Facebook Will Form 2 Classes of Stock

Facebook Will Form 2 Classes of Stock
By BRAD STONE
Copyright by The New York Times
Published: November 24, 2009
http://www.nytimes.com/2009/11/25/technology/internet/25facebook.html?th&emc=th


SAN FRANCISCO — Facebook is taking a rudimentary step down the path to becoming a public company.

The company said on Tuesday that it was creating a dual-class stock structure for itself, and converting all of its current shares into so-called Class B shares, which will have 10 votes each on matters of corporate governance.

Class A shares, which would be sold in an initial public offering, would carry one vote. Facebook said it had “no plans to go public at this time.”

In the event Facebook does sell shares, Mark Zuckerberg, Facebook’s founder and chief executive, would firmly retain control over the company and its board of directors.

“We did introduce a dual-class stock structure because existing shareholders wanted to maintain control over voting on certain issues to help ensure the company can continue to focus on the long term to build a great business,” a Facebook spokesman, Larry Yu, said in an e-mailed statement. “This revision to the stock structure should not be construed as a signal the company is planning to go public.”

The news of Facebook’s new stock structure was first reported by The Wall Street Journal.

Such dual-class stock structures — and the controversy they typically generate — are nothing new in the corporate world. Many families and individuals who start companies grant themselves these special voting shares as a way to preserve control of the company while selling shares to the public. The structure is used at The New York Times Company, Ford, Warren E. Buffett’s Berkshire Hathaway, Visa and EchoStar Communications, among others.

Google also employed a dual-class structure when it went public in 2004. Several investors criticized the arrangement, saying that it disenfranchised outside shareholders.

Earlier this month, Hyatt Hotels, which is based in Chicago, drew similar fire from analysts and unions when it went public, selling only A shares. The Pritzker family, which runs the hotelier, kept B shares and a strong majority of the voting power.

A dual class structure “is another mechanism to exert complete control and it’s tantamount to almost like a preferred security,” said Scott Sweet, senior managing partner at IPO Boutique, an advisory firm.

Facebook has recently shown more of an interest in delaying a public offering than in rushing one. Earlier this year, the company allowed its employees to sell a portion of their stock to Digital Sky Technologies, a Russian venture capital firm, which added $100 million in shares to its previous $200 million ownership stake.

Employees have also been able to sell their shares on so-called secondary exchanges, like SecondMarket, based in New York, and SharesPost, based in Santa Monica, Calif.

Facebook’s see-sawing valuation was last set at $6.5 billion when Digital Sky Technologies bought shares from employees. On secondary exchanges, where the supply of shares is limited, the valuation has risen to $9.5 billion. The social network said earlier this fall that it had surpassed 300 million members.