Google settles investor lawsuit over common stock split

June 17, 2013 06:44 AM

Google Inc., the world’s largest Internet search engine, settled a lawsuit on the brink of trial over the company’s plan for a stock split that shareholders claimed would unfairly allow founders Larry Page and Sergey Brin to strengthen their corporate control.

Lawyers for a Massachusetts pension fund and other investors were scheduled to begin presenting testimony tomorrow in a Delaware court about a stock reclassification to create a new class of nonvoting shares, court filings show.

Under the tentative settlement, which must be approved by a judge, amendments of stock policies will require advance warning, increases in voting control for Page and Brin will trigger enhanced scrutiny, and plaintiffs’ lawyers will get “reasonable” fees and expenses.

Unhappy shareholders contended Page and Brin were wrongly trying to entrench their control of Google, one of the world’s five largest companies by market value, according to data compiled by Bloomberg. Google’s market capitalization reached a record $278 billion in March and its shares were trading above $883 each today. Shares rose 1.22 percent to $855.72 at 10:54 a.m.

Web Services

“The case boils down to whether Page and Brin are getting something in the reclassification that comes at the expense of other Google shareholders,” Larry Hamermesh, a Widener University law professor who specializes in Delaware corporate law issues, said in an interview.

Google, based in Mountain View, California, reported first-quarter profit in April that beat analysts’ forecasts as it pushes beyond its roots as an Internet-search business to enter new ad-driven markets, including smartphones, Web services and video. The company’s search and video businesses generated $8.64 billion in revenue for the quarter, up 18 percent from a year earlier, according to Benjamin Schachter, an analyst at Macquarie Securities USA Inc.

Google’s lawyers said in pre-trial court filings that the new shares were designed to increase the company’s flexibility in making acquisitions and rewarding employees while properly allowing Page and Brin to maintain control of the company they started in 1998. Google first publicly sold $1.67 billion in shares in August 2004. At the time, it was the largest IPO for a Web company.

Corporate Litigation

The case was to be heard in Delaware Chancery Court in Wilmington. Google, like more than half of all Fortune 500 companies, is incorporated in the state. The court specializes in corporate litigation and judges hear the cases without juries. Page and Brin were to testify in person about the stock reclassification in a five-day trial.

Chief Judge Leo Strine had been asked to decide whether the company’s push to create the new share class falls under review standards that defer to executives’ business judgment on operational matters or whether the proposal must be shown to be “entirely fair” to all Google investors, Hamermesh said.

Google agreed to postpone the reclassification until after Strine “had the opportunity to consider the legal issues following a full trial on the merits,” according the court filings.

Voting Rights

Under Google’s existing stock structure, its Class A common shares carry one vote while Class B shares carry 10 votes, according to court filings. Page and Brin hold Class B shares that carry more than 56 percent of the company’s voting rights, the filings said. The pair own about 15 percent of the company’s outstanding equity.

Google wants to create Class C shares, which carry no voting rights. All investors would receive a dividend in the form of Class C shares in what amounts to a 2-for-1 stock split, according to the filings.

Attorneys for the Brockton, Massachusetts Retirement Board contend Google directors erred in backing the reclassification plan because it would allow Page and Brin to reap millions in stock sales without any effect on their voting control.

The Massachusetts pension fund has about $500,000 invested in Google’s shares, the Brockton Enterprise newspaper reported in May 2012.

The company made its voting structure clear in an “Owners Manual” issued during the company’s 2004 initial public offering and on its website, lawyers for Page and Brin said in court papers. The Class B super-voting shares were set up to “make it harder for outside parties to take over or influence Google,” according to the filings.

Shareholder Protection

To protect common-stock holders from harm, directors structured the reclassification in a way that barred Page and Brin from selling Class C shares unless they sell an equal number of Class B super-voting shares and bars Class B holders from receiving change-of-control premiums, the directors’ attorneys said.

Over the years, the Delaware courts have deferred to directors’ and executives’ judgment about the utility of “corporate acts like the recapitalization,” the lawyers said. The stock move is “eminently fair” to common shareholders and should be allowed to proceed, they added.

The case is In re Google Inc. Class C Shareholder Litigation, CA No. 7469, Delaware Chancery Court (Wilmington).

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