For Facebook and Zuckerberg, Avoiding Testimony in Share Case Could Cost $20 Million an Hour -- Dealpolitik
August 07 2018 - 9:29AM
Dow Jones News
By Ronald Barusch
Legal fees for the prevailing lawyers in class actions can be
eye-popping.
Take the $129 million sought by those who successfully
challenged a Facebook Inc. proposal in 2016 to issue nonvoting
stock to help Mark Zuckerberg keep control of the company.
Facebook, in fighting the fee, says it represents a $9,146 hourly
rate. Pretty good work if you can get it.
But there is a more impressive number at work here. Late last
month, Vice Chancellor J. Travis Laster effectively told Facebook
that if it wanted to continue the fee fight in his Delaware court,
Mr. Zuckerberg needs to testify at a hearing expected to take up to
six hours.
In my view, Mr. Zuckerberg won't want to do that, particularly
since the company threw in the towel when his testimony was
imminent in the underlying litigation last year. But I predict
skipping a trip to Delaware could end up costing Facebook somewhere
close to $20 million for each hour of testimony Mr. Zuckerberg
avoids.
Since Facebook's IPO in 2012, Mr. Zuckerberg has held a class of
stock with 10 times the voting power of the shares sold to the
public. That allows him to have a majority of the votes even though
he only has a minority of the overall shares. However, Mr.
Zuckerberg is committed to contributing a substantial portion of
his net worth to charity, and that will require him to dispose of
most of his supervoting shares and ultimately lose his ability to
control Facebook.
So in 2016, Facebook proposed issuing a new class of nonvoting
stock and distributing it as a dividend to all shareholders along
with some governance improvements Mr. Zuckerberg agreed to. The
distribution of the new shares would enable Mr. Zuckerberg to sell
stock to fund much of his charitable commitment without losing any
of his voting power.
Facebook was then hit with class-action lawsuits seeking to
block issuance of the nonvoting shares. Although shareholders
approved the plan, the company needed Mr. Zuckerberg's supervoting
shares to keep the most controversial elements from being rejected.
Last September, a few days before the trial in which Mr. Zuckerberg
was going to be required to testify, the whole plan was called
off.
The plaintiffs' lawyers claimed victory and asked Facebook to
pay them that big fee because of all the value they say they
created for shareholders. (Lawyers typically seek a so-called
"mootness fee" when a company gives up on a challenged plan before
a court can rule on the class action, and Facebook hasn't objected
to some fee but it says it shouldn't be more than $20 million.)
To be clear, shareholders didn't collect any cash, but the
lawyers' view is the outcome accelerates the timetable for the
public to control the company.
At the hearing last month, there was a lot of squabbling about
that and how much longer Mr. Zuckerberg will be in control.
That led to Vice Chancellor Laster requiring Mr. Zuckerberg to
come to Delaware and testify at a two-day hearing. Since the
executive gave up last year before appearing in court, who thinks
Mr. Zuckerberg is going to want to subject himself to
cross-examination now just to save Facebook legal fees that,
although astonishing for the rest of us, are a rounding error for a
company worth $500 billion? I suspect the Vice Chancellor
doesn't.
Instead, I predict a negotiated settlement that could value Mr.
Zuckerberg's court time at around $20 million an hour, because to
get the law firms to settle without a hearing, Facebook will
probably have to give them much of what they seek.
Facebook said in a statement: "The reclassification proposal has
been withdrawn. The only issue still being litigated is
compensation for plaintiffs' lawyers, who are seeking the second
highest fee in the history of the court. We continue to oppose
their efforts to recover a windfall at the expense of
stockholders."
It's easy to be critical of the attorneys' fees in class
actions. Big fee awards in cases like this where no cash goes to
shareholders or companies do give pause. But in our system there is
no sanction for breach of directors' fiduciary duties other than
through this type of litigation. Plus, recent Delaware court
decisions have restricted the circumstances in which such claims
can be made. If there aren't big fees for the lawyers who do
prevail, don't expect anyone to challenge dicey deals anymore.
(END) Dow Jones Newswires
August 07, 2018 09:14 ET (13:14 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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