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On the heels of a very impressive quarter, Facebook unveiled a proposal to add a third, non-voting, class of stock to its capital structure. The move is intended to cement founder Mark Zuckerberg's control of Facebook even as he intends to sell a substantial portion of his stake in the company in order to fund his philanthropic interests.

This sort of structure, which separates control from economic interest in the company, is often thought to be a "worst practice" as far as corporate governance is concerned. Only very well regarded companies with highly talented management can typically persuade investors to go along with this kind of structure. In Facebook's case, Mr. Zuckerberg already controls the company due to his large founder's stake in the company's shares. So investors who bought in previously knew, or should have known, that Mr. Zuckerberg could do any number of things with the company including implementing a new non-voting share class.

As always, clear lines of communication is the key. Facebook's board of directors is also now taking on increased responsibility in that they have a fiduciary responsibility to investors who, even in principle, can't remove them from the board. Courts may hold Facebook's board to a higher standard of scrutiny given this structure and the lack of power that Facebook's investors have to make changes to the board.

Apr 28, 2016 10:45 am EDT
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