Google Inc., operator of the world’s largest Internet search engine, settled a lawsuit on the brink of trial over a 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 that would create a new class of nonvoting shares, court filings show.
The settlement, which must be approved by a judge, clears the way for the split, which had been on hold while the Delaware case was being litigated. The accord provides enhanced board scrutiny of Page’s and Brin’s requests to amend restrictions on their sales of new Class C shares and on company acquisitions funded by more than 10 million shares of the new stock, according to court filings.
“Corporate governance settlements like this one have been viewed as sufficient to justify dismissal of claims in a settlement,” 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.
Matt Kallman, a Google spokesman, said the company was pleased that it reached a settlement in the Delaware case over the stock-reclassification plan.
“We’ve always believed our founder-led approach gives us the freedom to make long-term bets” on businesses and strategies, Kallman said in an e-mailed statement.
Unhappy shareholders contended Page and Brin were seeking to use the stock-reclassification plan to unfairly 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. The shares (GOOG:US) rose 1.5 percent to $888.18 at 1:28 p.m. New York time in Nasdaq trading.
Google said in pretrial 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 initial public offering for a Web company.
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.
The Brockton, Massachusetts Retirement Board contended that 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 fund’s lawyers contended that Google’s common shareholders (GOOG:US) face dilution of their holdings after the issuance of additional stock for acquisitions or employee compensation. Class C shares also are likely to trade at a discount to Class A shares because of the loss of voting rights, they added.
To address those concerns, directors structured the reclassification to bar Page and Brin from selling Class C shares unless they sell an equal number of Class B super-voting shares, the board’s attorneys said.
Under today’s settlement, if Page or Brin request a waiver of the Class C sale restrictions, it must be considered only by Google’s independent directors and approved by the full board, according to court filings.
“In the event that Google considers using in excess of 10 million shares of Class C stock as consideration for an acquisition, the independent members of the board shall consider the effects on using such shares on Class A shareholders and the company,” the filing added.
Hamermesh said settlements that make changes to a corporation’s stock or governance structure are common when investors’ claims are “relatively weak.”
“This stock-reclassification plan is something that falls under the board’s business judgment and that judgment would be deferred to by the courts,” Hamermesh added.
The case is In re Google Inc. (GOOG:US) Class C Shareholder Litigation, CA No. 7469, Delaware Chancery Court (Wilmington).
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