Google Inc (GOOG.O) has settled a shareholder class action lawsuit that clears the way for the company to issue a new class of nonvoting stock, giving the company a currency for acquisitions that would not dilute the founders' control.
The online search engine leader had planned to issue Class C shares as a dividend to investors. A shareholder, the Brockton Retirement Board, sued and claimed the plan gave the founders, Sergey Brin and Larry Page, added control without paying for it.
Legal experts said the case would be closely watched in Silicon Valley, where high-tech companies such at Facebook Inc have adopted dual-class share structures, which allow a founder to retain control after taking a company public.
The settlement, which still needs court approval, ends the lawsuit that had been scheduled to go to trial on Tuesday in the Court of Chancery in Delaware, where Google is incorporated. The founders of Google would have had to testify.
"We're pleased to have reached an agreement to settle this litigation," the company said in a statement.
"We've always believed our founder-led approach gives us the freedom to make long-term bets, like Android, Chrome and YouTube, that benefit consumers and shareholders alike."
The settlement, disclosed in a regulatory filing on Monday, will give holders of the new Class C stock a cash or stock payment if the value of the stock differs by more than 1 percent from the value of Class A shares, which have traded on the Nasdaq since its public listing in 2004.
The settlement also requires unanimous board approval to amend a "transfer restriction agreement" that requires Page and Brin sell Class B shares when they sell Class C shares. Google also agreed to a provision that would make it hard to amend the agreement without being sued by shareholders.
"They're tying their hands," said Brian Quinn, a professor at Boston College Law School, noting that the agreement has teeth.
Google has had two classes of stock since it went public. Class A carries one vote each, while Brin and Page control Google through their holdings of Class B shares, which carry 10 votes each.
The new Class C shares, which will trade publicly under a different ticker, will allow Brin and Page to sell more stock without surrendering control of the company.
The Class C stock was proposed by Page and Brin and it was reviewed by a special committee of independent directors, according to court documents. The lawyers for the plaintiffs had argued that the special committee never really considered rejecting the plan.
The settlement comes after the judge overseeing the case, Leo Strine, said he would be looking closely at whether the special committee members were overly chummy with the founders. "During the negotiations, were they arranging a fishing trip to Alaska? That stuff is actually, can actually be substantively relevant," Strine said, according to a court transcript.
Many of the court filings were heavily redacted, leading some to question whether Google settled to avoid putting its founders on the witness stand.
"I don't know until there's a trial what's in the evidence and how embarrassing it was or wasn't," said Quinn.
Google shares rose 1.5 percent to $888.25 alongside a broadly higher market. (Reporting by Tom Hals in Wilmington, Delaware; additional reporting by Jennifer Saba in New York; Editing by Jeffrey Benkoe and David Gregorio)