A pension fund sued Facebook Inc. (FB.O) directors for being too accommodating when co-founder Mark Zuckerberg sought to create non-voting shares so he could retain control after selling most of his stake to fund his family’s philanthropic endeavors.
While Zuckerberg scrapped his plans last year for creating a new class of shares with no voting power, directors should be held accountable for the chummy way in which they considered his proposal, the United Food and Commercial Workers Union’s pension fund said in the complaint.
The board committee tasked with evaluating Zuckerberg’s idea used a “corrupted process’’ that guaranteed “approval of a stock reclassification plan lacking in any legitimate business purpose and which was manifestly unfair’’ to Facebook investors, according to the suit filed Wednesday in Delaware Chancery Court.
The suit comes as Zuckerberg and Menlo Park, California-based Facebook are contending with data privacy scandals, congressional scrutiny and slowing user growth. It’s also dealing with criticism of its content policies from President Donald Trump and the threat of government regulation.
The failed bid to create the new share class cost the company more than $20 million in fees for lawyers and advisers, the fund alleged. Lawyers for other investors who challenged the non-voting shares are seeking $129 million in legal fees over Zuckerberg’s decision to nix the proposal.
Facebook declined to comment on the suit. Shares fell 2.4 per cent, to US$162, in Nasdaq trading.
The complaint details what’s described as unusual communications between venture capitalist and Facebook board member Marc Andreessen and Zuckerberg. Facebook set up a special board committee to represent shareholders while weighing the share-class proposal. Andreessen is named as a defendant in the case along with fellow Facebook directors Peter Thiel, Reed Hastings, Erskine Bowles, Susan Desmond-Hellmann and Jan Koum.
During a meeting with the committee over the proposed new class of shares, Zuckerberg got real-time texts from Andreessen giving him a heads up on which of his arguments were gaining traction.
“This line of argument is not helping,’’ Andreessen warned in one text. “The committee wants to do this. You don’t need to question that.’’ In another, the venture capitalist noted “NOW WE’RE COOKING WITH GAS.’’
Those kinds of actions by supposedly neutral directors made the committee’s evaluation of the proposal “a charade that was designed to appease’’ Zuckerberg, the fund’s lawyers said in the suit.
The case is United Food and Commercial Workers Union and Participating Employers Tri-State Pension Fund v. Zuckerberg, 2018-0671, Delaware Chancery Court (Wilmington).