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Google moves ahead with new stock class

The board of Google (GOOG) moved ahead with a new C class of stock that will trade but has no voting rights. During its earnings announcement on Jan. 30, the company said it would distribute Class C stock shares as a dividend for shareholders, creating a stock split.

The new class, first announced last year, initially met with resistance from some shareholders because it has no voting rights. Some critics thought that it would concentrate more power in the hands of CEO Larry Page and co-founder Sergey Brin as well as chairman Eric Schmidt.

The use of stock as a form of dividend is an example of why the company has been interested in creating a new non-voting form of stock. Public companies can largely issue stock as they wish so long as the board of directors approves. Because of Google's share price of more than $1,170, that is like having a printing press for money.

Instead of spending down cash reserves for dividends or acquiring other companies, Google could use Class C stock shares. Dilution -- the reduction of a stock's price because of increased number of shares -- could be a concern, but given Google's current share price and the company's overall value, that is unlikely to be an immediate problem. Google just passed Exxon (XOM) as the second most valuable company in the country, after Apple (AAPL).

There is nothing new in high tech companies using multiple stock classes when going public. Founders get a preferred class of stock that comes with a higher number of votes per share than other classes. The company gets the advantages of access to the public markets while the founders keep control. When Google went public, it did so with dual classes. Page's and Brin's shares came with ten votes each, while ordinary shares had only one vote. Zynga (ZNGA) and Facebook (FB) also used similar structures. In fact, Facebook went one step further, making it possible for CEO Mark Zuckerberg "to keep control even if he owned less than 10 percent of the company," according to the New York Times.

Although it already had A and B classes, Google proposed the C class in 2012 for acquisitions, stock incentive plans, and further rounds of raising capital. The expectation was that this would maintain, if not actually tighten, control because additionally issued shares would have no voting rights. In a letter, the founders argued that the move would allow them to "concentrate on the long term."

Such tight control is often criticized by certain activist investors and corporate governance experts because it allows a small group in a public company to essentially dictate direction without shareholders having a voice that matters at all.

An institutional investor, the Brockton Retirement Board, sued the company at the time, arguing that Page and Brin should have to pay to gain more control. A settlement provided for payments to Class C shareholders if A shares were at least 1 percent more valuable than C shares. Also, when Page and Brin, both billionaires, sell C shares, they must also sell some corresponding amount of their B shares with the high numbers of votes.
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