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Did Elizabeth Holmes take away too much power from Theranos shareholders? (Update)

Elizabeth Holmes has an extreme amount of control over the future of Theranos, maybe more than some shareholders even realized.

This story has been updated from an earlier version.

Anyone sick of hearing more news about Theranos and Elizabeth Holmes? Good. Didn’t think so…

Beyond all of the backlash concerning the company’s uncleared blood testing technology, questions are being raised about how leadership has operated within Theranos. Forbes columnist Peter Cohan recently brought to light the fact that stock splits and the say shareholders have in the company could be slightly suspect based on a letter from 2013 discussing the matter – specifically how Holmes has managed to maintain and build a significant portion of the leadership with different adjustments.

The letter addresses the creation of two classes of common stock, which would give Holmes the eligibility to switch her Class A common stock (one vote per share) for a Class B stock (100 votes per share) – a significant increase in power over the company now worth $9 billion. This was reportedly designed to help increase capital for Theranos.

Cohan’s article reports that the letter stated:

“We are completing a series of financial transactions with strategic partners that provide access to additional capital in order to accelerate our growth. We are also completing equity transactions with strategic entities who had previously invested in Theranos and had the option to invest additional equity in the company through the end 2013.”

Cohan’s criticism about this is that the letter doesn’t explicitly state the degree of shift in power for Holmes, which would be an important detail for investors. He wrote:

“After raising new capital, would her Class B shares give her enough votes to pick directors and decide whether to sell Theranos? Did Holmes have these powers before the creation of the new classes of common (stock) or would that change grant her new powers?”

Not only that, it was reported that the decision to move forward with the changes was unanimous, but one shareholder reportedly told Cohan that that isn’t possible. That shareholder apparently never signed a consent form.

So what does this all really mean for Theranos shareholders? Cohan spoke to the University of Delaware’s corporate governance expert, Charles Elson.

“If a CEO has Class B common shares with 100 votes with a 50% economic interest, then the CEO controls the board, decides whether to sell the company, and has complete control,” Elson reportedly said. “If the board wants to fire the CEO, the CEO can replace the board before that happens.”

Update: Following the Forbes publication, Theranos has stated that in Cohan’s article he “drew inaccurate conclusions based on incomplete information or misinterpretations,” and these are the correct points they requested to be made in response:

  • Ms. Holmes ALREADY owned a controlling stake in the company, so the article incorrectly stated  that she was taking “control from shareholders”;
  • Shareholders were fully informed about the reason for the vote and the powers that it vested in the holder of the Class B shares, in contrast to Mr. Cohan’s assertions that shareholders were not fully informed as to the rights of the owner of the Class B shares; and
  • The transaction was conditioned on, among other votes, approval by a majority of the outstanding shares of the capital stock and Common Stock of the Company, “held by stockholders who are independent of the Founder,” as opposed to Mr. Cohan’s incorrect assertion that shareholders were not adequately represented in the vote.