Mark Zuckerberg Threatened to Leave California. Meta's Board Cut Him a Deal.

Dow Jones
10/22

A proposed billionaire tax had Mark Zuckerberg thinking about leaving California. Provisions around the 2-for-1 split of Meta Platforms' stock are designed to keep him in the state -- and help him pay a potential tax bill.

As Meta's board negotiated the terms of the share split with the CEO, Zuckerberg told directors he was evaluating whether to leave the state in response to a proposed first-of-its-kind wealth tax, according to a new regulatory filing.

Proposition 40, proposed by a healthcare union, would levy a one-time, 5% tax on the net worth of those with net assets of $1 billion or more living in California on Jan. 1 of this year. Its novel approach -- taxing assets, rather than income -- has prompted some of the state's wealthiest residents to consider moves to lower-tax states, including Florida and Texas.

If California voters pass the measure on Nov. 3, Zuckerberg would owe a "significant, multi-billion dollar tax payment" based on his Meta shares, the company said in the filing. His tax bill could force a share sale that would reduce his voting interest, the company said.

Zuckerberg's negotiations with Meta's board about the impact of the potential tax, disclosed in a lengthy regulatory filing, offer a rare window into how the threat of the new measure is impacting decision-making by some of the state's powerful companies and their leaders.

Meta on Wednesday announced the creation of a new class of nonvoting stock to fund its continued AI expansion, to be issued to existing shareholders as a dividend. To align Zuckerberg's interest with the company's, his new shares will be "stapled" to the original ones, preventing him from selling them without also selling his voting shares. The shares will be gradually released from that arrangement over a period of eight years.

Zuckerberg will be able to immediately sell up to 20% of his new Class C shares, representing 10% of his financial stake in Meta, "for any reason, including so that he may pay his potential tax liability under California Proposition 40, if enacted into law." He agreed to maintain primary residence in the same state as the company's headquarters for the next eight years, barring "material unforeseen circumstances."

Zuckerberg's leadership and presence at its California headquarters "is critical at this current inflection point for the Company and the tech industry," the company said. Meta said it wants to avoid the challenges it encountered during the Covid-19 pandemic, when he wasn't working from the same location as the management team.

Members of Meta's board in June discussed forecasts showing that the company needed to raise hundreds of billions of dollars to fund its AI ambitions, beginning as early as the fall of 2026, according to the filing. They talked about a suggestion from Zuckerberg's outside counsel to create a new class of nonvoting shares that would address those needs.

Zuckerberg brought up concerns about the potential wealth tax. In a July conversation with a board member detailed in the filing, Zuckerberg said that he had taken a $1 annual salary since 2013 and that his potential tax liability would require a share sale that reduced his voting interest to about 53%. It is currently 60.6%.

Later that summer, Zuckerberg asked for a 20:1 dividend ratio for the new potential Class C stock. He told board members that he was considering establishing residence outside California before the election due to the wealth tax proposal, according to the filing.

A board committee proposed a "contingent dividend," paid only if the wealth tax passed that was opposed by company management.

Outside counsel representing Zuckerberg in early September offered a new term sheet with Class C stock carrying a 4:1 dividend ratio and said the CEO would need to begin taking steps to establish residency elsewhere by mid-October.

Zuckerberg told members of the board on Sept. 9 that he intended to publicly list his Palo Alto, Calif., home for sale in four days, the filing shows. The next day, his outside counsel proposed a new term sheet with a 1:1 dividend ratio, 80% of the CEO's Class C stock being restricted and 20% available for sale immediately.

Days later, Zuckerberg signed on to a final agreement -- committing to remain in California or wherever Meta is headquartered for at least the next eight years. He didn't ultimately list his Palo Alto home for sale.

 

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