Google has settled the class-action shareholder lawsuit that had been blocking a stock split it originally announced last year, the company said Monday, paving the way for it to move forward with the split as planned.
The suit’s settlement was an eleventh-hour development in this 14-month storyline, which included the imminent prospect of a trial in Delaware chancery court over the issue.
An Unequal Class
Google’s plan for the stock split was to create a new “Class C” of non-voting capital stock that would be listed on NASDAQ. These shares were to be distributed via a stock dividend to all existing stockholders such that the owner of each existing share would receive one new share of the non-voting stock, giving investors twice the number of shares they had before.
Class A shares would continue to trade under the “GOOG” ticker symbol, but the new Class C shares would trade under a different ticker symbol. Class C stockholders would be able to trade their shares and have the same rights as Class A and Class B stockholders, except for voting rights.
Google argued the structure was being put in place to allow the company to continue to make the investments it deemed necessary in emerging technology.
Not everyone was convinced, however. Led by Brockton Retirement Board in Massachusetts and Philip Skidmore, the shareholder suit alleged that the stock split was designed to unfairly benefit Google founders Larry Page and Sergey Brin.
Still No Voting Power
The resolution to the suit, which won’t be settled for several weeks until final court approval, requires Google to compensate Class C shareholders if, after a year, their shares are worth less.
Google is pleased to have reached an agreement to settle the litigation, it said.
“We’ve always believed our founder-led approach gives us the freedom to make long-term bets, like Android, Chrome and YouTube, that benefit consumers and shareholders alike,” said the company in a prepared statement provided to the E-Commerce Times by spokesperson Matt Kallman.
Some, however, view the resolution as less than favorable to the disgruntled shareholders.
In particular, the agreement didn’t resolve the issue of voting power, or lack thereof, among the Class C shareholders, noted David Cadden, a professor in the School of Business at Quinnipiac University.
“This means that the original founders of Google would essentially retain the same level of control that they currently possess,” Cadden told the E-Commerce Times.
‘Seldom an Ideal World’
The agreement does allow for compensation to the shareholders should the new stock become less valuable, he continued — which in an ideal world would be a win-win for both the founders of Google and prospective stockholders.
“However, this is seldom an ideal world,” Cadden said.
Of course, Google shareholders can always turn to the court for readdress. As for Google, it is acutely aware that its actions will be scrutinized.
“It is clear that Google has an active minority shareholder population that is watching the company’s and its majority shareholders’ actions quite closely,” Jenice Malecki, an attorney at Malecki Law, told the E-Commerce Times. “To the extent that the majority shareholders are led astray from acceptable ‘best laid plans,’ I have no doubt that the legal community will be re-engaged into this battle.”
Assuming that the Class C shares do maintain their value, as Google argues they will, this stock split — like most — should be a non-issue for shareholders.
“Halving the price of Google shares and doubling the number of shares outstanding does not change the value of the business,” Daniel Beckerman, a Covestor model manager and registered investment advisor, told the E-Commerce Times. “If Google shares did not split, that does not limit its growth prospects.”
Investors need to look at a stock price in concert with factors such as its earnings per share, number of shares outstanding, returns on equity and so on, Beckerman explained. “Otherwise, the stock price itself is meaningless. You can have a higher-priced stock that is cheaper fundamentally than a lower-priced stock.”
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