United Food and Commercial Workers Union v. Zuckerberg
262 A.3d 1034
Del.2021Background
- In 2016 Facebook’s board approved a stock reclassification that would let Mark Zuckerberg sell most of his shares while retaining voting control; the Special Committee negotiated terms largely favorable to Zuckerberg.
- Multiple stockholder class actions challenged the Reclassification; Facebook later abandoned the plan (at Zuckerberg’s request), mooting the class action after spending ≈$21.8M defending and paying ≈$68.7M in a corporate-benefit settlement.
- Tri‑State filed a derivative suit seeking to recover Facebook’s defense and settlement expenditures; it did not make a pre‑suit demand, claiming demand would be futile because the board’s approval was not a valid exercise of business judgment and most directors were beholden to Zuckerberg.
- The Court of Chancery dismissed Tri‑State’s complaint under Court of Chancery Rule 23.1 for failure to plead demand futility with particularity, applying a blended Aronson/Rales analysis.
- On appeal the Delaware Supreme Court affirmed, holding (1) exculpated duty‑of‑care claims (where the charter contains a §102(b)(7) exculpation) cannot, by themselves, establish demand futility under Aronson’s second prong because they do not create a substantial likelihood of personal liability, and (2) Tri‑State failed to plead particularized facts that a majority of the demand board lacked independence.
- The Court adopted a director‑by‑director three‑part demand‑futility test (material personal benefit; substantial likelihood of liability; lack of independence from a person who either received a material benefit or faces substantial liability) to harmonize Aronson and Rales going forward.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether exculpated duty‑of‑care claims can satisfy Aronson’s second prong and excuse demand | Exculpated care breaches show the transaction was not a valid exercise of business judgment, so demand is futile | Section 102(b)(7) exculpation eliminates substantial likelihood of liability, so care claims cannot excuse demand | Held: No — exculpated care claims do not satisfy Aronson’s second prong because they do not create a substantial likelihood of personal liability |
| Proper legal test for demand futility where board turnover/abstentions complicate Aronson/Rales application | Aronson’s language should control where the same board approved the transaction | Rales (or a blended approach) better accommodates mixed compositions and turnover | Held: Adopted a three‑part, director‑by‑director test blending Aronson and Rales (material personal benefit; substantial likelihood of liability; lack of independence) |
| Whether Tri‑State pleaded particularized facts that a majority of the demand board lacked independence from Zuckerberg | Tri‑State alleged friendships, business ties, philanthropy overlap, and advisor relationships sufficient to show directors were beholden | Defendants: allegations are conclusory or immaterial; no facts show material personal ties or that director service was financially or personally material | Held: Tri‑State failed to plead particularized facts showing a reasonable doubt as to the independence of two of the four relevant directors; demand not excused |
| Whether entire‑fairness or controller status automatically excuses demand | Plaintiff: conflicted‑controller transactions should render demand futile because entire‑fairness applies ab initio | Defendants: demand must still be tested against directors’ capacity to act impartially; controller status alone is not dispositive | Held: Controller status or invocation of entire‑fairness does not automatically excuse demand; focus remains on directors’ ability to consider demand impartially |
Key Cases Cited
- Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (articulates demand‑futility test when the same board approved the challenged transaction)
- Rales v. Blasband, 634 A.2d 927 (Del. 1993) (establishes the demand‑futility test when a different board would consider the demand)
- In re Cornerstone Therapeutics, Inc. Stockholder Litig., 115 A.3d 1173 (Del. 2015) (holds that where charter exculpates care claims, plaintiffs must plead non‑exculpated claims to survive dismissal)
- Brehm v. Eisner, 746 A.2d 244 (Del. 2000) (explains Rule 23.1 particularity requirement and demand‑futility analysis)
- Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040 (Del. 2004) (discusses standards for director independence at the pleading stage)