Saturday, 11 October 2014

How Larry Page and Sergey Brin manage to control 56% of the votes in Google Inc. with a 14% ownership stake.

The aim of this brief exercise is to enable you to identify potential differences between control rights and ownership rights in listed corporations from all over the world. This exercise is based on the concepts discussed in Chapters 1-3 of "International Corporate Governance". Further, briefer examples are contained in Chapter 3 of the book.

Before we can proceed just a reminder what we mean by control and ownership. Ownership is defined as ownership of cash flow rights. Cash flow rights give their holder a pro rata claim to the firm's earnings and a pro rata claim to the firm's assets if the firm is to be liquidated. Control is defined as ownership of voting rights. Voting rights give their holder the right to vote for or against a number of agenda points at the annual general shareholders' meeting (AGM), including the appointment and the dismissal of the members of the board of directors.

Unfortunately, a lot of the corporate governance literature, including some of the leading textbooks, confuses control with ownership. While the shares of many corporations confer both control and ownership rights, as we shall see this is not always the case. For those corporations for which control does not equate to ownership this has important implications for the types of conflicts of interests that these corporations are likely to suffer from.

The company we shall study is the American company Google Inc. Google Inc.'s 2013 annual report (or what the American Securities and Exchange Commission (SEC) calls form 10-K) is available from here. Click on the former link. Don't worry, the link will open in a new window. So you won't navigate away from this blog. If you have managed to get to the correct page, your screen should look like this (N.B. you can click on any of the screen shots included in this blog to magnify them):


Move to the balance sheet. Towards the bottom of the balance sheet there is information about the stockholders' equity (see screen shot below), i.e. the shares (or stocks) that make up Google Inc.'s equity capital.


You will notice that Google Inc. has four different types of shares:
  • preferred convertible stock,
  • Class A common stock,
  • Class B common stock, and 
  • Class C capital stock.
However, while Google Inc. is authorised to issue the first and last type of shares, it does not currently have any such shares outstanding. A bit of a relief really as this will makes things a bit less complicated! We shall now locate the note about the stockholders' equity further down form 10-K. I have highlighted in blue the relevant passage in the note, which is note 12 (see the following screen shot).


This note provides us with some very important information. Both Class A and Class B stock confer the same rights to their holders, except when it comes to the voting rights. While each Class A stock confers one vote to its holders, each Class B stock confers ten votes! Further, there are 279,325,564 Class A shares, but only 56,506,728 Class B shares outstanding. This means that Class B stock amounts to 16.8% of Google Inc.'s equity but to 66.9% of its total votes outstanding:


Now we need find out who owns what. Let us go back to the top of the document, more precisely the table of contents (see below).


Item 12 about "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" is the item we interested in. Click on the item. This should move you to the following place in the document.


Item 12 refers to another document, the 2014 Proxy Statement. The next step is to locate Google Inc.'s 2014 Proxy Statement, which is also referred to as Form DEF 14A ("DEF" stands for definite or final), on the SEC website. The easiest way to locate it is via the SEC search engine, which can be accessed by clicking here. Enter "Google" into the Company Search Field and press the Search button. Click on CIK 0001288776 next to "GOOGLE INC" in the middle of the list with the search results. You should then see the EDGAR Search Results Screen. Enter "DEF 14A" in the "Filing Type" search field and press the Search button. At the top of the list, you should then see the 2014 Proxy Statement, with a filing date of 28 March 2014. Click on the Documents button next to that filing. If you have done everything correctly, you should arrive at the screen below:


Click on "lgoogle2014_def14a.htm" in the top row of the Document column. Locate the section called "COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" in the proxy statement. Further down the section, you should be able to locate the following table:


You will see that the virtually all of the Class B stock, i.e. 94.1%, is owned by the executive officers (the executives) and the directors (the non-executives). However, they only own 94.1% of 16.8% of the total equity. Hence, while their voting rights amount to 62.7%, their ownership is only 15.8%! The two founders of Google, i.e. Larry Page and Sergey Brin, control 55.7% of the votes while owning only 14.1% of the company!

As a further exercise, try and identify which of the four combinations of ownership and control (i.e. A, B, C or D) applies to Google Inc.(see Chapter 3 of "International Corporate Governance").


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