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AP7 sues Facebook in class action over share dilution

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Sweden’s seventh national pension fund AP7 is suing Facebook over its resolution to issue a new class of shares as part of the internet giant’s plan to allow chairman and co-founder Mark Zuckerberg to retain control over the company while selling much of his own company stock.

AP7 said it launched a legal case against Facebook in the Delaware Court of Chancery in May after the US company announced the plan to issue a new “C” class of shares, adding to the “A” and “B” shares already in issue.

Richard Gröttheim, chief executive at AP7, told IPE: “The reason for the case is that we think, by suggesting the reclassification of shares – and the board has, indeed, now decided to do this – and by issuing the free shares, which will be less valuable because they don’t have voting rights, we will be less well off as a shareholder.”

Under the plan, announced in April and voted through in June, Facebook will issue new C shares and distribute two of the new shares to shareholders as a dividend for each class A or B share they own.

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AP7 owns A shares, and its holding in Facebook is worth around SEK2bn (€209m), making it one of the largest shareholders in the company.

However, according to US law firm Kessler Topaz, Zuckerberg controls Facebook through his 76% ownership of Class B shares, which each hold 10 votes, while A shares carry one.

Zuckerberg has said the share reclassification was aimed at allowing him and his wife Priscilla to carry out their plan to give 99% of their Facebook shares away to “advance human potential and promote equality” while keeping the company “founder-led”.

AP7 is the default pension provider in Sweden’s Premium Pension System (PPM).

Kessler Topaz, representing AP7 in the case, said that, by issuing stockholders two of the new shares for each share of Class A or Class B common stock, Zuckerberg will be able to sell or dispose of millions of shares of Class C stock while continuing to maintain control over the company.  

“Class A common stockholders further suffer economic harm because the non-voting Class C shares being foisted upon them will likely trade at a discount to the Class A voting shares, thus diminishing the value of their Facebook holdings,” the firm said.  

The Delaware court appointed AP7 and Kessler Topaz to co-lead the class action litigation along with Amalgamated Bank and the law firm of Grant & Eisenhofer on 16 May, the firm said.

The defendants have agreed not to issue the Class C stock until the court rules on AP7’s case, it said, adding that a trial is likely to be set for January 2017.  

Gröttheim said there had been similar cases where companies had suggested reclassifying shares, involving Google and sportswear firm Under Armour, but that these had both gone to settlement.

Meanwhile, the Swedish Pensions Agency (Pensionsmyndigheten) has announced it is acting to put in place better protection for consumers in its Premium Pension System.

The government agency said it developed a revised cooperation agreement for the many pensions investment providers whose funds are available to Swedes as an alternative to the default provider, national pension fund AP7.

Mats Oberg, director of the Swedish Pensions Agency’s fund unit, said: “The new agreement means even stronger consumer protection for the investor and underlines the obvious, in that rogue players should not have anything to do with premium pension fund activity.”

Even though there was already consumer protection in place in the current agreement, the agency said there had been far too many cases where people felt cheated by providers and their telemarketers.

Consumers had often been told outright lies on the phone, the agency said, with sales callers claiming to belong to the agency itself, or telling them the default AP7 fund option was to be closed.

“Marketing and sales of mutual funds within the premium pension should be done in a fair and transparent manner,” Öberg said.

The new cooperation agreement should not pose any problems for serious management companies, he said.

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