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What Google's 8-K Filing Means for Shareholders


Co-founders are going to sell Class B common stock with specific dates and amounts declared in advance.

Google (GOOG) filed an 8-K last Friday with the SEC announcing that co-founders Sergei Brin and Larry Page have each adopted plans under Rule 10b5-1 to sell shares of Class B common stock. Essentially, 10b5-1 plans lay out in advance specific dates and amounts of stock to be sold over a future time period. There's no "window" required to be open and it's done regardless of events that may be in play at the time -- good or bad.

Rule 10b5-1 plans are quite common among company executives and, when the overwhelming majority of an executive's wealth rests in one asset (in this case Google stock), it's a good idea to diversify.

That being said, one of the questions that should be asked is, if these plans were adopted by Brin and Page on November 30, 2009, why is the company just getting around to notifying investors on January 23, 2010? Were the corporate lawyers that busy they couldn't find the time?

The Class B shares Brin and Page are selling are different from the Class A shares that you or I may own. Class B shares carry 10 times the voting power of Class A shares. They're designed for the sole purpose of retaining control of Google by the co- founders, the CEO, and a small group of early investors. While the voting control by Brin and Paige will fall to 48%, the combined control by the Class B shareholders will remain above 50%. As noted in the company's original S-1 filing with the SEC, "each share of Class B common stock shall convert automatically into one share of Class A common stock upon any transfer…" so the power that's vested with them doesn't transfer as well.

In essence, Class A shareholders were needed for the capital infusion and to provide liquidity for those wanting to monetize their accumulated wealth. Sounds crass but that's life and few of the early Class A shareholders would argue with the rewards they've reaped thus far.

However, there will come a day when Google is no longer a hot commodity; when the decisions it makes have investors shaking their heads in disapproval rather than turning heads for their brilliance. Regardless of how bright you think its future is today, it happens to them all.

When it does happen, Class A shareholders will have no ability to influence the direction of the company regarding the Board of Directors and its decisions on management. That's the devilish trade-off that you make. The only alternative will be to sell your position and, possibly, take a big loss.

If you want a picture of what the future can look like when the control group hits a bridge abutment at 100 mph, I suggest you review the recent history of the New York Times Company's (NYT) common stock. Just some food for thought.

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