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Comment by vineyardmike | Hacker News Reader

> I get throwing in a little extra to shield executives, but $5 billion?

If i had singular control of a company the size of FB and the ability to spend it's money to avoid any sort of liability, i'd take the offer too.

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There's still a myth floating around that companies are legally obligated to make the maximum amount of profit for shareholders.

https://skeptics.stackexchange.com/questions/8146/are-u-s-co...

There’s a pretty big difference between “companies don’t have to seek maximum return for shareholders” and “companies can spend billions of dollars to prevent their executives from being personally liable”.

I reckon FB share price would dip more than $5Billion of Zuck got deposed.

I don't agree that they should be allowed do this, but it seems like the obvious move if they can get away with it - for shareholder value as well.

It's in the bylaws of the corporation typically. Feduce duty lawsuits are very common and it certainly isn't a "myth".

The myth part is that fiduciary duty != maximizing profits. There’s no quantity that you have to take a maximum of. You can’t spend the shareholder’s money on things that can’t be justified as business expenses, but that doesn’t keep companies from buying corporate jets or spending money on high-end travel. Or even just paying people more than they’re worth. Who’s to say what they’re worth?

This is a special case where saying “business judgement rule” might not be enough to get Facebook out of trouble, though I’m sure Facebook’s lawyers will dispute that.

Within some constraints you can put whatever you want in your corporation's bylaws when you found it, including a directive not to make a profit should you so choose.

Can you give an example of a company with it their bylaws? I’ve never seen it, and Facebook doesn’t.

https://s21.q4cdn.com/399680738/files/doc_downloads/governan...

It's absolutely not typically in the bylaws of corporations, that they must seek to optimize for profit. The parent comment dances around the language of the premise. It's extraordinarily rare to put anything remotely close to that in the bylaws, because it's a super dumb way to set yourself up for entirely unnecessary legal problems in the future.

The lawsuits may happen, however they also almost never win.

It isn't necessarily in the bylaws, it comes with being a director of a Delaware corporation.

https://corpgov.law.harvard.edu/2020/03/10/directors-fiducia...

Profit isnt even mentioned there. Which paragraph were you referring to?

Also, paying $5B to bail out your CEO and focusing on maximizing long term shareholder returns are far from mutually exclusive. Shareholders should be looking beyond a quarterly earnings report

Zuckerberg is the majority shareholder.

No he’s only the majority of the voting shares

That makes him (effectively) the majority shareholder. If you can't vote (or your vote is effectively meaningless) then you don't have ownership and your shares are just a loan with wildly variable interest.

It's not that clear cut. If you can prove in court that the majority shareholders are acting to the detriment of minority shareholders, that's actionable. See Dodge v. Ford (https://en.wikipedia.org/wiki/Dodge_v._Ford_Motor_Co.) The majority gets control over the vote but that doesn't mean they can freely screw over minority shareholders. If an environmental activist organization somehow managed to buy a majority stake in Shell, they couldn't just vote to pump it all back in the ground, cap it, and wait for bankruptcy. They could however decide to trade financial assets with the innovative strategy of "buy high, sell low" so long as you couldn't prove they were making terrible decisions with intent to screw over the rest of the shareholders.

> If you can prove in court that the majority shareholders are acting to the detriment of minority shareholders, that's actionable.

Interesting. Thanks!

that's quite a stretch. There's a massive difference in an equity investment and a debt investment regardless of giving up voting rights. Let's be real, even voting rights in 99% of SPX companies don't mean anything. It's a representative democracy, shareholders only vote on the very, very biggest decisions in public companies, like "should we accept this merger". In every single SPX company you invest in, you are effectively giving up control of 99% of decisions to the executives and those under them at the company, regardless of whether your shares are class A or C

You’re effectively saying that representative democracy is a sham.

Zuck has set up the share structure so that even if all the other shareholders collectivised to move against him on *any* issue he’d still have his way. That’s a dictatorship.

I've been told more than once by my employer that "this is not a democracy". They meant that staff can have opinions, but don't get to vote; they weren't talking about shareholders. But AFAIA, stockholder corporations are not supposed to be democracies - FSVO "democracy".

Investors in Faceache get no dividends; the only reason they're there is to speculate on the value of their stock. With no dividends, there's no reason for stockholders to worry about profits. They just want to see the share-price increase.

I dunno, I'm not an investor. The last two decades are littered with the corpses of social networking firms that failed. I imagine Faceache must own assets, in the form of IP and so on; I doubt their value comes anywhere close to the company's market valuation.

That valuation is suspended from the fickle thread of shareholder sentiment; so on my reading, Faceache shares amount to a bubble.

I should have said it's a representative aristocracy for the shareholders, as when you do get a vote, your vote is obviously weighted by how many shares you have and not equally. However, whether you have 1 share or 100,000 shares of public company X, your day to day involvement is still essentially equal at 0 unless you are an executive or on the board.

Although the preferred stock holders get paid before Zuck and co.

Preferred stockholders (get paid first but can't vote) and common stock (can vote) are normal; the tech innovation is multiple classes of shares so that they get the benefits of an IPO without risking loss of control. Without that, Zuck would have waited as long as possible to list because once he loses control he loses the ability to spend company money on himself. Which he's breaking the law by doing; hence this suit.

Ah, but if Mark Zuckerberg is the majority shareholder, isn't spending an obscene amount of money to keep him from facing liability actually in the best interest of... the majority of your shareholders?

Was he at the time? Majority requires 50%+ ownership and not just voting power, right?

Voting power.

yep

It’s a hell of an upsell, though. That’s 50 times the initial price. Zuckerberg must have been really worried, or really, really unwilling to take any personal risk.

> That’s 50 times the initial price.

There is no limit of someone else's money i'd spend - repercussion free - to avoid the slightest bit of liability. I can imagine the same thing applies to Mark. tbh can't fault him for it.

The blame for this behavior lies in the FTC for brokering a deal (as if the US needed money? Was it for a big-number press cycle?) and for early stage investors in FB for allowing a business with such a brass stock agreement.

Oh in point of fact this was illegal if it's true, and I don't know how you ignore the law in who you can "fault" with respect to corporate officer conduct.

But he personally has a controlling stake in the company, it’s like at least half his money in some sense.

> Zuckerberg must have been really worried, or really, really unwilling to take any personal risk.

I’m not so sure. If you asked a random person if they could wash the dishes, or not do them but someone other person would have to pay 5 billion dollars, what would the result be?

Depends on whether or not they're psychopathic enough to be CEO material.

I feel like these figures -- 50x and $5B -- are good things for people to keep in mind next time their company asks them for uncompensated self-sacrifice.

I'm sorry guys - we're unable to offer a CoL adjustment or performance raises this year. We really wish we could but the CEO just mauled a few pedestrians in his lambo.

The marginal utility of $5b of facebook’s money to Zuck is very low, but the cost of even a low chance of serious personal liability is high.

Guessing he had a few people fired from their 100k jobs for only generating a mil in profits for the company and thus being a drag on the metrics.

Zuckerberg is worth $130 billion.

And this $5 billion isn't even his money; it's the company's.

or is just really rich. perspectives are different at that scale.

if he has the ability to make fb pay for it why not?

It's just like me not giving a second thought to getting in my car, driving down to the market that's 1.5 blocks away to pick up some eggs. When I didn't have money, didn't have a car, that was unbelievable to me. But now it's just second nature.

To people with wealth at that scale, hundred million vs single digit billion might not be such a big deal. (I mean it's one order of magnitude to go from x00 million to y billion, so it's not that far fetched for a rich person to take that as is)

The real discussion should be why the fine was so low and wasn't in the hundreds of billion to trillion range in the first place. That's the real steal.

Minority shareholders aren't just supposed to be along for whatever frolic you whimsically decide to send them on.

Are they not? It's not exactly a secret he has full control.

They can sue him if they feel that he abused his position as executive or majority shareholder.

How did he get and maintain full control?

What are other startups / companies where the founder is in full control?

Is it possible, as a founder, to maintain complete control of the board and the company through Series A - E ?

I've seen several short answers on this in other threads, but I want to know more about this.

Some info here: https://www.latimes.com/business/hiltzik/la-fi-hiltzik-mark-... but the gist of how he controls it is pretty simple:

"Zuckerberg owns or controls 88.1% of Facebook’s Class B shares, which each have 10 votes at the annual meeting — 3.98 billion votes overall. There are only 2.4 billion Class A shares, which are the only shares ordinary investors can buy. So any proposal Zuckerberg doesn’t like will fail by nearly a 2-1 margin, assuming all Class A investors vote together, which never happens. (Zuckerberg owns 0.5% of the Class A shares.)"

Clearly all throughout the funding rounds he made sure he controlled the shares that mattered.

Facebook has two types of stock. Class A and Class B. Class B stock gets 10 votes per share, while Class A stock gets 1 vote.

Zuckerberg and other very early people had Class B stock so they can continue to have more than 50% of the vote even when they own less than 50% of the stock.

This was a really popular stock structure in Silicon Valley for a while because it cements founders in control - Evan Siegel at Snap has the same deal, and Adam Neumann at WeWork was about to do it. But now there's a lot of push back against it, and some indexes like the S&P 500 refuse to list new stocks with this dual class structure.

Class A $SNAP have no voting rights.

why just new ones? delist the old ones.

Hard to delist Facebook and Alphabet.

Note that the S%P doesn't have the power to delist stocks. They can drop them from their index (which certainly would cause some reputational harm and probably lower the stock price a bit, at least temporarily), but FB will continue to trade on Nasdaq.

> How did he get and maintain full control?

It's his company. When you make the company and give out shares, just get the lawyers to agree to allow you to keep control. Its just legal documents. If you have a good startup VCs and angels may be willing to give you better terms.

> Is it possible, as a founder, to maintain complete control of the board and the company through Series A - E ?

Sure. I've noticed several company IPO announcements on HN lately included the founder-control shares in their IPO prospectus, so it can't be too unique.

The way they do this is by having share classes. Eg Class A shares each gets x% of company and y% of votes. Class B shares get X% of company and [Y/20]% (or 0 sometimes) of votes. The 1/20 is arbitraty btw, it can be any ratio. Sometimes i see A, B, C shares where A is founder/vc tier with extra votes, B is "regular" with smaller votes, and C is no-vote shares, and often C is sold through IPOs into the exchanges.

I have no data on how common these different schemes are, but they're things ive seen in HN-announced start-ups and IPOs in the last year, so take that as anecdotal.

It honestly just comes down to a question of what the investors will let you get away with - if you're viewed as incompetent but sitting on a golden goose investors will push to dis-empower you as much as possible whenever you come knocking for emergency funds. If the company is successful and just seeking some marginal funding that could, alternatively, be secured by bank loans... then you've not given them as much leverage to work with.

Of course it's posssible for a founder to maintain complete control through those rounds. You just have to convince the investors to do the deal on terms that leave you in control. Nothing illegal about that.

And the investors here are very sophisticated venture capitalists. They understand very well what deals look like, and risks, and whatever else. Probably better than the founders themselves.

And they wanted in badly enough that they were willing to sign on terms that kept Zuck in control. And that decision made them very, very, obscenely, filthy, rich. Not a bad investment decision at all.

Minority shareholders do have rights, but keeping control as a founder is easy if the VCs want in badly enough. With facebook, they did.

He maintained full control by growing the value of Facebook so quickly and with so little capital that he could raise financing at astronomically low dilutions.

Not to mention the "minority" shareholders are only minority in voting rights, not minority in shares owned. The multi-class share system is designed to enable exactly this kind of executive behavior, where even a broad shareholder revolt isn't enough.

But in this case the Facebook board (which has a fiduciary duty to the company, not to Zuck) paid $5B when the BATNA had them pay $100M. The extra money bought the company nothing; the only benefits were to Zuck and Sandberg personally, which makes the $4.9B undeclared income -- if they didn't disclose it as part of their compensation on the relevant SEC documents and W2s, it's tax and securities fraud. And hence this lawsuit.

It seems pretty clear that the company considered avoiding depositions of Zuckerberg and Sandberg to not be worth $0.

Queue the shareholder lawsuit.

USA is home of justice to the highest bidder.

Er, yes. The topic of the linked article - the reason that this is coming to light in the news now - is indeed, that a shareholder lawsuit has been brought against them (Zuckerberg, Sandberg, etc are named defendants and the company is nominal defendant). Direct link, from the article: https://655e71e2-f98d-40e9-822b-081bc894b6af.filesusr.com/ug...

Also, lawsuits aren't just raw competitions between two entities about who is willing to spend the most.

Cue*

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