New rules would make CEO Mark Zuckerberg lose control of Facebook if he quits

The rules, which were first mooted as part of a reclassification of Facebook’s shares to help meet Zuckerberg’s philanthropy plans, will be voted on by shareholders at an annual meeting on June 20. The aim of the regulations is apparently to make it easier for the company to hire a top-quality successor to Zuckerberg, who would not be shadowed by the founder or be from his family. 

The measure seems to be more of a precaution as Zuckerberg has not indicated that he intends quitting his job.

The high-profile executive currently holds Class A and Class B common stock that collectively represents about 53.8 percent of the company’s total outstanding voting power. Under current rules, if Zuckerberg were to quit the company or his employment terminated for any reason, he would not be required to give up his majority voting control. Zuckerberg would also be able to pass Class B common stock shares, and potentially his majority voting control, to his descendants after his death, leading to voting control of the company passing across multiple generations, according to a regulatory filing Thursday by the company to the U.S. Securities and Exchange Commission.

Class A stock has one vote per share while Class B stock has 10 votes per share.

A Special Committee, appointed in August to look into the reclassification of Facebook’s capital or voting structure in view of Zuckerberg’s long-term plans to donate most of his stock to philanthropy, has recommended new terms that will ensure that Facebook “will not remain a founder-controlled company after we cease to be a founder-led company,” according to the proxy filing.

The committee and the board hold that it would be tougher to attract a qualified successor to Zuckerberg if he continued to retain majority voting control of the company. To avoid Zuckerberg having voting control of the company if he leaves his post, the committee has proposed new automatic triggers, which, with some exceptions, “require the conversion of all shares of Class B common stock into shares of Class A common stock if he is no longer in a leadership role at our company.”

The triggers would “provide significant value to our company by incenting Mr. Zuckerberg to remain with our company,” according to the filing.

Zuckerberg announced in December that he would give to philanthropy, through the Chan Zuckerberg Initiative, 99 percent of his shares in the company. The CEO is said to have informed the committee that he planned to sell or gift no more than US$1 billion of the company’s capital stock each year for the next three years, and that he aimed to retain his majority voting position for the foreseeable future.

In a regulatory filing earlier this year, Facebook said that it aimed to create a new class of publicly listed, but non-voting Class C capital stock and, if approved, to issue a one-time dividend of two shares of that new class of capital stock for each outstanding Class A and Class B share held by stockholders.

The reasoning was that the Class C shares could be used for Zuckerberg’s initial philanthropy aims without he losing control of the company, as the Class C stock would be non-voting shares. “The issuance of shares of Class C capital stock could prolong the duration of Mr. Zuckerberg's control of our voting power and his ability to elect all of our directors and to determine the outcome of most matters submitted to a vote of our stockholders,” according to the filing on Thursday. Zuckerberg is also likely to have the final say during the shareholder vote on June 20.