Facebook Investors Slam Marc Andreessen‬‬ For Conflict of Interest

Chief Executive Mark Zuckerberg went to shareholders of Facebook this year and asked them to allow him control of decisions at the firm even if he sold most of his stock. The move would benefit Zuckerberg because it would allow him sell Facebook stock to fund his philanthropic acts while still being able to be the main decision-making authority in the company.

This would also hurt investors because it limited their ability to maintain control of the company at any point. For their part, some shareholders tried to stop this measure by filing lawsuits but failed because Zuckerberg has voting control among shareholders because his stock has most of the voting rights.

So when the issues of allowing Zuckerberg to maintain control of the company while selling stock was put to a vote, no one had any doubts that Zuckerberg would get his way. Since he essential had majority voting rights.

In August 2015, with the CEO’s consent, Facebook’s board set up a committee, selecting the trio of directors who were least beholden to Zuckerberg or financially affected by the decision — Susan Desmond-Hellmann, Marc Andreessen and Erskine Bowles — to represent shareholders while weighing the matter, according to a regulatory filing.

But Mark Andreessen, a venture capitalist at Andreessen Horowitz and a longtime board member, is a close friend of Zuckerberg. While part of the committee, Andreessen passed Zuckerberg information about their progress and any issues, enabling Zuckerberg negotiate against them, according to court documents. The documents include the transcripts of private texts between Zuckerberg and Andreessen, revealing the inner workings of the board of directors at a pivotal time for Facebook.

When the time came for the committee to ask Zuckerberg questions on a conference call, Andreessen warned about what he would be asked before directors posed the questions. While the committee grilled Zuckerberg about why he wanted a special class of stock, Andreessen sent the CEO text messages to explain which of his arguments weren’t working and why, according to messages quoted in court filings. During one March 4 call, Andreessen gave Zuckerberg live updates, both negative (“This line of argument is not helping.”) and positive (“NOW WE’RE COOKING WITH GAS”), according to texts provided by Facebook’s lawyers and cited in court filings.

“Andreessen even told Zuckerberg that he was working to protect Zuckerberg’s personal interests,” according to the filings. The plaintiffs suing Facebook’s board include pension funds, like the Employee Retirement System for the city of Providence, R.I., and individual investors. The cases have been consolidated before Delaware Chancery Court Judge Travis Laster. A Facebook spokeswoman provided a statement saying: “Facebook is confident that the special committee engaged in a thorough and fair process to negotiate a proposal in the best interests of Facebook and its shareholders.”

Desmond-Hellmann referred a request for comment to Facebook. Andreessen Horowitz said Andreessen could not comment on pending litigation. Through Facebook, Zuckerberg also declined to comment. Facebook is expected to argue that the texts were not part of a secret conversation, according to a person familiar with the matter.

If Andreessen played both sides of the negotiation, it means minority shareholder interests weren’t properly represented by the committee, said Larry Hamermesh, a Widener University law professor who specializes in Delaware corporate law and governance issues. Facebook is incorporated in Delaware.

“The whole point of setting up a special committee is to be independent from the controller,” who in this case is Zuckerberg, Hamermesh said.

But in Silicon Valley, sometimes the conventional setups for companies don’t work. Keeping a controlling and visionary founder happy can lead to the high-risk, high-reward efforts that keep companies thriving, said David Larcker, a legal professor focusing on corporate governance at Stanford’s Graduate School of Business.

“Silicon Valley is a pretty networked place,” Larcker said. “People know each other, have done deals together — but it doesn’t mean that governance is out of control or it’s the Wild West or something. It could be the case that what the board is doing is actually (helpful) to shareholders.” Zuckerberg’s chats with Andreessen may just be “part of the dialogue” needed to evaluate the proposal, he said.

Andreessen has been caught up in conflict-of-interest controversies before. He stepped off the board of eBay in March 2014 after public battles with Carl Icahn, an activist investor who pushed for the company to split with PayPal, its payments unit. Andreessen had invested in companies that competed with PayPal, but disputed all accusations of a conflict of interest. In the same year, Facebook bought Oculus, a virtual reality company, that Andreessen’s firm was an investor in, too. Andreessen has said he recuses himself from both sides of acquisition discussions that involve his investments.

As co-founder of Netscape, which made the first widely used Web browser, Andreessen felt a kinship with Zuckerberg, becoming an adviser to him. When they met, Zuckerberg, new to Silicon Valley, didn’t know what Netscape was. The mentoring relationship evolved into business, with Andreessen taking a board seat, and his firm picking up Facebook stock before its initial public offering. Andreessen’s messages, as shown in the lawsuit, depict a friendship: assurances that he has Zuckerberg’s back, punctuated by smiley faces.

-Sources for this article: sfgate.com