Mark Zuckerberg Signed the Wrong Document
bloombergview.com
bloombergview.com
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-...
"Bill Lerach, the former #1 enemy of corrupted corporations. He may not have acted out of personal values but at least for a while corporations had the fear in the back of their minds that if they were going to act unethically it might cost them millions of dollars in security class actions and corporate derivative suits. Where as now they are able to act in a fraudulent manner without fear of consequences. Larach is the most sincere lawyer I have ever seen. He also seems like a really likable guy."
I'm unsure what to believe now, though I don't feel signing the wrong paper by accident is evidence of a "corrupted corporation". Of course, could also be the youtube commment was very sarcastic.
Why do you feel the need to point out how much Mr. Lerach earns or is worth in your discussion? What is the relevance?
You realize the Facebook Board of Directors has 8 billionaires on it, right?
As to the greed factor, he invented plaintiffs in 150 cases - in fact he used the same paid plaintiff in over 70 cases. He knew he was breaking the law by doing this and simply didn't care because there was money to be made. In the video I referenced, it explains that he was only caught because it just so happened that this particular plaintiff got caught in a $17 million insurance scam involving the staged theft of some rare art. When he was caught, he rolled over on Lerach.
He employed criminals to extort companies and made hundreds of millions of dollars doing it. His actions were seen as so repugnant that the federal government passed a tort reform law that many Congressional staffers referred to as the "Get Lerach Act," although the law unintentionally added jet fuel to his business. The whole thing just smacks of seedy, greedy criminals (Lerach among them) that were out to soak companies for every dime they could get.
Can you really "extort" money through the court system in the US?
We might think of it, feel that it is or fully believe that it is extortion, but the Government feels that this is okay because "Fuck what we think. Lobbyists said this is fair, so it must be so." <end of cynical rant />
> 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.
It was likely a clerical error, in this instance. But that was only after discovered after the law suit. Should we give these corporate boards the benefit of the doubt? That's funny.
>by creating exactly these kinds of nonsensical shareholder lawsuits against public companies
It isn't "non-sensical".
There are rules and laws that govern public companies, and public companies are obligated to follow them. Someone has to keep people honest, and in the US that's often done through the courts.
I'm sure Facebook and Mr. Zuckerberg will learn a lesson to be more diligent in such matters. That's the point.
The point is to be awarded millions of dollars in legal fees, which they will undoubtedly receive.
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.
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
If you're an investor in Google, you're betting either someone will buy the stock higher from you in the future or they will eventually pay dividends when growth slows.
Here's a discussion on an internet forum on the topic [1].
[1]http://money.stackexchange.com/questions/51976/if-a-stock-do...
If any company's stock is trading too low, you could take a loan and buy out the company using its own profit to pay the loan. So you would expect the stock price to track profits, even if existing shareholders are only in it waiting for a buyout.
That idea ensures the stock is valued somewhat accurately(say, within 35% of the 'true' value on the private market), but I wouldn't think it ensures that the market prices are tight down to the cent.
Besides, Apple started paying dividends again back in 2012.
Most shareholders in a big company don't have any where near enough stock to vote meaningfully. And most companies don't pay dividends with and regularity (or ever, for the most part). When dividends are paid, I'd bet that they're isolated and small - not enough to justify the price of the stock.
Is there some other mechanism that actually _links_ a company's real worth with its stock prices? If I owned 1% of Google, could I just walk in and demand to exchange my stock for 1% of the company's current assets?
So, in an event where Mark passes away, decides to sell, etc, then the rest of the shares will have more voting power, relatively.
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.
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.
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...
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.
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?
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.
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.
I think the SEC should be much harder on this gaming of the system its undemocratic and is not in the publics best interest.
It doesn't mean that the non (or lesser) voting shares are priced wrong; in fact, by definition, they are priced at what the market values them.
Also, different classes of shares aren't exactly 'new' or 'unusual'. http://www.slideshare.net/nimishhalkar/a-brief-history-of-pr... claims that the first preferential shares were issued in 1836 (yes, it's a different kind of 'preferential' than what we're talking about, but it's still a species of the genus 'share differentiation') E.g. they're a very common vehicle for structuring profit sharing in several civil law jurisdictions I happen to know of.
The parenthetical in my original comment was important. If everyone thinks they know what is going on, and they're all wrong, then the price isn't a good reflection of reality.
If he's annoyed about it, there will be a new job opening in the Facebook legal department.
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?
Notice the words "fully-informed disinterested majority." Even if Zuckerberg had formally voted for the pay packages, shareholders could have claimed that he wasn't fully informed or disinterested in his vote, and then Facebook would have had to litigate that.
The legal opinion is fairly easy to read and I think will answer some of your questions: http://courts.delaware.gov/opinions/download.aspx?ID=231620
On page 16, why do these formalities matter at all?
"This Court has recognized more broadly that, “[b]ecause Section 228 permits immediate action without prior notice to minority stockholders, the statute involves great potential for mischief and its requirements must be strictly complied with if any semblance of corporate order is to be maintained.”"
And then on page 33: "If Zuckerberg does not need to provide written consents to ratify the 2013 Compensation, why require written consents for any other action he takes? Such a regime would essentially negate most requirements under Delaware law to notify stockholders of meaningful events."
I still think this lawsuit is stupid, but it goes a little deeper than "rules are rules". And I think the problem is not really that he "signed the wrong document" like the article implies, but that he didn't sign any document at all to notify the shareholders and indicate their approval.
Sure, the rule is harsh, but there's an upside. You can look at a corporate doc and know right away whether it's sufficient. No debate. It's either 100% correct, or else it doesn't pass muster.
On balance, is it a good rule? I don't know! It's just one way to write a rule, and there are some upsides (certainty) and downsides (harsh results for a clerical error).
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.
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.
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.
If he would have kept >50%, everything would be fine.
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.
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?
Definitely not an insignificant cost for small companies, especially when you factor in the enormous management overhead
While traditionally this is the purpose of IPO's and secondary stock issuances, if you look at corporate financing in 2015, this has become such a miniscule percentage of how capital is raised, even for public companies, that it is almost irrelevant. So the standard reason given for a stock issuance, raising money, is really no longer the reason for stock issuance.
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.
"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...
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.
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.
IANAL, but that seems like a crazy lawsuit.
Everyone on Facebook's board is already quite wealthy and is not serving on the board for the purpose of getting a salary.
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?
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.
Are we really going to describe these things as "innovations"?
You have to be intensely desperate to list these two trivialities as innovations.
I personally think that limiting the early user base to elite universities was the more important innovation for Facebook’s success. It allowed them to control their growth while creating an “aspirational” platform that could be scaled out later. I am surprised that more companies haven’t tried the same approach - it would be hard to do now, but the value in targeting this community is still there.