and proves that he is forging evidence. This sounds like a Hollywood plot? You bet it is, because he totally can do that as the Emperor of Facebook. He can lead the product to toilet. He can say he likes to own the entire floor alone and have everyone work from a cubicle instead of open-floor plan. Fine. You can sue him, challenge him, but he owns the company. Sounds cynical, you bet. The laws can take him away from the company, but it requires humans to actually make the laws or changes to replace him.
Yeah, the public markets are so uncomfortable with it, they've given Google a $512 billion market cap, and Facebook a $295 billion market cap.
The most famous of these bottom-feeding attorneys, Bill Lerach, built an estimated net worth of $700 million [1] by creating exactly these kinds of nonsensical shareholder lawsuits against public companies. He also earned a short prison stint and a $7.5M fine for bribing shareholders to become plaintiffs in 150 of the cases he filed. Here is a fascinating video [2], entitled The Rise and Fall of Bill Lerach.
[1] http://www.bloomberg.com/news/articles/2011-10-12/convicted-...
[2] https://www.youtube.com/watch?v=wYIC9GU9OeM
> I should say, nothing in the actual court opinion here has anything to do with public markets: It's a decision of Delaware corporate law, applicable to public and private companies alike. But! The thing is, if Facebook was still private and controlled by its founder and a handful of venture capital firms, no one would have sued. It is not the law that is a feature of being a public company; it's the litigious shareholders.
"Bill Lerach, the former #1 enemy of corrupted corporations. He may not have acted out of personal values but at least for a while corporations had the fear in the back of their minds that if they were going to act unethically it might cost them millions of dollars in security class actions and corporate derivative suits. Where as now they are able to act in a fraudulent manner without fear of consequences. Larach is the most sincere lawyer I have ever seen. He also seems like a really likable guy."
I'm unsure what to believe now, though I don't feel signing the wrong paper by accident is evidence of a "corrupted corporation". Of course, could also be the youtube commment was very sarcastic.
Can you really "extort" money through the court system in the US?
We might think of it, feel that it is or fully believe that it is extortion, but the Government feels that this is okay because "Fuck what we think. Lobbyists said this is fair, so it must be so." <end of cynical rant />
Why do you feel the need to point out how much Mr. Lerach earns or is worth in your discussion? What is the relevance?
You realize the Facebook Board of Directors has 8 billionaires on it, right?
As to the greed factor, he invented plaintiffs in 150 cases - in fact he used the same paid plaintiff in over 70 cases. He knew he was breaking the law by doing this and simply didn't care because there was money to be made. In the video I referenced, it explains that he was only caught because it just so happened that this particular plaintiff got caught in a $17 million insurance scam involving the staged theft of some rare art. When he was caught, he rolled over on Lerach.
He employed criminals to extort companies and made hundreds of millions of dollars doing it. His actions were seen as so repugnant that the federal government passed a tort reform law that many Congressional staffers referred to as the "Get Lerach Act," although the law unintentionally added jet fuel to his business. The whole thing just smacks of seedy, greedy criminals (Lerach among them) that were out to soak companies for every dime they could get.
[1] https://en.wikipedia.org/wiki/Turtles_all_the_way_down
It was likely a clerical error, in this instance. But that was only after discovered after the law suit. Should we give these corporate boards the benefit of the doubt? That's funny.
>by creating exactly these kinds of nonsensical shareholder lawsuits against public companies
It isn't "non-sensical".
There are rules and laws that govern public companies, and public companies are obligated to follow them. Someone has to keep people honest, and in the US that's often done through the courts.
I'm sure Facebook and Mr. Zuckerberg will learn a lesson to be more diligent in such matters. That's the point.
The point is to be awarded millions of dollars in legal fees, which they will undoubtedly receive.
What the fuck does which piece of paper he signed change? If I understand this correctly, the bare facts are:
1). Zuckerberg is a director, this doesn't seem to be in dispute.
2). Zuckerberg makes up the shareholder majority with 60% of the shares, this also doesn't seem to be in dispute.
3). Zuckerberg believed that the salaries awarded to the board of directors were fair, I guess this could be argued except for...
4). There is paperwork that proves he believed this prior to commencement of this lawsuit... it may be the wrong paperwork, but it is still indisputable evidence that he held this belief at such a time as which this lawsuit would be unfounded.
5). The law states that so long as the shareholder majority (which is proven by number 2) decides the awarded salaries are fair (which is assumed by 3 and proven by 4), then they are fair.
No amount of paper shuffling or hypothesizing that will change this conclusion.
The judge should point out the clerical error, tell him to fix it and throw the case out.
This kind of bullshit is the reason why the court system is under so much pressure and can't try real cases; and also why bottom feeding lawyers are making so much money just to be giant pains in the ass to society while extorting a shit ton of money, endorsed by the legal system to fuel future bullshit lawsuits.
Has the legal system/department of justice taken leave of its senses?
Nope, he has 60% of the voting power, but not 60% of the shares. He simply owns shares that give him more votes per share. He isn't owning the majority of Facebook anymore, so he is considered a "regular" shareholder. But because of his voting power, he can act like he owns the place most of the time.
If he owns >50% of the company, no one can sue him over this matter, because there is no way that >50% of the shareholders have a different opinion about payment.
AFAIK he owns <20% of the company, so there are about >80% of shareholders who can have a different opinion about payment.
In this case Zuck could not be part of the disinterested majority since it was his salary up for vote. Consequently, his shares (and the accompanying votes) should have been ignored.
If he would have kept >50%, everything would be fine.
Notice the words "fully-informed disinterested majority." Even if Zuckerberg had formally voted for the pay packages, shareholders could have claimed that he wasn't fully informed or disinterested in his vote, and then Facebook would have had to litigate that.
The legal opinion is fairly easy to read and I think will answer some of your questions: http://courts.delaware.gov/opinions/download.aspx?ID=231620
On page 16, why do these formalities matter at all?
"This Court has recognized more broadly that, “[b]ecause Section 228 permits immediate action without prior notice to minority stockholders, the statute involves great potential for mischief and its requirements must be strictly complied with if any semblance of corporate order is to be maintained.”"
And then on page 33: "If Zuckerberg does not need to provide written consents to ratify the 2013 Compensation, why require written consents for any other action he takes? Such a regime would essentially negate most requirements under Delaware law to notify stockholders of meaningful events."
I still think this lawsuit is stupid, but it goes a little deeper than "rules are rules". And I think the problem is not really that he "signed the wrong document" like the article implies, but that he didn't sign any document at all to notify the shareholders and indicate their approval.
Sure, the rule is harsh, but there's an upside. You can look at a corporate doc and know right away whether it's sufficient. No debate. It's either 100% correct, or else it doesn't pass muster.
On balance, is it a good rule? I don't know! It's just one way to write a rule, and there are some upsides (certainty) and downsides (harsh results for a clerical error).
IANAL, but that seems like a crazy lawsuit.