Google’s evil stock split

By Felix Salmon
April 13, 2012
Robert Cyran: there's something a little evil about the way that Google is splitting its stock, and in so doing creating a whole new class of non-voting shares.

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Count me in with Robert Cyran: there’s something a little evil about the way that Google is splitting its stock, and in so doing creating a whole new class of non-voting shares.

There’s a long history of such things: they were outlawed in the 1920s, when they were commonly used by unscrupulous managers. The New York World even wrote a poem on the subject:

Then you who drive the fractious nail,
And you who lay the heavy rail,
And all who bear the dinner pail
And daily punch the clock—
Shall it be said your hearts are stone?
They are your brethren and they groan!
Oh, drop a tear for those who own Nonvoting corporate stock.

Dual-class voting shares were illegal for most of the 20th Century, but came back in 1986. James Sterngold’s NYT story on their reintroduction is well worth a read, featuring as it does comments against the new rules from both Felix Rohatyn (”The one-share, one-vote rule is pretty fundamental to the market”) and T Boone Pickens (”Let’s face it, managements want this because they want to entrench themselves. They went to Congress to get protection and they didn’t get it. So they went to the exchange to get protection, and they got it.”)

Even then, however, there were safeguards, including the crucial one that a majority of independent shareholders — excluding management and some directors — had to approve the move. The basic idea was explained ten years later:

The defining principle of current American corporate law seems to be, if the existing shareholders agree to the creation of a new type of shares with no voting rights, why should we object?

Google has, now, clearly violated the spirit of the NYSE rules, if not their letter. It took 15 months for the independent directors on the board to be persuaded of this, in long and secret deliberations:

In January 2011, the board established a special committee, comprised of independent, non-management board members to consider a new class of stock, or other alternatives. This committee retained its own financial and legal advisers to assist with its deliberations, and met on numerous occasions over the 15 months that the special committee considered the proposal separately from the board. The committee recommended, and the board unanimously approved, today’s proposal.

The proposal is subject to the approval of a majority of the voting power of Google’s common stock, voting together as a single class, at our annual meeting on June 21, 2012. Given that Larry, Sergey, and Eric control the majority of voting power and support this proposal, we expect it to pass.

My key problem with the proposal is that it’s being pushed through without common shareholders being given the opportunity to object. I would be OK with it if it was being voted on a one-share, one-vote basis. But instead, Google’s Troika has decided that having ten times the votes of any other shareholder isn’t good enough for them, and that what they really want is a whole new class of shareholders — including new employees — who have no votes in the company at all.

Given the way that this is being done, I’m with Cyran that we can place no store whatsoever in the “stapling” provision which says that as the Troika sells their stock, they will be forced to sell down their super-voting stock commensurately. Such provisions tend to last until they’re needed, at which point the controlling shareholders simply use their control to get rid of them.

Non-voting shares are rare things, and Google’s news comes not long after Telus decided to move the other way, giving votes to all the holders of its non-voting stock. There’s no need for this to happen now — or ever, for that matter — and the letter from Larry and Sergei is pretty unconvincing on the subject of why they’re doing it.

We have a structure that prevents outside parties from taking over or unduly influencing our management decisions. However, day-to-day dilution from routine equity-based employee compensation and other possible dilution, such as stock-based acquisitions, will likely undermine this dual-class structure and our aspirations for Google over the very long term. We have put our hearts into Google and hope to do so for many more years to come. So we want to ensure that our corporate structure can sustain these efforts and our desire to improve the world.

It’s worth putting this theoretical fear in perspective. Common shareholders currently have just 32.6% of the voting stock at Google, with Larry and Sergei Sergey between them controlling 57.7%. If Google doubled the number of common shares outstanding, the Troika still wouldn’t lose control. And in any case, as Steve Jobs has shown, you don’t need control of the stock to have complete control of the company.

This move, then, is basically a way for Google to try to retreat back into its pre-IPO shell as much as possible. It never really wanted to go public in the first place — it was forced into that by the 500-shareholder rule — but at this point, Google is far too entrenched in the corporate landscape to be able to turn back the clock. It’s too big, and too important, and has been public for too long. That’s the thing about going public: it might suck, but once you’ve done it, you’ve done it. And at that point, if you try to pull a stunt like this, you risk looking all too much like Rupert Murdoch.

That said, however, I can’t say I’m wholly surprised by this development. Google hasn’t always been evil, but it has been evil since January: this news just confirms what many of us suspected when they closed down the Kaffee Klatsch in Davos. Which just goes to prove, I suppose, that the World Economic Forum really does give you advance notification of important corporate developments.

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