A shareholder has filed a class action against Google arising out of Google’s recent announcement that it would do a stock split. The complaint alleges that Google founders Larry Page and Sergey Brin are cementing their hold on the company through a 2-for-1 stock split that creates a non-voting class of stock that will “preserve their voting power into perpetuity.” Google’s stock reclassification proposal gives public shareholders a dividend of non-voting Class C stock for every share of Class A stock they own.
Messrs. Page and Brin, who founded Google in 1998, control the company through ownership of most of Google’s Class B stock, which has 10 times the voting power of the public shares. They also will receive the 2-for-1 stock split, according to the complaint.
Eight other Google directors and the company itself are named as defendants, along with Messrs. Page and Brin.
Because the voting proportions will remain unchanged, the issuance of the non-voting shares will let the founders retain their “ironclad grip over company management and operations,” and allow them to use the new shares to buy other companies or issue stock to employees, the complaint states.
Reclassification of Google’s stock “will have the same effect as a gift to the founders of billions of dollars in equity, for which they will pay nothing,” the complaint states.
To approve the sweetheart deal, Messrs. Page and Brin formed a “Special Committee” of Google directors, who, according to the lawsuit, “did not bargain hard with the founders to obtain anything of meaningful value in exchange for the extraordinarily valuable benefit that is being bestowed upon them.”
Defendant Paul Otellini, CEO of Intel, was chosen as a “disinterested” member of the Special Committee, “despite the close business ties between Intel and Google,” lead plaintiff Philip Skidmore claims.
In fact, Mr. Skidmore says, Google and Intel collaborated extensively on Google’s Android Operating System, through the “use of the Intel Atom processor” to “re-engineer the Android Operating System up from the kernel level of coding.”
Mr. Skidmore claims that the “relationship goes even deeper than collaboration at the symbiotic level of microchip and operating system,” in that an antitrust complaint was filed recently in California that alleges “an illegal conspiracy” between Google and Intel, “conspiring not to solicit workers employed by the other.” And, “that pending litigation mirrors a previous Department of Justice investigation, which found that by no later than September 2007, Google and Intel executives agreed not to solicit each other’s employees.
The conflicts of interest do not stop there, according to the complaint. Perella Weinberg Partners was appointed the Special Committee’s financial adviser, and, although “terms of this engagement are undisclosed, Perrella’s compensation may have been contingent on the deal being reached.”
In short, Mr. Skimore says, the “Special Committee’s ‘negotiations’ were tepid, and did not approximate arm’s length bargaining,” receiving so-called “concessions” from the founders “that are essentially meaningless” and “no different from the status quo.”
A so-called Stapling Provision was “bargained for” in the negotiations between the Special Committee and Messrs. Page and Brin, which prevents them from selling their shares of Class C stock without selling voting shares as well. But this “provision is seen by analysts as nothing more than a temporary restriction almost certain to be later revised to the benefit of the founders and leading to their further entrenchment,” the complaint states.
Google filed its preliminary Proxy Statement with the SEC on the reclassification of its stock in April. The complaint claims that the Proxy Statement breached the defendants’ fiduciary duty of good faith and candor to Google shareholders because it is “incomplete and misleading”, including the omission of details regarding compensation of the Special Committee and the financial adviser.
Industry analysts and investors reacted negatively to the reclassification announcement, precipitating a more than $44 drop in the price of Google shares. Google shares were selling for around $607 on May 2.
Google created its controversial dual class of stock in 2004 when the company went public and raised $1.67 billion through its IPO. The initial reason for the formation of Google’s class B stock, the founders said at the time, was to give the company “time, stability and independence,” enabling it “to become an important and significant institution in the transition to public ownership.”
But this reclassification has no “legitmate business purpose,” the complaint states, and is only a “thinly veiled effort to further entrench the founders’ voting power and control over the company.