124 A.3d 47
Del. Ch.2015Background
- Facebook’s board (8 directors) approved increased 2013 compensation (RSUs and cash retainers) for six non-employee directors; Zuckerberg and Sandberg (inside directors) did not receive the awards.
- Plaintiff Espinoza filed a derivative suit alleging breach of fiduciary duty, unjust enrichment, and waste, asserting a majority of the board was interested and thus the transaction should be reviewed under entire fairness.
- Zuckerberg controls ~61.6% of voting power (Class B super-vote shares). After suit, he stated in an affidavit and deposition that he approved the 2013 awards and would have voted or signed a written consent in favor.
- Defendants moved for summary judgment on fiduciary duty and unjust enrichment claims based on Zuckerberg’s asserted ratification; they moved to dismiss the waste claim.
- The Court considered whether a disinterested controlling stockholder can effect ratification through informal or post‑hoc expressions (affidavit/deposition) rather than the DGCL’s prescribed mechanisms (meeting vote or written consent under §228).
- Chancellor Bouchard held that stockholder ratification that shifts review from entire fairness to business judgment requires formal compliance with the DGCL methods for taking stockholder action; Zuckerberg’s statements did not suffice.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a disinterested controlling stockholder may ratify an interested board’s action without using DGCL-prescribed formalities | Espinoza: Ratification must follow DGCL procedures (vote or §228 written consent); informal assent cannot shift the standard of review | Defendants: Zuckerberg’s controlling vote and his affidavit/deposition expressing approval suffice to ratify without formalities | Held: Formal statutory methods are required; informal post-hoc statements do not effectuate ratification |
| Standard of review for the 2013 Compensation | Ratification absent -> entire fairness applies because majority of board was interested | Ratification by Zuckerberg -> business judgment presumption should apply | Held: Entire fairness applies; defendants failed to meet or prove entire fairness on summary judgment |
| Unjust enrichment claim (derivative) | Follows breach claim; should survive if breach claim survives | If fiduciary claim fails, unjust enrichment fails | Held: Denied summary judgment on unjust enrichment (survives because fiduciary claim survives) |
| Waste claim (extreme standard) | Plaintiff: Awards were excessive relative to peers and company performance | Defendants: Allegations do not meet the rare, extreme waste standard | Held: Waste claim dismissed for failure to state a claim (alleged excessiveness not waste) |
Key Cases Cited
- Gantler v. Stephens, 965 A.2d 695 (Del. 2009) (defines shareholder ratification as a fully informed shareholder vote approving director action)
- Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304 (Del. 2015) (stockholder approval via a valid vote converts judicial review to business judgment where vote was fully informed and uncoerced)
- Lewis v. Vogelstein, 699 A.2d 327 (Del. Ch. 1997) (discusses shareholder ratification and cautions application of agency ratification principles in corporate context)
- Cede & Co. v. Technicolor, Inc., 634 A.2d 345 (Del. 1993) (articulates the two-part entire fairness test: fair dealing and fair price)
- Nemec v. Shrader, 991 A.2d 1120 (Del. 2010) (elements of unjust enrichment)
- In re Wheelabrator Techs., Inc. S’holders Litig., 663 A.2d 1194 (Del. Ch. 1995) (approval by fully informed, disinterested shareholders invokes business judgment review)