By Deepa Seetharaman
Facebook Inc.'s move to change its capital structure was tainted
by secret text messages and meddling from financial advisers that
pointed to a process rife with conflicts of interest, according to
investor lawsuits filed in Delaware.
Late last summer, Chief Executive Mark Zuckerberg asked the
board to approve a plan to create a new class of nonvoting shares
that would allow him to maintain control of the company he
co-founded. The board formed a three-person special committee
tasked with assessing the capital plan.
Morgan Stanley, which advised Facebook, appeared to pull the
strings behind the scenes by convincing the board's advisers to
water down parts of the plan that would have been unfavorable to
Mr. Zuckerberg, according to court documents filed by the
plaintiffs.
Meanwhile, longtime Facebook director Marc Andreessen, who
served on the special committee, was privately coaching Mr.
Zuckerberg by text message on how to win over the other two
directors, according to court documents. In one instance, Mr.
Andreessen texted Mr. Zuckerberg during a March meeting of the
special committee with progress reports. "NOW WE'RE COOKING WITH
GAS," Mr. Andreessen wrote.
The capital plan was approved by the eight-member board in
April.
The lawsuits allege a web of entangled interests at Facebook and
the covert dealings that allowed Mr. Zuckerberg to cement his
control over the company. The board showed "stunning" disloyalty to
shareholders in approving a plan that would diminish shareholders'
say, investors said in court documents, which were first reported
by Bloomberg.
The suits were filed in the spring, and later bundled into one
by the Delaware Chancery Court. The documents were unsealed
recently.
"It is clear that the process surrounding the reclassification
was rife with actual, acted-upon conflicts of interest," according
to the investor lawsuit, which said "virtually every aspect of the
process was tainted."
Representatives for Mr. Andreessen and Morgan Stanley declined
to comment. "Facebook is confident that the special committee
engaged in a thorough and fair process to negotiate a proposal in
the best interests of Facebook and its shareholders," a Facebook
spokeswoman said. Mr. Zuckerberg declined to comment through a
spokeswoman.
In August 2015, Mr. Zuckerberg told the board of his plans to
give away 99% of his wealth to the Chan Zuckerberg Initiative LLC,
a for-profit entity he created with his wife to donate to
nonprofits and make private investments toward causes such as
curing disease and education. He proposed a plan to overhaul
Facebook's capital structure so he could keep his majority voting
rights, according to court filings.
The special committee Facebook's board formed to study its
options was made up of the three board members deemed by directors
to have the fewest potential conflicts of interest: Mr. Andreessen,
a well-known venture capitalist; Susan Desmond-Hellmann, chief
executive of the Bill and Melinda Gates Foundation; and Erskine
Bowles, a former White House official and president emeritus of the
University of North Carolina.
Initially, the committee considered hiring Morgan Stanley as its
adviser but opted not to because Mr. Bowles is a director on the
bank's board, according to court documents. The committee ended up
hiring Evercore Group LLC as its banker and Wachtell, Lipton, Rosen
& Katz as its legal counsel. Morgan Stanley switched to
providing advice to Mr. Zuckerberg's senior advisers, the lawsuit
says.
Yet Morgan Stanley still was able to influence the committee's
discussions in a way that favored Mr. Zuckerberg, according to the
lawsuit. The bank urged Evercore and Wachtell to use as a blueprint
a similar creation of nonvoting shares by Google parent Alphabet
Inc. in 2014, according to the lawsuit.
Evercore removed portions of its presentation to the committee
that "would have facilitated robust Committee negotiations with
Zuckerberg" at the urging of Wachtell and Morgan Stanley, according
a plaintiffs' brief. Evercore scrapped its conclusion that
investors would place a higher value on voting shares over
nonvoting shares after a call with Morgan Stanley and Wachtell in
which Morgan Stanley pushed back, court documents say.
Wachtell Lipton declined to comment. Evercore didn't respond to
a request for comment.
According to court documents, Morgan Stanley Managing Director
Michael Grimes said the bank "landed in the right spot with the
company" and was happy to have "volunteered" advice to Mr.
Zuckerberg. "[T]he more we add value we could decide token fee a la
goog [sic] but we wait to consider later," the bank wrote,
referring to its advising of Google, according to the lawsuit.
Morgan Stanley ultimately was paid $2 million for advice, a
proxy filing shows. Evercore was paid $2.5 million, according to
the proxy filing. It wasn't clear what Wachtell was paid.
Throughout the special committee's deliberations, Mr. Andreessen
kept in touch with Mr. Zuckerberg, assuring him that the
negotiations were "all intended to protect the company and you
personally," according to text messages included in the court
documents.
In later text messages, Mr. Andreessen conveyed that the
"biggest issue" was Mr. Zuckerberg's desire to be able to go into
government service for two years without losing control of
Facebook.
"Erskine is just massively uncomfortable with you getting to low
economic ownership and then going off on leave with no involvement
by the board and retaining control," Mr. Andreessen wrote. "I'm
going to try to drag it over the line one more time."
The government service provision was approved and laid out in
Facebook's proxy earlier this year.
Ms. Desmond-Hellmann, chair of the committee, and Mr. Bowles
didn't reply to requests for comment.
On April 14, the committee agreed to approve the plan. "The
cat's in the bag and the bag's in the river," Mr. Andreessen wrote.
"Does that mean the cat's dead?" Mr. Zuckerberg asked. "Mission
accomplished," Mr. Andreessen replied with a smiley-face
emoticon.
Each director on the special committee was paid $20,000 for his
or her work. The board's compensation committee, which also
includes Mr. Andreessen, approved the payment, according to a proxy
filing.
The capital plan was approved by shareholders in June. The
outcome was no surprise, as Mr. Zuckerberg held majority voting
power.
Write to Deepa Seetharaman at Deepa.Seetharaman@wsj.com
(END) Dow Jones Newswires
December 10, 2016 02:47 ET (07:47 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
Morgan Stanley (NYSE:MS)
Historical Stock Chart
From Sep 2024 to Oct 2024
Morgan Stanley (NYSE:MS)
Historical Stock Chart
From Oct 2023 to Oct 2024