Facebook’s new non-voting shares plan arouses Delaware plaintiffs’ bar

May 4, 2016

In the good old days of Delaware Chancery Court litigation – a mere 9 or 10 months ago – major corporate announcements would routinely be followed by shareholder suits. Then came last summer’s crackdown on disclosure-only settlements of M&A class actions. And just like that, Chancery Court filings dried up. When is the last time you heard about, say, a fight among plaintiffs’ firms to grab control of a Delaware shareholder suit?

Facebook’s newly announced Class C shares have awakened the shareholder bar from its Trulia-induced slumber. In the week since the company released an April 27 proxy statement disclosing its plan to create a new class of non-voting shares, Facebook has been hit with five Chancery Court complaints alleging that the new shares will shortchange existing investors.

Facebook’s board said in its proxy statement that the non-voting shares, which will be granted as a two-for-one dividend to existing shareholders but will thereafter trade independently, will encourage company founder Mark Zuckerberg to remain CEO of Facebook despite his announced intention of selling or giving away his stock to set up a charitable foundation. The shareholder suits allege that directors breached their duty to shareholders by entrenching Zuckerberg in power, allowing him to retain control of 60 percent voting power, and effectively granting him billions of dollars in equity without bargaining for anything from the founder in return. All five suits ask the court to enjoin Facebook from moving forward with the Class C share plan.

Chancellor Andre Bouchard has assigned the Facebook cases to himself, which is a good sign that the court considers the new litigation to be notable. On Tuesday, according to Nicholas Porritt of Levi & Korsinsky, who filed one of the Facebook complaints, the chancellor sent a letter suggesting that plaintiffs’ firms negotiate a structure for leading the case. If they can’t reach agreement, they will have to file lead counsel briefs on Friday.

Levi & Korsinsky will be in the running. The firm previously settled a similar case against Google when Google proposed issuing a class of non-voting shares to effectively guarantee the voting control of company founders Larry Page and Sergey Brin. Though some commentary questioned the settlement’s value for Google shareholders, Porritt told me investors ended up receiving $522 million in additional stock grants in exchange for the allegedly discounted value of their non-voting shares.

Two other plaintiffs’ firms with Facebook complaints, the Grant Law Firm and the Paskowitz Law Firm, were also involved in the Google case. Paskowitz led parallel litigation in Maryland state court against Under Armour when it issued a class of non-voting shares and entrenched its founder’s control. The other big name in the Facebook case is Michael Hausfeld of the eponymous Washington firm. He did not return my call.

According to Lynda Grant, plaintiffs’ firms are following Chancellor Bouchard’s advice and talking this week about a leadership structure. Interestingly, Levi & Korsinsky is also working with Michael Kelly of McCarter & English on the Facebook case. Kelly and his firm typically appear on the defense side.

I asked Levi partner Porritt whether he expected additional plaintiffs’ firms to surface with suits against Facebook directors. He said some may be conflicted because they’re involved in ongoing shareholder litigation over the company’s initial public offering. In any event, Porritt said, “there are already five suits, which is plenty.”

Facebook didn’t respond to my request for comment but told my Reuters colleague Dan Levine last week that its plan “is in the best interests of the company and all stockholders.” Facebook has said keeping Zuckerberg in charge is critical to its future.

(This post has been corrected. An earlier version incorrectly paraphrased one of the participants in lead counsel discussions. That sentence has been deleted.)

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