Facebook Stock Split: What You Need to Know

Mark Zuckerberg at F8. Image source: Facebook.

There's been a rising trend among Silicon Valley tech companies in recent years to implement multiple share classes as a way for insiders to retain control over the company. This isn't particularly new, but it has become more popular in the past decade.

Search giant Alphabet is among the most prominent names that have helped popularize the trend. It makes a little bit more sense for Alphabet considering its penchant for investing heavily in experimentation. It wouldn't be misplaced to loosely consider Alphabet a search company with a side of venture capital.

Social networker Facebook now wants to follow in Alphabet's footsteps.

Facebook's current class structureThe company has always had a dual class structure: Class A and Class B. Class A shares are entitled to one vote per share. Supervoting Class B shares are entitled to 10 votes per share. Since only company insiders are able to hold Class B shares, the effect is that voting control is heavily concentrated and maintained within the company.

As of April 25, 2016, there were 2.31 billion Class A shares outstanding and 548.4 million Class B shares outstanding.

More specifically, Mark Zuckerberg single-handedly controls approximately 60% of Facebook's voting power through his Class B holdings.

What Facebook is proposingThe shareholder proposal that Facebook will present at its upcoming annual meeting would introduce yet another class to the mix: Class C shares. These Class C shares would have the same economic rights as Class A and Class B, but would be a non-voting class of capital stock.

The Class C shares would be paid out as a stock dividend, with existing Class A shareholders receiving an additional two Class C shares for every one Class A share held -- effectively a 3:1 stock split as far as the share price is concerned.

Why Facebook wants to do thisFacebook notes that this would not have any immediate impact on voting interests that current investors hold; existing Class A shareholders have always had one vote per share, and receiving additional non-voting shares does not change that.

In December following the birth of their daughter, Mark Zuckerberg and his wife Priscilla Chan pledged to donate 99% of their Facebook holdings throughout their lifetime. They created a new LLC specifically for this purpose, the Chan Zuckerberg Initiative. The use of an LLC instead of a charitable trust or foundation drew some criticisms, since there will technically be less transparency. The Chan Zuckerberg Initiative will primarily be funded by Facebook shares that the couple donates. As the couple donates Class B shares, they convert to Class A shares.

Creating the Class C shares will allow Zuckerberg to confidently continue donating shares to the LLC without risking losing majority control of Facebook.

Can you stop it?While the proposal will technically be put up for shareholders to vote on, due to the already-existing dual-class structure public investors have no real recourse to stop it. As mentioned above, Zuckerberg's 60% voting power allows him to pass this proposal single-handedly.

This tri-class structure is incrementally less shareholder friendly, but it doesn't represent a meaningful change in terms of investors' overall ability to enact change at Facebook. Like Alphabet investors, Facebook investors have never had much say in how the company is run due to consolidated control.

The only comfort for shareholders is that Facebook has done quite well under Zuckerberg's leadership and control so far, so they can only hope that continues.

The article Facebook Stock Split: What You Need to Know originally appeared on Fool.com.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Evan Niu, CFA owns shares of Facebook. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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