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Facebook (FB) Decides Against the Creation of Class C Shares

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Facebook Inc (FB - Free Report) has decided to drop the proposed creation of Class C shares, which could have helped CEO Mark Zuckerberg to hold his sway over the company. Facebook’s sudden plan to discard the creation of Class C shares reportedly comes under tremendous investor pressure.

Last year, during its first-quarter 2016 results, Facebook had proposed the creation of publicly listed but non-voting new Class C shares. Facebook, at present, has a double class structure. The Class C shares will have the same economic rights as Class A and Class B shares. Notably, Class B shares have 10 times the voting rights of Class A shares. Class B shares aren’t traded and are held mostly by Facebook executives.

The idea behind the creation of this new class of shares was to allow Zuckerberg to have control over the company while continuing his charitable work. In December 2015, following the birth of their first daughter, Zuckerberg had said that he and his wife plan to give 99% of their Facebook shares, valued at $45 billion then, over their entire lifetime, to the Chan Zuckerberg Initiative LLC, a limited liability company for betterment of the society.

However, a certain section of investors filed a class action lawsuit against Zuckerberg’s proposal. These investors reportedly argued that the new class structure could potentially cause huge losses for them (running into billions of dollars) if the new Class C shares started trading. The trial was scheduled to begin in a few days at Delaware’s Chancery Court. The case will now probably to be dismissed.

In a blog post, Zuckerberg said that, “I shared a proposal announced by Facebook's board of directors to create a new class of Facebook stock. The idea was that it would allow me to keep voting control of Facebook so we can continue to build for the long term, but also allow Priscilla and me to fund the work we're doing through the Chan Zuckerberg Initiative. At the time, I felt that this reclassification was the best way to do both of these things.”

He went on to add that in the last 18 months, Facebook’s robust performance has helped the stock to grow “to a point” that he can easily continue his charitable work as well as keep hold of his voting control for the next two decades and therefore a reclassification is not necessary anymore. He added that he was selling nearly 35 to 75 million shares over the next one and a half years for philanthropic purposes.

Facebook is under fire ever since the disclosure that Russians used the platform to meddle with the 2016 Presidential elections. Facebook is now furnishing details of nearly 3K ads to congressional investigators. Zuckerberg in a Live video broadcast also said that to create transparency for political ads on its platform, it will now make it mandatory for advertisers to disclose their identities.

Not just this, arecent revelation by ProPublica also put Facebook in a tough spot. Per ProPublica, Facebook helped advertises target anti-Jew groups. An algorithm error rather than a human error was the cause added ProPublica. Post this revelation, Facebook said that it has removed the fields in question.

After facing fire, Facebook has taken proactive measures to fight bogus ads on its platform. In his live broadcast on Sep 21, 2017, Zuckerberg added that the company will also hire additional 250 election integrity employees and partners with election commissions across the globe. Facebook will now increase the information shared with other tech companies as well cyber security specialists to ensure safety and security on the platform.

Facebook’s proactive measures look good. Such measures are the need of the hour as Facebook’s top line mostly comprises ad revenues. Last year, Facebook generated over $27.6 billion in revenues with ad revenues of $26.9 billion.

Zacks Rank and Share Price Movement

Facebook carries a Zacks Rank #3 (Hold).

Notably, the company has outperformed the industry in the past year. Shares of Facebook have surged 34% compared with the industry’s 14.5% increase.

Stocks to Consider 

Better-ranked stocks in the broader technology sector include Applied Materials (AMAT - Free Report) , Activision Blizzard (ATVI - Free Report)  and FormFactorInc (FORM - Free Report) , all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Applied Materials, Activision and FormFactor is currently projected to be 17.1%, 13.6% and 16%, respectively.

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