250 A.3d 862
Del. Ch.2020Background
- Mark Zuckerberg (founder, CEO, controlling stockholder) proposed a Class C non‑voting share reclassification so he could transfer economic value (for his Giving Pledge) while preserving voting control. The plan would issue two non‑voting shares for each existing share and shift much economic value to non‑voting stock.
- The Board created a special committee (Andreessen, Bowles, Desmond‑Hellmann) to negotiate concessions; committee retained Wachtell and Evercore but negotiations were dominated by terms favorable to Zuckerberg.
- Andreessen engaged in extensive back‑channel communications with Zuckerberg during the committee process; the Board approved the reclassification in April 2016 despite substantial disinterested shareholder opposition.
- Multiple stockholder suits sought injunctive relief; Facebook agreed to delay implementation while the consolidated class action proceeded; shortly before trial Zuckerberg asked the Board to abandon the reclassification and the Board withdrew it, mooting the class action.
- Facebook incurred about $21.8 million in costs pursuing/defending the reclassification and later paid $68.7 million in a fee award; the derivative plaintiff sued directors (including Zuckerberg and committee members) for breach of fiduciary duty seeking those damages and reputational harms.
- Defendants moved to dismiss under Court of Chancery Rule 23.1 for failure to make a pre‑suit demand and lack of demand futility; the Court applied Rales as the governing test, analyzed directors individually (taking exculpation into account), and granted the motion because a majority of the demand board was independent and disinterested.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether pre‑suit demand was excused (demand futility) | Demand excused because the Board (or enough directors) were conflicted, disloyal, or faced substantial likelihood of liability for approving the reclassification. | Demand not excused; a majority of the Demand Board could impartially consider a litigation demand. | Demand not excused; dismissal under Rule 23.1 granted. |
| Which test governs demand futility (Aronson v. Rales)? | Aronson applies because most directors who approved the transaction remained on the Board. | Rales is the appropriate, generally applicable test; apply Rales while borrowing Aronson principles as needed. | Court applies Rales as the general test and conducts a director‑by‑director inquiry. |
| Effect of exculpatory charter provision (8 Del. C. §102(b)(7)) on pleading non‑exculpated claims | Exculpation should not automatically defeat demand‑futility allegations; alleged conduct (bad faith/disloyalty) defeats exculpation. | Exculpation requires plaintiffs to plead particularized facts supporting non‑exculpated claims (self‑interest, beholden status, or bad faith) to show a substantial likelihood of liability. | Following Cornerstone, plaintiff must plead particularized non‑exculpated claims; here allegations did not show a substantial likelihood of liability for a majority of directors. |
| Independence/interest of specific directors (e.g., Andreessen, Zuckerberg, Andreessen’s back‑channels) | Several directors (Zuckerberg, Andreessen, certain committee members) were conflicted, beholden, or acted in bad faith so they could not consider a demand. | Most directors (Zients, Chenault, Hastings, Thiel, Bowles, and at least five total) were independent/disinterested; allegations as to others were conclusory. | Even accepting several pro‑plaintiff assumptions, court found at least five directors could impartially consider a demand; plaintiff’s allegations were insufficiently particularized to establish futility. |
Key Cases Cited
- Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (articulates the two‑prong demand‑futility test coupling director independence and the applicable standard of review)
- Rales v. Blasband, 634 A.2d 927 (Del. 1993) (frames the governing inquiry whether the board could impartially consider a demand as of filing)
- Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981) (board authority over corporate claims and procedural framework for director decisions)
- In re Cornerstone Therapeutics Inc. S’holder Litig., 115 A.3d 1173 (Del. 2015) (clarifies that plaintiffs seeking monetary damages must plead non‑exculpated claims against exculpated directors)
- Brehm v. Eisner, 746 A.2d 244 (Del. 2000) (pleading standards and appellate review for Rule 23.1 determinations)
- Wood v. Baum, 953 A.2d 136 (Del. 2008) (discusses interplay of Aronson and Rales)
- Stone v. Ritter, 911 A.2d 362 (Del. 2006) (demand futility and duty of oversight/Caremark principles)
- Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110 (Del. 1994) (controlling‑stockholder transactions and entire‑fairness principles)
- Kahn v. Tremont Corp., 694 A.2d 422 (Del. 1997) (controlling‑stockholder/entire‑fairness doctrine)
- Beam v. Stewart, 845 A.2d 1040 (Del. 2004) (director independence and demand futility analysis)
- Cede & Co. v. Technicolor, Inc., 634 A.2d 345 (Del. 1993) (director duty of care and disclosure obligations)