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Facebook Board Bent on Limiting Zuckerberg Majority Right?

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Facebook IncFB board of directors is seemingly uncomfortable with founder and CEO Mark Zuckerberg calling the shots.

As per a SEC filing, the board is contemplating to dilute Zuckerberg's majority voting control in case (if ever) he decides to quit his position so that the next CEO does not remain in his shadow. Currently, even if Zuckerberg ceases to be Facebook's chief he will still carry maximum voting rights.

At its annual meeting on Jun 20, the board will propose that all of Zuckerberg's Class B shares be converted to Class A shares in case he quits his CEO duties. Also, he will not be allowed to pass any of his Class B shares to his family even in case of his death so that the selection of a new CEO is on the basis of merit.

As per the SEC filing, the board said "these new terms thus ensure that we will not remain a founder-controlled company after we cease to be a founder-led company." The board further added "the Special Committee and the board of directors also believe that the quality of a chief executive officer who would step into the role under these circumstances is likely to be significantly lower than it would be if we were no longer controlled by Mr. Zuckerberg, which could result in the potential loss of significant value for us."

Zuckerberg literally exercises absolute voting power. As of Jun 2, 2016, Zuckerberg had 419 million shares of Class B or 53.8% of voting power. Facebook has a dual class structure. Notably, Class B shares have 10 times the voting rights of Class A shares. Class B shares aren't traded and are held mostly by Facebook executives. Zuckerberg also has over 4 million Class A shares as well, nearly 15% of total outstanding economic interests of the company.

The latest development pertains to the company's announcement of the creation of publicly listed but non-voting new Class C shares in April, which if adopted will solidify Zuckerberg's position in the company. The idea behind the creation of this new class of shares is to allow Zuckerberg to hold his sway over the company while continuing his charitable work. In December, Zuckerberg had said that he and his wife plan to give 99% of their Facebook shares , valued at $45 billion then, over their entire lifetime, to the Chan Zuckerberg Initiative LLC, a limited liability company for the betterment of the society.

It actually would be interesting (or not) to see what happens at the annual general meeting, given that Zuckerberg has 54% of the voting rights. Also, it is important to keep in mind that investors remain impressed with Facebook's phenomenal performance in back-to-back quarters, driven by its founder's sheer business acumen. Moreover, he has outlined a very ambitious and envious roadmap for the next 10 years that aims at building the company into something much bigger than just a social media platform.

At present, Facebook sports a Zacks Rank #1 (Strong Buy). Other stocks worth considering include NetEase, Inc NTES , 58.com Inc WUBA and DST Systems Inc DST . All carry the same rank as Facebook.

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NETEASE INC (NTES): Free Stock Analysis Report

FACEBOOK INC-A (FB): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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