The Strategist

What you need to know about Facebook's stock split

08/10/2017 - 14:53

Facebook’s stock split has been approved quite a long time ago. This happened in the last year. Then, shareholders approved the proposal to split 1 to 2, and then to pay a one-time payment of dividends as non-voting shares of class C. It was assumed this decision would let the company’s founder Mark Zuckerberg and his wife Priscilla Chan to give most of their capital - 99% - to charity, but at the same time to retain control over the company.

Anthony Quintano
Anthony Quintano
The proposed split does not look typical. As a rule, a split implies that the total value of the shares is divided into several cheaper shares. Together, they cost as much as the original paper. This time, however, it's different. To retain voting rights of Zuckerberg, the company's board of directors green-lighted a proposal to create a new class of shares.

Technically, the stock split implies issue of a one-time dividend in the form of two new non-voting shares of Class C for a Facebook's paper at present. Today, most Facebook shareholders hold Class A shares. More powerful investors hold shares of class B, each of which has 10 times more votes. Both of them will receive two shares of class C for each share of Facebook in their portfolios.

By the split’s time, the introduction of a new class of shares will not affect the voting rights of investors of both types. However, as Zuckerberg and Chan will be giving 99 per cent of their shares to charity, the class B papers they have donated can be converted into class A shares to keep the company in the hands of the founders.

According to Facebook's official statement, the division of shares "will allow the company to keep and improve the structure that protects the interests of shareholders so well, and will allow Mark to solve important problems with the help of the Chan-Zuckerberg Foundation." Investors can get more information about the split of Facebook shares in a statement that the company submitted to the Securities and Exchange Commission of the United States.

What an investor should understand

Investors will receive 3 shares for each previously owned one. Overall value of these three papers will equal value of one stock of class A. Thus, the split will be similar to a typical split of shares of three to one, except that two papers will refer to a new non-voting class with another ticker.

The stock split will not be taxed in the US. Even though new Class C shares are paid as a dividend, investors will not receive any cash, and such transactions are not taxed. However, Facebook advises shareholders to talk about the split with their financial advisers.

A lower price will not make Facebook shares a more profitable investment. After the split, the new shares will cost three times cheaper than A shares before the split, this does not mean that new shares will have a higher growth potential. The split will not change the market capitalization of the company; it will be valued by the same indicators.

Facebook, probably, will not postpone this stip. Otherwise, donations of Zuckerberg and his wife to charity will jeopardize their control over the company. Although Facebook does not name the date of the split, it is likely to happen soon.