In re Facebook, Inc.
922 F. Supp. 2d 445
S.D.N.Y.2013Background
- Plaintiffs Cole, Hubuschman, Levy, and Childs filed shareholder derivative actions in California state court seeking relief for alleged fiduciary breaches by Facebook officers/directors.
- Facebook removed the actions to the SDNY, asserting original federal jurisdiction as a covered class action; plaintiffs moved to remand to state court.
- Facebook moved to dismiss the derivative actions on threshold grounds: improper venue under a Delaware forum selection clause, lack of standing (contemporaneous ownership), and lack of ripeness, along with SLUSA considerations under Rule 23.1.
- Forum provision in Facebook’s restated certificate Designates Delaware Court of Chancery as exclusive forum for derivative actions; whether enforceable against pre-IPO/IPO-era shareholders is disputed by plaintiffs.
- Court cites pre-IPO adoption of the forum provision and filing with Delaware Secretary of State timing to determine enforceability; the clause becomes effective upon filing, which occurred after the IPO.
- Court ultimately grants dismissal on standing and ripeness, denies venue dismissal, and then denies remand as moot, granting leave to replead within twenty days.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Enforceability of the forum selection clause | Clause unenforceable as unilaterally adopted post-IPO | Clause adoptable pre-IPO and binding; mandatory and exclusive | Forum clause unenforceable as to derivative plaintiffs (not binding pre-IPO shareholders) |
| Derivative standing (contemporaneous ownership) | Plaintiffs had contemporaneous ownership since IPO date | Plaintiffs lacked ownership at time of alleged wrongdoing; standing void | Derivatives lack standing; contemporaneous ownership not met; dismissal for lack of standing |
| Demand futility under Delaware law | Board not independent; demand futile | Board independent; no particularized facts showing futility | Demand futility not pled with particularized facts; dismissal for lack of proper demand pleading |
| Ripeness of the derivative claims | Claims ripe due to damages from ongoing class actions and reputational cost | Damages contingent on outcomes of other lawsuits; not ripe | Claims not ripe; dismissal on ripeness |
| Remand vs dismissal sequencing (jurisdiction threshold) | Remand decision should precede threshold dismissal | Threshold issues may be resolved first for efficiency and consistency | Threshold issues resolved first; remand denied as moot |
Key Cases Cited
- Sinochem Int’l Co. Ltd. v. Malaysia Int’l Shipping Corp., 549 U.S. 422 (U.S. 2007) (threshold issues may be decided before jurisdiction; no jurisdictional hierarchy in threshold matters)
- Ruhrgas AG v. Marathon Oil Co., 526 U.S. 574 (U.S. 1999) (court may choose among threshold grounds to deny audience to merits)
- Can v. United States, 14 F.3d 160 (2d Cir.1994) (justiciability may be a threshold question before jurisdiction)
- Aronson v. Lewis, 473 A.2d 805 (Del.1993) (demand futility and independence threshold concepts in derivative suits)
- Rales v. Blasband, 634 A.2d 927 (Del.1993) (test for demand futility; independence inquiry)
- In re Bank of N.Y. Derivative Litig., 320 F.3d 291 (2d Cir.2003) (caremark-like theories; pleading requirements for derivative claims)