Facebook wants to keep its CEO and co-founder Mark Zuckerberg in control of the company even as he gives away most of his wealth to philanthropy, but that plan hit a hurdle last year when investors sued the Menlo Park tech firm.
The lawsuit, which aims to block the creation of a new class of non-voting stock, is heading to trial next week.
Zuckerberg and other Facebook board members are expected to testify during the trial, which kicks off in the Delaware Court of Chancery on Sept. 26.
The rare court appearance by Zuckerberg will be the second time the tech mogul takes the witness stand.
“There’s a battle underway between institutional investors and insiders in Silicon Valley,” said Stephen Diamond, a law professor at Santa Clara University. “It revolves around the ideology of founder control — this idea that somehow the people who start these businesses have to run or control them from start to finish.”
That belief often clashes with a principle in American finance and law, he said, that when you borrow or use other people’s money you have to be very cautious about those relationships.
The class-action lawsuit, which was filed in April, alleges that Facebook board members breached their duty to shareholders when they approved Zuckerberg’s plan for a new class of stock.
Investors would receive two shares of non-voting stock — known as class C shares — for each Class A or Class B share, which have voting rights. Zuckerberg would be able to maintain control of the company by selling shares with non-voting rights.
Shareholders suing Facebook, which include pension funds, claim that allowing a founder to have this type of control over the company is “a recipe for disaster.” Shares with no voting rights will likely be traded at a discounted value, and the plan benefits Zuckerberg far more than investors, the lawsuit alleges.
“Once you let Zuckerberg’s economic interests vastly differ from his voting interests, it can lead to really bad decisions,” said Stuart Grant, co-founder and managing director of Grant & Eisenhofer P.A, one of the law firms representing shareholders suing Facebook.
Investors also claim that the committee process, which was meant to evaluate the stock proposal, was tainted. Venture capitalist Marc Andreessen, who was on the committee, was texting Zuckerberg observations that helped him during the committee’s negotiations with the co-founder, shareholders allege in court documents.
Menlo Park-based Facebook, which argues that the tech firm’s future success will depend on Zuckerberg’s leadership, denies these allegations.
“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,” a Facebook spokesperson said in a statement.
In December 2015, Zuckerberg and his wife, Dr. Priscilla Chan, vowed to give away 99 percent of their Facebook shares to fund philanthropic causes throughout their lives.
With Zuckerberg holding the majority of voting rights, Facebook’s stock proposal was approved by shareholders in June. Issuing a new class of stock remains on hold until the lawsuit is resolved.
