Chapter 18
Google This!
On April 2, 2014, Google Inc. paid its shareholders a share dividend, an event that was later described as the “1,998 for 1,000 stock split.” For every 1,000 shares that were held prior to the split, an additional 998 shares were issued. This essentially doubled the number of outstanding shares and caused the share price to fall to approximately half of its pre-split price, which had been hovering above $1,000 per share. This technique is called a stock split and is commonly used by companies to lower a share price when it starts rising to levels that are unaffordable for the average investor.
Although Google’s share price certainly justified a stock split, the unique structure of this split suggests other motivations as well. Prior to the split, Google Inc. had two classes of shares: Class A, which carried one vote each and were publicly traded, and Class B, which carried ten votes each and were not publicly traded (held mostly by the company’s founders, Larry Page and Sergey Brin). Because of the super-voting rights of their Class B shares, the founders were able to maintain control of the company. However, as many Class A shares were issued over the years to acquire new businesses or to reward employee performance, the founders’ share of the ownership became diluted.
When the split occurred, in 2014, Google took the unusual step of creating a new class of shares, Class C, to distribute to existing Class A shareholders. However, the new Class C shares did not carry any voting rights. The Class A shareholders immediately objected to this arrangement, as they felt that these new shares would not be as valuable as the existing shares because they lacked voting rights. The company argued that, because the founders already controlled the majority of the shares, the voting rights of the Class A shares were of no significant value. In response, the shareholders launched a class action lawsuit, which was eventually settled when the company agreed to pay compensation to the existing Class A shareholders if, after one year, the Class C shares were trading at a discount of more than 1%, as compared to the Class A shares. On April 3, 2015, the Class A shares were trading at $542.08 per share and the Class C shares were trading at $535.76, a difference of 1.2%. Apparently, the market did attach some value to minority voting rights. Google agreed to pay an “adjustment payment” of $522 million to Class A shareholders in May 2015.
As demonstrated in this example, the rights of shareholders can create complicated legal issues. The right to vote and the right to receive dividends are the two essential elements that shareholders have in order to protect their investment. Proper and detailed disclosure in the shareholders’ equity section of the balance sheet can help shareholders better understand their relationship with the company and the risks that they face.
(Sources: Alphabet Investor Relations, 2015; Liedtke, 2014)
