
Mark Zuckerberg Signed the Wrong Document - dsri
http://www.bloombergview.com/articles/2015-10-29/mark-zuckerberg-signed-the-wrong-document
======
downandout
The "investors" suing are just working with/for attorneys that extort massive
legal fees and damages from public companies for a living. This case has
nothing to do with the underlying conduct, which was merely a clerical error.
These attorneys are one of the big reasons that unicorns are staying private.

The most famous of these bottom-feeding attorneys, Bill Lerach, built an
estimated net worth of $700 million [1] by creating exactly these kinds of
nonsensical shareholder lawsuits against public companies. He also earned a
short prison stint and a $7.5M fine for bribing shareholders to become
plaintiffs in 150 of the cases he filed. Here is a fascinating video [2],
entitled _The Rise and Fall of Bill Lerach_.

[1]
[http://www.bloomberg.com/news/articles/2011-10-12/convicted-...](http://www.bloomberg.com/news/articles/2011-10-12/convicted-
king-of-class-actions-bill-lerach-builds-aviary-regrets-nothing)

[2]
[https://www.youtube.com/watch?v=wYIC9GU9OeM](https://www.youtube.com/watch?v=wYIC9GU9OeM)

~~~
thaumasiotes
There's a great footnote to the article making a very similar point:

> I should say, nothing in the actual court opinion here has anything to do
> with public markets: It's a decision of Delaware corporate law, applicable
> to public and private companies alike. But! The thing is, if Facebook was
> still private and controlled by its founder and a handful of venture capital
> firms, _no one would have sued_. It is not the law that is a feature of
> being a public company; it's the _litigious shareholders_.

~~~
spacecowboy_lon
Enough with the scare quotes Sometimes in order to enforce your rights you
have to go to law

------
sopooneo
If a share barely gives you voting rights, and the company does not, and does
in the foreseeable future plan to, issue dividends, then what is the inherent
value of the stock? Is it just my portion of the proceeds in case of a
firesale?

~~~
jegutman
The structure of the company gives you the right to future dividends at the
same rate as other classes of stock. So as long as they think they're creating
something of value and the marketplace does you own an equal equity share of
that entity.

Google finally paid a dividend (although a one-time dividend) and also
announced a stock buyback so these companies may start returning capital. As
of right now facebook thinks that capital is best put to use inside the
company. I think there's a pretty good chance they're right on that.

Bottom line, you have the same rights to payments per share as Zuckerberg.
Also technically Zuckerberg will at some point (might be 30-50 years from now)
start divesting his shares and at some point your stock might be valuable for
someone who does want to change the structure of the company or take it
private.

Another defense is "internal arbitrage". So the company has value, and a
different owner might decide to sell off assets or pay dividends to realize
that value. But even without the stock changing hands, let's say it started
trading at $20 a share. This would encourage Zuckerberg to work with a PE firm
to take the company private again.

When stocks trade near, at, or above fair value you wont' really see any of
these things happen, but if they started trading way below fair value, you
would.

~~~
michaelt

      Bottom line, you have the same rights to payments per
      share as Zuckerberg. Also technically Zuckerberg will at
      some point (might be 30-50 years from now) start divesting
      his shares
    

Why would he issue a dividend, where he has to share the money with other
shareholders, when he could approve himself a bonus, and not have to share the
money with anyone?

~~~
hyperpape
I'm not sure if issuing himself a sufficiently large bonus to compete with the
value of his shares is feasible. And giving yourself a billion dollar bonus
probably does not inspire confidence in the stock markets. He'd probably end
up losing as much in stock value as he gained in the bonus.

------
choppaface
An interesting issue here is if the 2-voting-class design is sustainable for
new companies. The bottom of the article notes the issue with the legal docs
"took place in 2013." I wish the author would have spent more time grappling
with 2-class voting (which TBH the major focus of the article) rather than
Zuck's clerical error.

The problem with 2-class voting is that it dilutes the inherent value of non-
voting shares in a way that is not reflected in the price. Shares without
voting power increase inflation, right? Furthermore, a lot of tech companies
have put only a small number of shares on the open market (likely at the
recommendation of banks who want demand to support the share price). I guess
the company will gradually become more publicly available as employees sell.

I'd be curious to know what portion of public companies have multi-class
voting and which ones have only about 10% available as public shares. If these
practices are new and rare... something to think about.

~~~
nostrademons
Dual-class voting structures have been around forever. Ford and Berkshire
Hathaway are two prominent examples. Historically, they've been relatively
rare, and the non-voting shares don't trade at much of a discount. It's rare
that individual shareholders get to exercise their voting rights anyway.

The interesting trend now is that so _many_ tech companies have dual-class
supervoting shares. It sends the message that a few titans of industry
basically make all the decisions, and everybody else is along for the ride.
Which is probably where we are, economically, right now, but seems
disheartening.

~~~
Animats
The New York Stock Exchange, back when it had a Board of Governors, did not
allow companies with more than one class of stock to trade on the NYSE.[1]
That rule was in effect from 1928 to 1988. The NYSE gave it up because
companies were listing on the NASDAQ instead, which allowed multiple classes
of stock.

Ford was grandfathered in. Berkshire Hathaway only created a second class of
stock in 1996, and that was just because Buffett refused to split the stock,
and the current price of $215,000 per share (up from $290 in 1980) was
inconvenient for small investors.

The Google and Facebook founder-for-life arrangements are unusual, and they're
going to lead to trouble for companies whose stock drops and whose management
can't be replaced.

[1]
[http://articles.latimes.com/1986-07-04/business/fi-648_1_vot...](http://articles.latimes.com/1986-07-04/business/fi-648_1_voting-
rights)

~~~
forgetsusername
> _and they 're going to lead to trouble for companies whose stock drops and
> whose management can't be replaced._

That will be both the problem and solution. Eventually a situation will arise
in which the shareholders get burned, and it will be restricted from that
point on, either by fiat or refusal of common investors to partake in any
offering with this sort of structure.

~~~
aianus
You would not have wanted to invest in a Google or Facebook run by some MBA
instead of the founders.

~~~
forgetsusername
> _You would not have wanted to invest in a Google or Facebook run by some MBA
> instead of the founders._

I invest in companies run by MBAs all of the time. I don't fear them or think
they're inherently stupid.

I mean, "tech people" have never failed at running companies, am I right?

~~~
aianus
> I invest in companies run by MBAs all of the time.

So do I. But not if it's a tech growth startup. If you'd replaced Zuckerberg
with an MBA in 2006 they would have exited at $1B, pocketed the cash, and
moved on.

~~~
forgetsusername
> _If you 'd replaced Zuckerberg with an MBA in 2006 they would have exited at
> $1B, pocketed the cash, and moved on._

Well, this is all bizarre speculation..but so what? Then what would have
happened to the company? What would the purchaser have done with it? What
would Zuckerberg have gone on to build?

Maybe our difference of opinion lies in what we think of Facebook. Personally,
I think it's a successful, well-run (so far) company that makes a product
that's a vehicle to sell advertising. From that perspective, I don't think
it's exactly earth-shattering stuff. I don't even use it.

------
tlrobinson
So if Facebook loses the lawsuit, what happens? They pay the shareholders some
relatively small amount and have to pay the directors less... until Mark signs
the right document then they can pay them whatever they want?

~~~
meric
It will be a reminder to Mark Zuckerberg to take more care in his fiduciary
duties, like signing with the correct letterhead.

~~~
GCA10
Generally it's the lawyers that put paper in front of the CEO, saying: 'Sign
this." They are supposed to get it right.

If he's annoyed about it, there will be a new job opening in the Facebook
legal department.

------
balabaster
I'm not sure I fully understand this. Perhaps someone can explain.

What the fuck does which piece of paper he signed change? If I understand this
correctly, the bare facts are:

1). Zuckerberg is a director, this doesn't seem to be in dispute.

2). Zuckerberg makes up the shareholder majority with 60% of the shares, this
also doesn't seem to be in dispute.

3). Zuckerberg believed that the salaries awarded to the board of directors
were fair, I guess this could be argued except for...

4). There is paperwork that proves he believed this prior to commencement of
this lawsuit... it may be the wrong paperwork, but it is still indisputable
evidence that he held this belief at such a time as which this lawsuit would
be unfounded.

5). The law states that so long as the shareholder majority (which is proven
by number 2) decides the awarded salaries are fair (which is assumed by 3 and
proven by 4), then they are fair.

No amount of paper shuffling or hypothesizing that will change this
conclusion.

The judge should point out the clerical error, tell him to fix it and throw
the case out.

This kind of bullshit is the reason why the court system is under so much
pressure and can't try real cases; and also why bottom feeding lawyers are
making so much money just to be giant pains in the ass to society while
extorting a shit ton of money, endorsed by the legal system to fuel future
bullshit lawsuits.

Has the legal system/department of justice taken leave of its senses?

~~~
k__
> 2). Zuckerberg makes up the shareholder majority with 60% of the shares,
> this also doesn't seem to be in dispute.

Nope, he has 60% of the voting power, but not 60% of the shares. He simply
owns shares that give him more votes per share. He isn't owning the majority
of Facebook anymore, so he is considered a "regular" shareholder. But because
of his voting power, he can act like he owns the place most of the time.

~~~
balabaster
The result is the same, but thanks for that clarity. Your point clears up a
misunderstanding I've had about how that works for a while.

~~~
k__
The difference is:

If he owns >50% of the company, no one can sue him over this matter, because
there is no way that >50% of the shareholders have a different opinion about
payment.

AFAIK he owns <20% of the company, so there are about >80% of shareholders who
can have a different opinion about payment.

~~~
gamblor956
Key term: "disinterested majority"

In this case Zuck could not be part of the disinterested majority since it was
his salary up for vote. Consequently, his shares (and the accompanying votes)
should have been ignored.

~~~
TheCoelacanth
The article says that the vote only concerned the salaries of the six
directors who are not employed by Facebook in some other capacity, so
Zuckerberg wasn't voting on his own salary.

~~~
k__
Well, seems to me like he was too greedy and careless.

If he would have kept >50%, everything would be fine.

------
chollida1
I feel kind of bad for Mark here.

There is an entire cottage industry of firms that will do nothing but look for
ways to use these types of procedural errors to extract money from companies.

There are law firms whose sole form of income is to have hedge funds send them
their daily trades so they can cross reference them against companies who had
to restate earnings, the implication being that if hedge fund A owned some
stock during the period where the firm had released the improper numbers and
when the firm refiled then the fund can claim they were fraudulently mislead
into buying the shares even though the refiling might not have mattered at
all.

As to the second part of the story about private companies, this is something
that alot of people are trying to figure out.

The last 5 years have been defined by private companies "disrupting" things
where they try to have their cake and eat it to.

\- Want to be a taxi when it works for you but don't want all the rules,
regulations, laws and taxes taht go along with it? No problem, just pretend
there are no such thing as taxi laws.

\- Want the benefit of people to work and the ability to define how they do
their job for you but don't want to bother yourself with things like payroll
taxes, workers comp payments, no problem just declare that you don't have
contractors or employees but some new form of worker. The IRS just ins't smart
enough to see your vision...

Now we have companies who want the benefits of being public

\- access to capital as they need it

\- ability for founders to cash out their shares

\- rising share prices to entice employee's with so they won't focus on the
below market wage you pay.

but don't want to petty baggage that goes along with it:

\- how dare someone short my company and point out its flaws

\- I and only I will pick my share holders,

\- I don't want to release earnings of any kind to my shareholders, I only
want true believers who won't worry about things like profit.

\- Why are people asking about earnings, just look at my growth numbers and
those numbers only.

I think most people agree that there needs to be some reform to make it easier
for companies to go public but if companies think that being "disruptive" is a
technique that will work with the SEC, then that's one battle I don't think
silicon valley will win.

Or put another way, for all of Silicon Valley's impact over the past 50 years,
its had about zero impact on the process of companies going public. When
companies go public they all play ball by Wall Street and the SEC's rules.

~~~
jmcatani
I really like your point on the Unicorns "having their cake and eating it too"
in regards to public funding.

I am very worried that the technology industry is creating this new capital
market that reserves access for the super rich and is completely free from
goverment oversight. Are there any points in history that had similar market
structure? And if so, how did those markets respond to successes and failures?

~~~
sportanova
It's turned that way because of onerous regulations (Sarbanes-Oxley). We made
it way too painful to go public, and now we can't benefit from most of the
tech growth

~~~
JDDunn9
The average cost of compliance with Sarbanes-Oxley was 0.043% of revenue by a
2006 survey.

~~~
sportanova
How is average defined? If it's aggregateDollarsCompliance / aggregateRevenue
for all companies then small companies are going to pay a much higher
percentage versus big companies. Apparently it can be as much as ~1.5% of
revenue
([http://www.sec.gov/info/smallbus/acspc/appendi.pdf](http://www.sec.gov/info/smallbus/acspc/appendi.pdf)
Table 10 shows audit through 2000-2004)

Definitely not an insignificant cost for small companies, especially when you
factor in the enormous management overhead

------
hacknat
It may seem like splitting hairs, but the Chancery court's decision makes
sense. Corporate governance sounds boring and technical, but it is an
important sounding board for valuation and consent.

Imagine a company where two people collectively owned 51% of a public company,
one of them more "in charge" than the other. If they start making all kinds of
ad hoc decisions without shareholder consent, then they will never hear some
important feedback from their fellow owners. What if 48% of the other
shareholders don't like how they're doing x? It might just change how things
are run.

Minority votes and feedback are important, especially when you consider that
the majority of shareholders of public companies are institutional investors
they have every right to make sure their feedback is taken seriously by their
executives, whether or not those executive happen to be majority shareholders
or not.

Don't like the rules? Then don't go public.

~~~
tristanj
Facebook did not want to go public, they were forced to do so because of an
obscure SEC investor rule. There was quite a bit of coverage on this when they
announced their IPO.

~~~
justincormack
No, they would have had to disclose like a public company but they were not
obliged to be public

------
EwanG
OK, but who was the legal eagle or director who gave him the wrong form? I
would expect that somebody besides Zuckerberg had a job to get it right, and
probably should be on the hook for screwing up one way or another.

~~~
danieltillett
Yes.I would imagine Z. just signs whatever the lawyers produce for him to sign
after the meeting. I wonder what the outcome will be now? Doesn’t this ruling
just give the lawyers the right to sue and they now have to prove the
compensation was excessive?

~~~
adventured
The excessive compensation argument has already been dropped. There's no
scenario under which a few hundred thousand dollars in compensation is going
to end up being considered excessive for being a director of a $300 billion
corporation. It simply will never happen.

"Espinoza had sued alleging breach of fiduciary duties, waste of corporate
assets and unjust enrichment. Bouchard tossed Espinoza’s waste claim, saying
he couldn’t prove the directors’ compensation was unjustified. He allowed the
other two claims to proceed."

[http://www.bloomberg.com/news/articles/2015-10-28/facebook-a...](http://www.bloomberg.com/news/articles/2015-10-28/facebook-
and-zuckerberg-must-face-claims-over-directors-pay)

------
cooperpellaton
More surprising to me than this article was the fact that Bloomberg has
spiraled off a completely different brand for editorials/commentary/opinion.
It amazes me that Bloomberg View which bears the Bloomberg brand has no clear
explanation of what it is, and that it is only commentary.

[https://en.wikipedia.org/wiki/Bloomberg_News](https://en.wikipedia.org/wiki/Bloomberg_News)

------
yeukhon
> But the law sees him as just another shareholder, whose large shareholdings
> and job as CEO are coincidental, whose control of the company can be
> measured purely by numbers and without reference to his personal
> relationships and history.

Not being totally ignorant about this, but the strawman example would be "just
because you are the President of the United States of America doesn't make you
invincible; you are still a citizen in front of the law, you may get away with
some immediate legal charges, but you still have to face the Congress for any
misconduct."

However, I argue, while the law is supposedly being above all, the framework
which gives the President the power to govern the Executive branch is exactly
what makes him nearly invincible until someone yelling at him in the
newspaper.

Mark can be a total prick, fire someone he doesn't like, make up evidences, as
long as no one talks and proves that he is forging evidence. This sounds like
a Hollywood plot? You bet it is, because he totally can do that as the Emperor
of Facebook. He can lead the product to toilet. He can say he likes to own the
entire floor alone and have everyone work from a cubicle instead of open-floor
plan. Fine. You can sue him, challenge him, but he owns the company. Sounds
cynical, you bet. The laws can take him away from the company, but it requires
humans to actually make the laws or changes to replace him.

------
adventured
> These startups are extensions of their founders in a way that public
> companies are not, and that public markets are not comfortable with.

Yeah, the public markets are so uncomfortable with it, they've given Google a
$512 billion market cap, and Facebook a $295 billion market cap.

------
jokoon
So many wasps buzzing around for that sweet honey. That's why you're
vulnerable if you're not careful and don't hold a law degree.

------
mark_l_watson
Wow, $300K for a director salary does not seem like much, given the
connections and experience they have.

IANAL, but that seems like a crazy lawsuit.

------
late2part
The directors only get $300k per year for serving on the BOD of Facebook? They
are worth more than that!

~~~
krapp
Not to be trite, but if they were worth more, they would be paid more.

~~~
morgante
Not necessarily. A large portion (indeed, probably a majority) of the benefit
from serving on Facebook's board comes in non-pecuniary compensation.

Everyone on Facebook's board is already quite wealthy and is not serving on
the board for the purpose of getting a salary.

------
toast0
This article was really hard to read because of bizarre font choices:

[http://imgur.com/MvCW9RP](http://imgur.com/MvCW9RP) on windows phone 8.1,
oddly the footnotes were totally fine, just everything else was missing
several pixels on the right. Can we go bad to normal fonts please?

~~~
gopowerranger
And now ... on to the topic!

~~~
brazzledazzle
Yes please. I'm aware this comment itself is contributing to the off-topic
problem but the constant avalanche of complaints about readability belong in
the comment sections and mailboxes of the sites in question.

------
orionblastar
There is a startup plan that is basically a cookie cutter plan that a lot of
startup follow.

1\. Invent new technology/software/website.

2\. Get VCs to invest in it.

3\. Sell ads on the website and use ML to target people with those ads.

4\. IPO to go public to raise up the stock price.

5\. Issue yourself a different type of stock that has different voting rights
so you retain control of your company.

6\. Keep investing new stuff for growth and sell off shares to raise more
money.

The problem is people who become CEO without ever taking a business management
class or understanding how a business or the laws that effect it work. Steve
Jobs found it hard and resigned from Apple in 1985 and had to go back to
college to learn business management to learn how to manage a company better.
It paid off when Apple merged with Next and Jobs knew how to manage Apple
better than he did in 1985.

We haven't seen Bitstock companies yet that trade on Bitcoin instead of the US
Dollar. Nobody ever thought to make a Bitstock market based on Bitcoin. You
just modify Bitcoin to issue shares of stock called Bitstock and you have
issues the company puts that Bitstock can vote on based on what type of
Bitstock it is, and then you avoid the lawsuits of signing the wrong document
because Bitstock replaces that old system with a new one. Zuck just votes with
his Bitsock on each issue and makes it official no need to sign documents
anymore.

~~~
meeper16
1\. facebook did not "invent" anything, especially compared to Google, they
copied text entry boxes and messaging, which anybody could easily duplicate
from myspace and reworked the design. Google invented something.

~~~
jliptzin
Google's products make you more efficient. Facebook's products make you less
efficient.

~~~
ascorbic
I don't know about you, but I find Facebook an extremely efficient way of
keeping up to date with my family and organising events with them. Certainly
beats long email threads trying to work out Christmas plans or group trips.
Facebook is a social network, and that's what it's good at, if only for the
reason that everyone is on it so there's none of the friction involved in
getting people to use some other tool.

