Google is proposing a new stock structure that it says will help founders Larry Page and Sergey Brin, along with Chairman Eric Schmidt, preserve their outsized influence over key company decisions. The triumvirate wants to protect their two-thirds voting power, a figure that has gradually slipped since the end of 2005, when they controlled 69 percent of votes.
What causes this number to change?
When Google prepared to go public in 2004, it created what’s called a dual-class stock structure. Executives and early employees at the company were given Class B shares, which held 10 times the voting power of the common stock — or Class A shares — sold to the public. The voting power of Page, Brin and Schmidt at the time of the IPO was 37.6 percent.
After the offering, employees sold their Class B shares, which converted that stock into less-powerful Class A shares. The founders and Schmidt held onto their Class B shares, giving them a higher portion of the total number of votes. A year after the IPO, their power almost doubled, to 69 percent.
Since then, the company has issued new stock to compensate employees and make acquisitions. Handing out more Class A shares had the effect of diluting the power of everyone, including the founders and Schmidt. While they still control two-thirds of the vote, there’s a danger of that power being further diluted and dropping below 50 percent, which would give the common shares an actual voice in the board room.
The solution: Create a new class of stock, Class C shares, that holds no votes. This stock can be distributed for compensation and acquisitions without diluting anyone. So while the triumvirate’s power is still likely to decline because they’ve agreed to sell some of their shares, they’re likely to keep a firm grip on the majority control of the company.
[bloomberg]
