Google Inc (NASDAQ:GOOG)’s recent stock settlement will perpetuate the co-founders’ control and won’t help much for shareholders’ causes.
Steven M. Davidoff of Dealbook terms the settlement an "odd-one" and stretches the laws of corporate finance.
Genesis Of The Case
While going public in 2004, Google Inc (NASDAQ:GOOG) had a dual-class structure. Google’s co-founders Mr. Brin and Mr. Page were issued Class B shares with 10 votes apiece, while public shareholders received Class A shares with only one vote. The idea of dual-class structure was to ensure that co-founders continue to keep control over the company despite not owning a majority holding in Google.
However, over a period of time, Google Inc (NASDAQ:GOOG) issued more Class A stock while the two co-founders have sold Class B shares, making them vulnerable to losing control over the search-engine giant.
Hence, the co-founders approached Google's board to issue new non-voting Class C shares to retain control over the company. Though Google’s board approved the proposal, it was rejected by the shareholders carrying support only from about 12.7 percent of Google’s Class A shareholders.
A shareholder class-action lawsuit was filed in Delaware Chancery Court arguing the directors were in conflict while deciding to issue Class C stock, as their jobs required continuous goodwill from the co-founders.
However, on the eve of the trial, Google Inc (NASDAQ:GOOG) and the lawyers representing the plaintiffs settled.
Steven M. Davidoff feels the stock settlement is a financial puzzle. The settlement requires Google Inc (NASDAQ:GOOG) to pay a certain percentage of the difference in the price of the Class C shares and Class A shares after one year, with the amount capped at a difference of 5 percent.
Steven M. Davidoff of Dealbook points out the odd settlement would perpetuate the co-founders’ control and hence stretch the laws of corporate finance. He feels the settlement doesn’t make clear what, if any, value it gives to Google shareholders.
Delaware Court Hearing October 28
Steven M. Davidoff feels the question now is whether the Delaware court will approve the stock settlement at an upcoming hearing scheduled for October 28. Steven notes it is extremely rare for a Delaware court to reject a proposed settlement.
Steven M. Davidoff doubts whether despite obtaining shareholders’ approval, the co-founders of Google would pay for Class C stock, as it clearly offers them some privileges.