Understanding Facebook’s Stock Restructuring

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This week Facebook announced that it will introduce a new version (or “class”) of its stock. It will essentially be doing a 3-for-1 split, with Facebook stockholders getting two shares of the new version for every one share of the old version that they own. Why would Facebook go through these kinds of financial contortions? And what are the implications for investors?

The purpose of the change is to allow Facebook founder Mark Zuckerberg to retain control of the company. Ordinarily when someone owns a stock, the financial investment comes with the right to vote on issues such as who should be on the company’s board of directors. As companies issue more shares of stock over time—perhaps to give stock grants to their employees or fund acquisitions of other companies—the voting power of their founders decreases.

Zuckerberg was especially at risk of losing voting control because he has pledged to donate most of his Facebook stock to charity. But because the new class of Facebook stock won’t have voting rights, he’ll now be able to sell it without losing voting power. This idea was also the impetus behind Google’s very similar move in 2014.

While Facebook’s stock restructuring clearly makes sense for Zuckerberg, it may not be so good for other investors. The reason stock typically comes with voting rights is to try to ensure that a company’s leadership is working in the shareholders’ best interest. With a smaller financial stake in Facebook once he’s given most of his stock to charity, Zuckerberg might be incentivized to make decisions (for reasons such as enhancing his reputation) that hurt shareholders rather than help them.

The counter-argument is that by not having to worry about losing control of Facebook to activist investors who may be too focused on the short term, Zuckerberg will be able to stay focused on the company’s long-term goals. Given his history of bold and (in hindsight) financially shrewd moves such as the purchase of Instagram in 2012, investors might be willing to give Facebook’s founder the benefit of the doubt.