Google may have the motto "don't be evil." But it is certainly not a democracy.
On Thursday, Google's co-founders, Sergey Brin and Larry Page, announced that the Internet giant would be revamping its corporate structure. The company is creating a class of nonvoting shares that will be issued for employee stock incentive plans, acquisitions and other stock sales.
The move will allow Mr. Brin and Mr. Page to keep a tight grip on the company.
Google is proposing to have three classes of stock. Mr. Brin and Mr. Page will control the super-voting Class B stock, which have 10 votes per share and provide the two co-founders with voting control over Google. The Class B shares are convertible into the current publicly traded Class A shares, which have one vote per share and trade under the symbol Goog.
Now, Google is planning to add a separate nonvoting stock called Class C shares, which will trade publicly under a separate ticker. According to Google, Class C will have all the same rights as Class A shares including the rights to dividends, if and when Google ever pays them.
Google is doing this is so that founders can maintain control of the company.
The issuance of regular stock and sales of Class B shares by the two has diluted their interest over time. The two control only slightly more than 50 percent of the votes.
Since the Google structure was set up about a decade ago, it no longer represents the state of the art in public companies.
Zynga has a dual-class stock that gives Mark Pincus, a co-founder and the chief executive, 70 votes per share. By simple math, Mr. Pincus can sell a substantially greater number of his shares than the Google founders and still retain control of Zynga.
In fact, almost all of the recent technology companies have super-voting stock that gives some measure of control to their founders, including Facebook, LinkedIn, Groupon and Zynga. The ordinary shareholders at these companies receive regular stock, which only has one vote.
These types of dual-class share structures are often found in media and technology companies. (The New York Times has a dual share structure.) The reason, companies say, is that it allows them to focus on the long term, which can't necessarily be achieved with the short-term sway of shareholders who are more worried about quarterly profits.
In a letter on Thursday, the Google founders justified the new share class in this way, saying it would allow them to "concentrate on the long term."
Whether shareholders actually create this pressure, the potential problem with a dual-class structure is that over time executives can use this control to their advantage.
Recent examples of this include the acquisitions of Affiliated Computer Services and Delphi Financial. In both cases, executives with high vote shares arranged to pay themselves substantially more money than regular shareholders in the sale of their companies. Academic studies have also found that dual-class companies tend to pay their chief executives more and make more value-destroying acquisitions because of this freedom.
Google could not simply start from scratch.
The company went public in 2004 and it has already issued voting stock. Google cannot take these votes away. Nasdaq rules prevent so-called dual-class recapitalizations where management is issued a high vote share class and public shareholders shares get one or no votes.
These types of structures were used in the 1980s to fight off hostile takeovers. Management would adopt high vote share classes and keep this stock to ensure that the company was not forced into a sale. The Securities and Exchange Commission tried to ban these maneuvers, but a rule was struck down by the courts.
Subsequently, both Nasdaq and the New York Stock Exchange adopted a similar prohibition that applies to publicly traded companies. Google and other technology companies didn't have to adhere to this rule initially as they adopted dual-class share structures before they were public.
Instead, Google is going in a new direction and issuing this new class of no-vote shares in a dividend to all shareholders. This will give liquidity to this new class of shares until Google issues shares in a substantial number through acquisitions or to employees.
Investors who want to purchase Google shares will now have a choice. They can purchase Class A voting shares or these new Class C nonvoting ones.
We thus have two experiments occurring.
The first is whether Google's founders will get greedy or sloppy down the road and abuse their control to their own advantage and the detriment of shareholders. So far, they have not taken actions like this, so there is hope that they have good intentions.
The real fear, though, may be the knock-on effects. Other companies with less-benevolent founders will now just simply adopt voting and nonvoting share classes. In other words, the problem with this share issuance may not be Google, but Google's followers.
The second experiment is whether shareholders really care about having a vote.
Initially, shareholders might not value the stock classes different. After all, control will remain with Google's founders and so the votes are not worth very much. Over time, this may change if a big investor wants to take a sizable stake.
It may very well be that Google' share structure has an unintended consequence – proving the value (or not) of the shareholder vote.
In the meantime, one thing is certain. The clear trend in technology companies is to deny shareholders this choice and a real vote. In other words, expect more Google followers.
Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the world of mergers and acquisitions.
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