From the Desk of Herb
Facing a trial that was to start this week in Delaware, last Friday Facebook Inc. dropped its plan to issue new non-voting stock, which was opposed in the then-pending shareholder lawsuit. On Saturday, September 23, 2017, The Wall Street Journal reported that the Delaware court administrator sent an email Friday afternoon saying the trial was canceled.
It was reported that the non-voting Facebook stock was proposed by the board of directors because Mark Zuckerberg was concerned about losing control as he transferred his Class B stock to fund his for-profit philanthropic organization – The Chan Zuckerberg Initiative he announced in April 2016.
Facebook currently has outstanding both Class A and Class B voting stock. However, Zuckerberg’s supercharged Class B shares have 10 times the voting power of the publicly held Class A stock. The Class B voting stock, 86% of which is allegedly controlled by Zuckerberg, gives him about 60% of the vote and thus control over Facebook.
Because Facebook shares have increased by more than 50% since April 2016, in scrapping the new stock plan Zuckerberg now claims he is no longer concerned about losing control. In the lawsuit, Zuckerberg, with voting control, was alleged to have influenced the stunningly disloyal decision of the board of directors to propose establishing the new non-voting stock.
To maintain founder control, other companies such as Google (now Alphabet Inc.) and Snap Inc. have issued non-voting shares in their IPOs. Accordingly, the non-voting stock will never gain control and the non-voting shareholders have limited say on any company matters.
Unlike publicly or widely-held companies, it is very common in family-owned businesses for the founder (Generation 1 or G1) to have all of the voting stock and for G2 and G3 to have non-voting stock. In estate planning for business owners, it is common for counsel to recommend a voting and non-voting structure to allow G1 owners to retain control and to pass control to select G2 family members as part of business succession planning. This structure is regularly used with family-owned businesses.
Non-voting equity is the most commonly used tool to save taxes in gift and estate planning by employing business valuation discounts for lack of control and marketability. The business discounts were set to be eliminated in 2017 under the Obama administration, but the discount prohibition was sidelined by the Trump administration and continues as the cornerstone of estate tax planning for family-owned businesses.
Please feel free to contact me to discuss your gift and estate planning if your family or closely held owned business does not have voting and non-voting stock.
Questions about gift and estate planning? Contact Herb Fineburg at
ABOUT HERB FINEBURG
Mr. Fineburg is recognized as one of Philadelphia’s most respected business lawyers whose substantial knowledge of tax law provides clients with strategic and cost-saving benefits in connection with commercial transactions, taxation and wills, trusts and estates matters. Known for his ability to resolve complicated matters effectively, Mr. Fineburg has assisted businesses and individuals with the organization of their finances, business and real estate affairs, and the structure of their assets (i.e., in LLCs, partnerships, corporations, trusts or joint ownership). He has substantial expertise in the preparation of buy-sell agreements for co-owners who are family members or unrelated business partners and has handled the resolution of shareholder and partner disputes and buy-outs. In addition, to working on bank financings, business contracts and employment matters for his business clients, Mr. Fineburg also provides advice on business acquisitions and sales. Mr. Fineburg, who began his law career as a commercial litigator and bankruptcy lawyer, frequently provides litigation counsel and assistance to a wide range of firm clients. His articles have appeared in the Pennsylvania CPA Journal, the Journal of S Corporation Taxation and other publications. A graduate of Washington University in St. Louis, Mr. Fineburg received his law degree from the University of Missouri and a Master of Laws in Taxation (LL.M) from the New York University School of Law, Graduate Division. Mr. Fineburg is the Managing Shareholder of the Philadelphia office and is also a member of the Board of Directors at Offit Kurman.
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