Facebook Stock Split: Everything You Need to Know

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"Hold up. Wasn't Facebook (NASDAQ: FB) going to split its stock?"

It's a fair question. And it deserves some fresh analysis.

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Facebook's stock split was approved a while ago. Indeed, it was the summer of 2016 when shareholders approved the board's proposal to split its stock and subsequently issue a new Class C stock in the form of a one-time stock dividend. The planned stock split was part of an effort to help CEO Mark Zuckerberg keep controlling voting rights as he and his wife, Dr. Priscilla Chan, embark on a journey to give away 99% of their wealth.

Here's everything you need to know about Facebook's stock split.

Facebook's stock split explained

Facebook's proposed stock split isn't representative of the typical stock splits investors are used to. Normally, stock splits simply divide the total economic value of a share into multiple, lower-priced shares, which together total the same amount as the original share. But this is different.

In order to preserve Zuckerberg's voting rights as he gives away wealth by selling Facebook stock, Facebook's board of directors approved a proposal to create a new class of stock. Zuckerberg explained the reasoning behind the split in an April 2016 blog post about the new share class:

The technicalities of the stock split include a one-time dividend of two new nonvoting Class C shares for each Facebook share currently held. Today, most Facebook shareholders own Class A shares; Facebook insiders own Class B shares, which have 10 times the voting rights that Class A shares have. Both Class A shareholders and Class B shareholders will each receive a one-time stock dividend of two Class C shares.

At the time of the split, the new stock classes will have no impact on voting rights for outsiders or insiders. But as Zuckerberg and his wife give away 99% of their Facebook holdings during their lives, their donated Class B shares can be converted to Class A shares, protecting their founder control.

As summed up by Facebook, the stock split "will allow Facebook to maintain and improve upon the structure that has served shareholders well, while also enabling Mark to pursue his important goals through the Chan Zuckerberg Initiative."

Investors can view more details about Facebook's stock split in Facebook's U.S. Securities and Exchange Commission filing regarding the split.

Investor takeaways

Here are some of the most important things investors should understand about the split.

1. Investors will own three shares for every one previously owned. After two Class C shares are paid out as a stock dividend as part of the approved stock split, Facebook investors will own one Class A Facebook share and two Class C Facebook shares. The total value of these three shares will equal what a single class A share was worth before.

The split, therefore, will look somewhat like a typical 3-to-1 stock split, except that two shares will be a new, non-voting class with a different ticker symbol.

2. The stock split will not be a taxable event. Although new Class C shares are called "stock dividends," there will be no cash payments involved, and this is not a taxable event. But Facebook does advise shareholders to discuss the stock dividends with their accountants or financial advisors.

3. A lower stock price won't make Facebook a better investment. While the 3-to-1 stock split will value all new shares at a third of what Class A shares used to trade at, this doesn't mean the stocks will have more upside potential; a stock split does not change a company's market capitalization. The company will still be judged by the same metrics.

4. Facebook likely won't wait too long to split its stock. Without this stock split, Zuckerberg and his wife's donations of Facebook shares will put their controlling voting rights at greater risk. So, though Facebook has been mute about when the split will occur, it will likely happen in the near future. But as of yet, there's no set date.

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Daniel Sparks owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.