Facebook’s plans to issue new Class C stock have received a setback. A shareholder opposing it claims the move is unfair because it entrenches Chief Executive Mark Zuckerberg as controlling shareholder. To stop the company from creating this new class of stock, the shareholder filed a proposed class-action lawsuit.
Facebook should have bargained with Zuckerberg
On Friday, the shareholder filed the lawsuit in the Delaware Court of Chancery following Facebook’s announcement about issuing the shares, says Reuters. In December, Zuckerberg revealed his intentions of putting 99% of his Facebook shares into a new philanthropy project that will focus on human potential and equality.
The lawsuit claims that before approving the share deal, the Facebook board committee should have bargained hard with Zuckerberg “to obtain anything of meaningful value” in exchange for granting added control to him. The social networking giant claims that the new plan will benefit not just the company but all stockholders as well and that the key to its future success is keeping Zuckerberg at the helm.
“Zuckerberg wishes to retain this power, while selling off large amounts of his stockholdings, and reaping billions of dollars in proceeds. The issuance of the Class C stock will, in effect, have the same effect as a grant to Zuckerberg of billions of dollars in equity, for which he will pay nothing,” the lawsuit said.
Facebook is planning to create a new class of shareholders which will be publicly listed but will not have any voting rights. For each outstanding Class A and Class B share that shareholders are holding, the company will issue two Class C shares. The new Class C shares will be traded publicly under a new symbol.
In 2013, Google settled a lawsuit just before the trial to clear the way for the company to carry out similar plans.
Price target raised
It appears that the lawsuit will not affect the stock as yesterday, Jim Cramer and AAP Research Director Jack Mohr upped their price target for Facebook to $145 from $130.
“Our new valuation of $145 a share reflects about 30x next year’s EPS (we view $4.80 a share as fair) which, considering the 40% year-over-year growth, implies a price-to-earnings-growth (PEG) multiple of 0.75x — this would still be the lowest across the entire large- cap tech space,” they said.
On Monday, Facebook shares closed up 0.84% at $118.57. Year to date, the stock is up by almost 12%, while in the last year, it is up by over 50%.