Don’t be(gin) evil
Google shareholders are getting some modest future-proofing. A novel deal protects owners of the company’s non-voting stock against a discount – and from the day when founders Larry Page and Sergey Brin no longer wield full control. The convoluted legal settlement, however, only goes to show it’s better to avoid a shareholder caste system in the first place.
Shareholders opposed the $300 billion web search giant’s plan to issue non-voting stock. They argued that Page and Brin, who already hold super-voting Class B stock, would become even more entrenched if Google started issuing non-voting C shares rather than standard voting A shares.
Facebook, Zynga and Groupon are among the other technology companies boasting classes of shares with different voting rights. There’s a case for protecting the autonomy of founders up to a point, but a misalignment of economic and voting interests can cause trouble. Big valuation gaps sometimes open up. Non-voting stock in both Rupert Murdoch’s News Corp and Sumner Redstone’s Viacom has on occasion traded at least 20 percent below the price of voting shares.
The Google solution, agreed just before the case went to trial, involves a five-step sliding scale. Starting at a 1 percent discount, Class C holders will be compensated in cash or stock for part or all of the gap, up to a 5 percent discount. That turns out to be coincidentally on a par with the long-term discount at Telus, a Canadian telecoms group where an ultimately successful plan to merge voting and non-voting shares met resistance last year from hedge fund Mason Capital Management.
Moreover, if Brin and Page, who control well over half Google’s voting power, sell down to below 15 percent of the votes, there’s a provision in the deal encouraging the board to convert C shares into voting A shares. That makes sense looking ahead to a time when the founders hold less sway and the votes of ordinary shareholders really count.
With a behemoth like Google involved, other companies with different voting classes might follow a similar template, assuming the settlement is approved by the Delaware court. But the fact is, it’s a messy solution for a problem that needn’t exist in the first place. As they establish their capital structures, companies should just stick to one share, one vote.