UNITED FOOD AND COMMERCIAL WORKERS UNION AND PARTICIPATING FOOD INDUSTRY EMPLOYERS TRI-STATE PENSION FUND v. ZUCKERBERG
No. 404, 2020
Court Below – Court of Chancery of the State of Delaware
September 23, 2021
Submitted: June 30, 2021
IN THE SUPREME COURT OF THE STATE OF DELAWARE
UNITED FOOD AND
COMMERCIAL WORKERS UNION
AND PARTICIPATING FOOD
INDUSTRY EMPLOYERS TRI-STATE PENSION FUND,
Plaintiff-Below,
Appellant,
v.
MARK ZUCKERBERG, MARC
ANDREESSEN, PETER THIEL,
REED HASTINGS, ERSKINE B.
BOWLES, and SUSAN D.
DESMOND-HELLMANN,
Defendants-Below,
Appellees
and
FACEBOOK, INC.,
Nominal Defendant-Below,
Appellee.
§
§
§
§
§
§
§
§
§
§
§
§
§
§
§
§
§
§
§
§
§
§
§
§
§
No. 404, 2020
Court Below – Court of Chancery
of the State of Delaware
No. 2018-0671-JTL
Submitted: June 30, 2021
Decided: September 23, 2021
Before SEITZ, Chief Justice; VALIHURA, VAUGHN, TRAYNOR, and
MONTGOMERY-REEVES, Justices, constituting the Court en banc.
Upon appeal from the Court of Chancery. AFFIRMED.
P. Bradford deLeeuw, Esquire, DELEEUW LAW LLC, Wilmington, Delaware; Robert C. Schubert, Esquire, Willem F. Jonckheer, Esquire (argued), SCHUBERT JONCKHEER & KOLBE LLP, San Francisco, California; James E. Miller, Esquire, SHEPHERD FINKELMAN MILLER & SHAH, LLP, Chester, Connecticut; Attorneys for Appellant United Food and Commercial Workers Union and Participating Food Industry Employers Tri-State Pension Fund.
Kevin R. Shannon, Esquire, Berton W. Ashman, Jr., Esquire, Tyler J. Leavengood, Esquire, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; William Savitt, Esquire (argued), Ryan A. McLeod, Esquire, Anitha Reddy, Esquire, Kevin M. Jonke, Esquire, WACHTELL, LIPTON, ROSEN & KATZ, New York, New York; Attorneys for Appellees Marc L. Andreessen, Erskine B. Bowles, Susan D. Desmond-Hellman, Reed Hasting, and Peter Thiel.
Raymond J. DiCamillo, Esquire, Kevin M. Gallagher, Esquire, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; George M. Garvey, Esquire, Laura Lin, Esquire, MUNGER, TOLLES & OLSON LLP, Los Angeles, California; Attorneys for Appellee Mark Zuckerberg.
David E. Ross, Esquire, Garrett B. Moritz, Esquire, R. Garrett Rice, Esquire, ROSS ARONSTAM & MORITZ LLP, Wilmington, Delaware; Attorneys for Appellee Facebook,
MONTGOMERY-REEVES, Justice:
In 2016, the board of directors of Facebook, Inc. (“Facebook”) voted in favor of a stock reclassification (the “Reclassification”) that would allow Mark Zuckerberg—Facebook’s controller, chairman, and chief executive officer—to sell most of his Facebook stock while maintaining voting control of the company. Zuckerberg
Not long after, numerous stockholders filed lawsuits in the Court of Chancery, alleging that Facebook’s board of directors violated their fiduciary duties by negotiating and approving a purportedly one-sided deal that put Zuckerberg’s interests ahead of the company’s interests. The trial court consolidated more than a dozen of these lawsuits into a single class action. At Zuckerberg’s request and shortly before trial, Facebook withdrew the Reclassification and mooted the fiduciary-duty class action. Facebook spent more than $20 million defending against the class action and paid plaintiffs’ counsel more than $68 million in attorneys’ fees under the corporate benefit doctrine.
Following the settlement, another Facebook stockholder—the United Food and Commercial Workers Union and Participating Food Industry Employers Tri-State Pension Fund (“Tri-State”)—filed a derivative complaint in the Court of Chancery. This new action
rehashed many of the allegations made in the prior class action but sought compensation for the money Facebook spent in connection with the prior class action.
Tri-State did not make a litigation demand on Facebook’s board. Instead, Tri-State pleaded that demand was futile because the board’s negotiation and approval of the Reclassification was not a valid exercise of its business judgment and because a majority of the directors were beholden to Zuckerberg. Facebook and the other defendants moved to dismiss Tri-State’s complaint under Court of Chancery Rule 23.1, arguing that Tri-State did not make demand or prove that demand was futile. Both sides agreed that the demand futility test established in Aronson v. Lewis1 applied to Tri-State’s complaint.
In October 2020, the Court of Chancery dismissed Tri-State’s complaint under Rule 23.1. The court held that exculpated care claims do not excuse demand under Aronson’s second prong because they do not expose directors to a substantial likelihood of liability. The court also held that the complaint failed to raise a reasonable doubt that a majority of the demand board lacked independence from Zuckerberg. In reaching these conclusions, the Court of Chancery applied a three-part test for demand futility that blended the Aronson test with the test articulated in Rales v. Blasband.2
Tri-State has appealed the Court of Chancery’s judgment. For the reasons provided below, this Court affirms the Court of Chancery’s judgment. The second prong of Aronson
focuses on whether the derivative claims would expose directors to a substantial likelihood of liability. Exculpated claims do not satisfy that standard because they do not expose directors to a substantial likelihood of liability. Further, the complaint does not plead with particularity that a majority of the demand board lacked independence. Thus, the Court of Chancery properly dismissed Tri-State’s complaint for failing to make a demand on the board.
Additionally, this Opinion adopts the Court of Chancery’s three-part test for demand futility. When the Court decided Aronson, raising a reasonable doubt that the business judgment standard of review would apply exposed directors to a substantial
I. RELEVANT FACTS AND PROCEDURAL BACKGROUND
A. The Parties and Relevant Non-Parties
Appellee Facebook is a Delaware corporation with its principal place of business in California.3
Appellant Tri-State has continuously owned stock in Facebook since September 2013.5
Appellee Mark Zuckerberg founded Facebook and has served as its chief executive officer since July 2014.6 Zuckerberg controls a majority of Facebook’s voting power and has been the chairman of Facebook’s board of directors since January 2012.7
Appellee Marc Andreessen has served as a Facebook director since June 2008.8 Andreessen was a member of the special committee that negotiated and recommended that the
transaction was otherwise the product of a valid business judgment.”106 This
The Rales test applies in all other circumstances. Under Rales, demand is excused as futile if the complaint alleges particularized facts creating a “reasonable doubt that,
While Delaware law recognizes that there are circumstances where making a demand would be futile because a majority of the directors “are under an influence which sterilizes their discretion”
In this case, Tri-State alleged that demand was excused as futile for several reasons, including that the board’s negotiation and approval of the Reclassification would not be “protected by the business judgment rule” because “[t]heir approval was not fully informed” or “duly considered,”112 and that a majority of the directors on the Demand Board lacked independence from Zuckerberg.113 The Court of Chancery held that Tri-State failed to plead with particularity facts establishing that demand was futile and dismissed the complaint because it did not comply with Court of Chancery Rule 23.1.114
On appeal, Tri-State raises two issues with the Court of Chancery’s demand-futility analysis. First, Tri-State argues that the Court of Chancery erred by holding that exculpated care violations do not satisfy the second prong of the Aronson test.115 Second, Tri-State argues that its complaint contained particularized allegations establishing that a majority of the directors on the Demand Board were beholden to Zuckerberg.116
For the reasons provided below, this Court affirms the Court of Chancery’s judgment.
A. Exculpated Care Violations Do Not Satisfy Aronson’s Second Prong
The directors and officers of a Delaware corporation owe two overarching fiduciary duties—the duty of care and the duty of loyalty.117 “[P]redicated upon concepts of gross negligence,” the duty of care requires that fiduciaries inform themselves of material information before making a business decision and act prudently in carrying
Tri-State alleges that the Director Defendants breached their duty of care in negotiating and approving the Reclassification. Section 102(b)(7) of the DGCL authorizes corporations to adopt a charter provision insulating directors from liability for breaching their duty of care:
“[T]he certificate of incorporation may . . . contain any or all of the following matters:
(7) A provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director: (i) For any breach of the director’s duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; . . . or (iv) for any transaction from which the director derived an improper personal benefit.
Facebook’s charter contains a Section 102(b)(7) clause;120 as such, the Director Defendants face no risk of personal liability from the allegations asserted in this action. Thus, Tri-State’s demand-futility allegations raise the question whether a derivative plaintiff can rely on exculpated care violations to establish that demand is futile under the second prong of the Aronson test. The Court of Chancery held that exculpated care claims do not excuse demand because the second prong of the Aronson test focuses on whether a director faces a substantial likelihood of liability.121 Tri-State argues that this analysis was wrong because
Aronson’s second prong focuses on whether the challenged transaction “satisfies the applicable standard of review,” not on whether directors face a substantial likelihood of liability.122
The following discussion is divided into three parts. The first part affirms the Court of Chancery’s holding that, in light of subsequent developments, exculpated care claims do not excuse demand under Aronson’s second prong. The second part explains why Tri-State’s counterarguments do not change our analysis. The third part adopts the Court of Chancery’s three-part test as the universal test for demand futility.
1. The second prong of Aronson focuses on whether the directors face a substantial likelihood of liability
The main question on appeal is whether allegations of exculpated care violations can establish that demand is excused under Aronson’s second prong. According to Tri-State, the second prong excuses demand
Tri-State’s argument hinges on the plain language of Aronson’s second prong, which focuses on whether “the challenged transaction was . . . the product of a valid business judgment”:
[I]n determining demand futility, the Court of Chancery . . . must decide whether, under the particularized facts alleged, a reasonable doubt is created that: (1) the directors are disinterested and independent and (2) the challenged transaction was otherwise the product of a valid business judgment. Hence, the Court of Chancery must make two inquiries, one into the independence and disinterestedness of the directors and the other into the substantive nature of the challenged transaction and the board’s approval thereof.124
Later opinions issued by this Court contain similar language that can be read to suggest that Aronson’s second prong focuses on the propriety of the challenged transaction.125 These passages do not address, however, why Aronson used the standard of review as a proxy for whether the board could impartially consider a litigation demand. The likely answer is that, before the General Assembly adopted Section 102(b)(7) in 1995,126 rebutting the business judgment rule through allegations of care violations exposed directors to a substantial likelihood of liability. Thus, even if the demand board was independent and
disinterested with respect to the challenged transaction, the litigation presented a threat that would “sterilize [the board’s] discretion” with respect to a demand.127
Aronson supports this conclusion. For example, in Aronson the Court noted that, although naming directors as defendants is not enough to establish that demand would be futile, “in rare cases a transaction may be so egregious on its face that board approval cannot meet the test of business judgment, and a substantial likelihood of liability therefore exists. . . . [I]n that context demand is excused.”128 This passage
On the other hand, if the business judgment rule would apply, allowing the derivative litigation to go forward would expose the directors to a minimal threat of liability. A remote threat of liability is not a good enough reason to deprive the board of control over the corporation’s litigation assets. Thus, demand is required.
Although not unanimous,129 the weight of Delaware authority since the enactment of Section 102(b)(7) supports holding that exculpated care violations do not excuse demand under Aronson’s second prong.130 For example, in Lenois, the Court of Chancery held that the second prong focuses on whether director-defendants face a substantial likelihood of liability:
[W]here an exculpatory charter provision exists, demand is excused as futile under the second prong of Aronson with a showing that a majority of the board faces a substantial likelihood of liability for non-exculpated claims. That a non-exculpated claim may be brought against less than a majority of the board or some other individual at the company, or that the board committed exculpated duty of care violations alone, will not affect the board’s right to control a company’s litigation.131
In reaching that conclusion, Lenois examined several other Court of Chancery decisions holding that Section 102(b)(7) provisions are relevant when assessing whether demand should be excused under Aronson’s second prong:
- In Higher Education Management Group, Inc v. Matthews, the Court of Chancery noted that because the corporation’s charter contained a Section 102(b)(7) provision, and the complaint did “not support an inference of bad faith conduct by a majority of the Director Defendants,” demand was required because “there would be no recourse for Plaintiffs and no substantial likelihood of liability if the Director Defendants’ only failing was that they had not become fully informed.”132
- In Pfeiffer v. Leedle, the Court of Chancery held that demand was “excused under the second prong of Aronson” because the board committed “breaches of the duty of loyalty” that “cannot be exculpated” under the charter.133
- In In re Goldman Sachs, the Court of Chancery noted that where a corporation’s charter contains a Section 102(b)(7) provision, the second prong of Aronson requires that the plaintiff “plead particularized facts that demonstrate that the directors acted with
scienter; i.e., there was an ‘intentional dereliction of duty’ or a ‘conscious disregard’ for their responsibilities, amount to bad faith.”134 In other words, to establish that making a demand would be futile under the second prong of Aronson a derivative complaint would have to raise a reasonable doubt that the directors faced a substantial likelihood of liability for committing non-exculpated breaches of their fiduciary duties.135 - In In re Lear, the Court of Chancery reached the same conclusion that where a corporation’s charter has a Section 102(b)(7) provision, “the plaintiffs [must] plead particularized facts supporting an inference that the directors committed a breach of their fiduciary duty of loyalty” by “act[ing] in bad faith.”136
- In Disney I, the Court of Chancery held that making a demand would be futile because the complaint raised a reasonable “doubt whether the board’s actions were taken honestly and in good faith,” exposing the directors to liability for non-exculpated breaches of their fiduciary duties.137
Several opinions issued after Lenois support the same analysis:138
- In Ellis v. Gonzalez, the Court of Chancery held that because the corporation’s charter contained a Section 102(b)(7) provision, “under either Aronson or Rales, the question . . . is the same: Does the Complaint adequately allege that a majority of . . . [the] board faces a substantial likelihood of liability for breaching the duty of loyalty?”139
- In Steinberg v. Bearden, the Court of Chancery’s demand-futility analysis focused on whether “a majority of the Board face[d] a substantial threat of personal liability . . . such that the Board could not consider a demand impartially.”140
This Court’s opinion in In re Cornerstone Therapeutics, Inc. Stockholder Litigation, changed the landscape even more.141 Before Cornerstone, there was some uncertainty about how to apply a Section 102(b)(7) provision when deciding a motion to dismiss under Court of Chancery Rule 12(b)(6). Some courts held that an exculpation clause could warrant dismissing a complaint alleging care claims.142 Others, particularly where the entire fairness standard of review might apply, ruled that more factual development was needed
Cornerstone eliminated any uncertainty and held that where a corporation’s charter contains a Section 102(b)(7) provision, “[a] plaintiff seeking only monetary damages must plead non-exculpated claims against a director who is protected by an exculpatory charter provision to survive a motion to dismiss, regardless of the underlying standard of review for the board’s conduct.”144 Thus, under current law a Section 102(b)(7) provision removes the threat of liability and protracted litigation for breach of care claims. As such, Cornerstone eliminated “any continuing vitality from Aronson’s use of the standard of review for the challenged transaction as a proxy for whether directors face a substantial likelihood of liability sufficient to render demand futile.”145
Accordingly, this Court affirms the Court of Chancery’s holding that exculpated care claims do not satisfy Aronson’s second prong. This Court’s decisions construing Aronson have consistently focused on whether the demand board has a connection to the challenged transaction that would render it incapable of impartially considering a litigation demand.146
When Aronson was decided, raising a reasonable doubt that directors breached their duty of care exposed them to a substantial likelihood of liability and protracted litigation, raising doubt as to their ability to impartially consider demand. The ground has since shifted, and exculpated breach of care claims no longer pose a threat that neutralizes director discretion. These developments must be factored into demand-futility analysis, and Tri-State has failed to provide a reasoned explanation of why rebutting the business judgment rule should automatically render directors incapable of impartially considering a litigation demand given the current landscape. For these reasons, the Court of Chancery’s judgment is affirmed.
2. Tri-State’s other arguments do not change the analysis
Tri-State raises a few more counterarguments that do not change the Court’s analysis.
in the challenged transaction (i.e., a personal financial benefit from the challenged transaction that is not equally shared by the stockholders).149 This is a different consideration than whether the directors face a substantial likelihood of liability for approving the challenged transaction, even if they received nothing personal from the challenged transaction. The second prong excuses demand in that circumstance. Thus, the first and second prongs of Aronson perform separate functions, even if those functions are complementary.
Second, Tri-State argues that this holding places an unfair burden on plaintiffs and will fail to deter controllers from pressuring boards to approve unfair transactions.150 Although not entirely clear, Tri-State appears to argue that because the entire fairness standard of review applies ab initio to a conflicted-controller transaction,151 demand is automatically excused under Aronson’s second prong. As the Court of Chancery noted below, some cases have suggested that demand is automatically excused under Aronson’s second prong if the complaint raises a reasonable doubt that the business judgment standard of review will apply, even if the business judgment rule is rebutted for a reason unrelated to the conduct or interests of a majority of the directors on the demand board.152 The Court of Chancery’s case law developed in a different direction, however, concluding that demand is not futile under the second prong of Aronson simply because entire fairness applies ab initio
.to a controlling stockholder transaction. As the Court of Chancery has explained, the theory that demand should be excused simply because an alleged controlling stockholder stood on both sides of the transaction is “inconsistent with Delaware Supreme Court authority that focuses the test for demand futility exclusively on the ability of a corporation’s board of directors to impartially consider a demand to institute litigation on behalf of the corporation—including litigation implicating the interests of a controlling stockholder.”153
Further, Tri-State’s argument presumes that a stockholder has a general right to control corporate claims. Not so. The directors are tasked with managing the affairs of the corporation, including whether
Finally, Tri-State’s argument collapses the distinction between the board’s capacity to consider a litigation demand and the propriety of the challenged transaction. It is entirely
possible that an independent and disinterested board, exercising its impartial business judgment, could decide that it is not in the corporation’s best interest to spend the time and money to pursue a claim that is likely to succeed. Yet, Tri-State asks the Court to deprive directors and officers of the power to make such a decision, at least where the derivative action would challenge a conflicted-controller transaction. This rule may have its benefits, but it runs counter to the “cardinal precept” of Delaware law that independent and disinterested directors are generally in the best position to manage a corporation’s affairs, including whether the corporation should exercise its legal rights.155
For these reasons, Tri-State cannot satisfy the demand requirement by pleading—for reasons unrelated to the conduct or interests of a majority of the directors on the demand board—that the entire fairness standard of review would apply to the Reclassification. Rather, to satisfy Rule 23.1, Tri-State must plead with particularity facts establishing that a majority of the directors on the demand board are subject to an influence that would sterilize their discretion with respect to the litigation demand.
Third, Tri-State argues that this holding is contrary to Brehm v. Eisner,156 H&N Management Group v. Couch,157 and McPadden.158 This Court’s opinion in Brehm contains language that can be read to suggest that the second prong of the Aronson test focuses on the
propriety of the challenged transaction rather than on whether the directors face a substantial likelihood of liability for approving the transaction. For example, the Court’s demand-futility analysis focused on duty of care violations even though the opinion was issued after the legislature adopted Section 102(b)(7) and it appears that Disney’s corporate charter had an exculpation clause.159 Nonetheless, the Court did not hold that exculpated claims can establish demand futility,160 and on remand the plaintiff relied on non-exculpated claims to
H&N Management is inapposite because the corporation’s charter did not exculpate directors for breaches of the duty of care.162 Thus, the Court of Chancery did not address whether exculpated claims could excuse demand under the second prong of the Aronson test.
This leaves McPadden, which appears to be the only Delaware decision squarely holding that exculpated care violations can excuse demand under the second prong of Aronson.163 It is understandable that the Court of Chancery reached this holding given the
plain language of Aronson. Nonetheless, given the subsequent developments in Delaware law, it is our view that exculpated care violations no longer pose a sufficient threat to excuse demand under the second prong of the Aronson test. Rather, the second prong requires particularized allegations raising a reasonable doubt that a majority of the demand board is subject to a sterilizing influence because directors face a substantial likelihood of liability for engaging in the conduct that the derivative claim challenges.
3. This Court adopts the Court of Chancery’s three-part test for demand futility
This issue raises one more question—whether the three-part test for demand futility the Court of Chancery applied below is consistent with Aronson, Rales, and their progeny. The Court of Chancery noted that turnover on Facebook’s board, along with a director’s decision to abstain from voting on the Reclassification, made it difficult to apply the Aronson test to the facts of this case:
The composition of the Board in this case exemplifies the difficulties that the Aronson test struggles to overcome. The Board has nine members, six of whom served on the Board when it approved the Reclassification. Under a strict reading of Rales, because the Board does not have a new majority of directors, Aronson provides the governing test. But one of those six directors abstained from the vote on the Reclassification, meaning that the Aronson analysis only has traction for five of the nine. Aronson does not provide guidance about what to do with either the director who abstained or the two directors who joined the Board later. The director who abstained from voting on the Reclassification suffers from other conflicts that renders
reasonable doubt that the transaction at issue was the product of a valid exercise of business judgment,” but dismissing the complaint as to certain directors due to a Section 102(b)(7) provision).
her incapable of considering a demand, yet a strict reading of Aronson only focuses on the challenged decision and therefore would not account for those conflicts. Similarly, the plaintiff alleges that one of the directors who subsequently joined the Board has conflicts that render him incapable of considering a demand, but a strict reading of Aronson would not account for that either. Precedent thus calls for applying Aronson, but its analytical framework is not up to the task. The Rales test, by contrast, can accommodate all of these considerations.164
To address these concerns, the Court of Chancery applied the following three-part test on a director-by-director basis to determine whether demand should be excused as futile:
(i) whether the director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand;
(ii) whether the director would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand; and
(iii) whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct that is the subject of the litigation demand
or who would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand.166
This approach treated “Rales as the general demand futility test,” while “draw[ing] upon Aronson-like principles when evaluating whether particular directors face a substantial likelihood of liability as a result of having participated in the decision to approve the Reclassification.”167
This Court adopts the Court of Chancery’s three-part test as the universal test for assessing whether demand should be excused as futile. When the Court decided Aronson, it made sense to use the standard of review to assess whether directors were subject to an influence that would sterilize their discretion with respect to a litigation demand. Subsequent changes in the law have eroded the ground upon which that framework rested. Those changes cannot be ignored, and it is both appropriate and necessary that the common law evolve in an orderly fashion to incorporate those developments. The Court of Chancery’s three-part test achieves that important goal. Blending the Aronson test with the Rales test is appropriate because “both ‘address the same question of whether the board can exercise its business judgment on the corporat[ion]’s behalf’ in considering demand”;168 and the refined test does not change the result of demand-futility analysis.169
Further, the refined test “refocuses the inquiry on the decision regarding
Finally, because the three-part test is consistent with and enhances Aronson, Rales, and their progeny, the Court need not overrule Aronson to adopt this refined test, and cases properly construing Aronson, Rales, and their progeny remain good law.
part test yield the same result. Op. at 890. Similarly, if the derivative litigation would expose a director to a substantial likelihood of liability, then the demand requirement is excused as futile with respect to that director under the second prong of the Aronson test and the second prong of the refined test. See Aronson, 473 A.2d at 814; Op. at 890. Thus, the refined three-part test excuses demand whenever the Aronson test would excuse demand.
Accordingly, from this point forward, courts should ask the following three questions on a director-by-director basis when evaluating allegations of demand futility:
(i) whether the director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand;
(ii) whether the director faces a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand; and
(iii) whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct that would be the subject of the litigation demand or who would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand.
If the answer to any of the questions is “yes” for at least half of the members of the demand board, then demand is excused as futile. It is no longer necessary to determine whether the Aronson test or the Rales test governs a complaint’s demand-futility allegations.
B. The Complaint Does Not Plead with Particularity Facts Establishing that Demand Would Be Futile
The second issue on appeal is whether Tri-State’s complaint pleaded with particularity facts establishing that a litigation demand on Facebook’s board would be futile. The Court resolves this issue by applying the three-part test adopted above on a director-by- director basis.
The Demand Board was composed of nine directors. Tri-State concedes on appeal
that two of those directors, Chenault and Zients, could have impartially
Tri-State concedes on appeal that neither Thiel, Hastings, Bowles, nor Desmond- Hellmann had a personal interest in the Reclassification.174 This eliminates the possibility that demand could be excused under the first prong of the demand-futility test, as none of the remaining four directors obtained a material personal benefit from the alleged misconduct that is the subject of the litigation demand.
Similarly, there is no dispute that Facebook has a broad Section 102(b)(7) provision;175 and Tri-State concedes on appeal that the complaint does not plead with particularity that Thiel, Hastings, Bowles, or Desmond-Hellmann committed a non- exculpated breach of their fiduciary duties with respect to the Reclassification.176 This
eliminates the possibility that demand could be excused under the second prong of the demand-futility test, as none of the remaining four directors would face a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand.
This leaves one unanswered question: whether the complaint pleaded with particularity facts establishing that two of the four remaining directors lacked independence from Zuckerberg.
“The primary basis upon which a director’s independence must be measured is whether the director’s decision is based on the corporate merits of the subject before the board, rather than extraneous considerations or influences.”177 Whether a director is independent “is a fact-specific determination” that depends upon “the context of a particular case.”178 To show a lack of independence, a derivative complaint must plead with particularity facts creating “a reasonable doubt that a director is . . . so ‘beholden’ to an interested director . . . that his or her ‘discretion would be sterilized.’”179
“A plaintiff seeking to show that a director was not independent must satisfy a
materiality standard.”180 The
“A variety of motivations, including friendship, may influence the demand futility inquiry. But, to render a director unable to consider demand, a relationship must be of a bias-
producing nature.”185 Alleging that a director had a “personal friendship” with someone else, or that a director had an “outside business relationship,” are “insufficient to raise a reasonable doubt” that the director lacked independence.186 “Consistent with [the] predicate materiality requirement, the existence of some financial ties between the interested party and the director, without more, is not disqualifying.”187
Like the Court of Chancery below, we hold that Tri-State failed to raise a reasonable doubt that either Thiel, Hastings, or Bowles was beholden to Zuckerberg.188
1. Hastings
The complaint does not raise a reasonable doubt that Hastings lacked independence from Zuckerberg. According to the complaint, Hastings was not independent because:
- “Netflix purchased advertisements from Facebook at relevant times,” and maintains “ongoing and potential future business relationships with” Facebook.189
- According to an article published by The New York Times, Facebook gave to Netflix and several other technology companies “more intrusive access to users’ personal data than it ha[d] disclosed, effectively exempting those partners from privacy rules.”190
- “Hastings (as a Netflix founder) is biased in favor of founders maintaining control
of their companies.”
191
- “Hastings has . . . publicly supported large philanthropic donations by founders during their lifetimes. Indeed, both Hastings and Zuckerberg have been significant contributors . . . [to] a well-known foundation known for soliciting and obtaining large contributions from company founders and which manages donor funds for both Hastings . . . and Zuckerberg . . . .”192
These allegations do not raise a reasonable doubt that Hastings was beholden to Zuckerberg. Even if Netflix purchased advertisements from Facebook, the complaint does not allege that those purchases were material to Netflix or that Netflix received anything other than arm’s length terms under those agreements. Similarly, the complaint does not make any particularized allegations explaining how obtaining special access to Facebook user data was material to Netflix’s business interests, or that Netflix used its special access to user data to obtain any concrete benefits in its own business.
Further, having a bias in favor of founder-control does not mean that Hastings lacks independence from Zuckerberg. Hastings might have a good-faith belief that founder control maximizes a corporation’s value over the long-haul. If so, that good-faith belief would play a valid role in Hasting’s exercise of his impartial business judgment.193
Finally, alleging that Hastings and Zuckerberg have a track record of donating to similar causes falls short of showing that Hastings is beholden to Zuckerberg. As the Court
of Chancery noted below, “[t]here is no logical reason to think that a shared interest in philanthropy would undercut Hastings’ independence. Nor is it apparent how donating to the same charitable fund would result in Hastings feeling obligated to serve Zuckerberg’s interests.”194 Accordingly, the Court affirms the Court of Chancery’s holding that the complaint does not raise a reasonable doubt about Hastings’s independence.
2. Thiel
The complaint does not raise a reasonable doubt that Thiel lacked independence from Zuckerberg. According to the complaint, Thiel was not independent because:
- “Thiel was one of the early investors in Facebook,” is “its longest-tenured board member besides Zuckerberg,” and “has . . . been instrumental to Facebook’s business strategy and direction over the years.”195
- “Thiel has a personal bias in favor of keeping founders in control of the companies they created . . . .”196
- The venture capital firm at which Thiel is a partner, Founders Fund, “gets ‘good deal flow’” from its “high-profile association with Facebook.”197
- “According to Facebook’s 2018 Proxy Statement, the Facebook shares owned by
the Founders Fund (i.e., by
Thiel and Andreessen) will be released from escrow in connection with” an acquisition.198 - “Thiel is Zuckerberg’s close friend and mentor.”199
- In October 2016, Thiel made a $1 million donation to an “organization that paid [a substantial sum to] Cambridge Analytica” and “cofounded the Cambridge
Analytica-linked data firm Palantir.”200 Even though “[t]he Cambridge Analytica scandal has exposed Facebook to regulatory investigations”201 and litigation, Zuckerberg did not try to remove Thiel from the board.
- Similarly, Thiel’s “acknowledge[ment] that he secretly funded various lawsuits aimed at bankrupting [the] news website Gawker Media” lead to “widespread calls for Zuckerberg to remove Thiel from Facebook’s Board given Thiel’s apparent antagonism toward a free press.”202 Zuckerberg ignored those calls and did not seek to remove Thiel from Facebook’s board.
These allegations do not raise a reasonable doubt that Thiel is beholden to Zuckerberg. The complaint does not explain why Thiel’s status as a long-serving board member, early investor, or his contributions to Facebook’s business strategy make him beholden to Zuckerberg. And for the same reasons provided above, a director’s good faith belief that founder controller maximizes value does not raise a reasonable doubt that the director lacks independence from a corporation’s founder.
While the complaint alleges that Founders Fund “gets ‘good deal flow’” from Thiel’s “high-profile association with Facebook,”203 the complaint does not identify a single deal that flowed to—or is expected to flow to—Founders Fund through this association, let alone any deals that would be material to Thiel’s interests. The complaint also fails to draw any connection between Thiel’s continued status as a director and the vesting of Facebook stock
related to the acquisition. And alleging that Thiel is a personal friend of Zuckerberg is insufficient to establish a lack of independence.204
The final pair of allegations suggest that because “Zuckerberg stood by Thiel” in the face of public scandals, “Thiel feels a sense of obligation to Zuckerberg.”205 These allegations can only raise a reasonable doubt about Thiel’s independence if remaining a Facebook director was financially or personally material to Thiel. As the Court of Chancery noted below, given Thiel’s wealth and stature, “[t]he complaint does not support an inference that Thiel’s service on the Board is financially material to him. Nor does the complaint sufficiently allege that serving as a Facebook director confers such cachet that Thiel’s independence is compromised.”206 Accordingly, this Court affirms the Court of Chancery’s holding that the complaint does not raise a reasonable doubt about Thiel’s independence.
3. Bowles
The complaint does not raise a reasonable doubt that Bowles lacked independence
- “Bowles is beholden to the entire board” because it granted “a waiver of the mandatory retirement age for directors set forth in Facebook’s Corporate Governance Guidelines,” allowing “Bowles to stand for reelection despite having reached 70 years old before” the May 2018 annual meeting.207
- “Morgan Stanley—a company for which [Bowles] . . . served as a longstanding board member at the time (2005-2017)—directly benefited by receiving over $2 million in fees for its work . . . in connection with the Reclassification . . . .”208
- Bowles “ensured that Evercore and his close friend Altman financially benefitted from the Special Committee’s engagement” without properly vetting Evercore’s competency or considering alternatives.209
These allegations do not raise a reasonable doubt that Bowles is beholden to Zuckerberg or the other members of the Demand Board. The complaint does not make any particularized allegation explaining why the board’s decision to grant Bowles a waiver from the mandatory retirement age would compromise his ability to impartially consider a litigation demand or engender a sense of debt to the other directors. For example, the complaint does not allege that Bowles was expected to do anything in exchange for the waiver, or that remaining a director was financially or personally material to Bowles.
The complaint’s allegations regarding Bowles’s links to financial advisors are similarly ill-supported. None of these allegations suggest that Bowles received a personal benefit from the Reclassification, or that Bowles’s ties to these advisors made him beholden to Zuckerberg as a condition of sending business to Morgan Stanley, Evercore, or his “close friend Altman.”210 Accordingly, this Court affirms the Court of Chancery’s holding that the complaint does not raise a reasonable doubt about Bowles’s independence.211
IV. CONCLUSION
For the reasons provided above, the Court of Chancery’s judgment is affirmed.
to make accelerated donations to fulfill his pledge. See A33. Tri-State did not repeat this allegation in the portion of the complaint addressing demand futility. See A56-57. It is therefore unclear whether the complaint relies on this assertion to establish that Bowles lacks independence. Nonetheless, Tri-State has argued below and on appeal that Bowles’s expression of gratitude is “hardly a sign of director independence” and is “a harbinger of [his] flawed tenure on the Special Committee.” Opening Br. 43. To the extent Tri-State intended to rely on this allegation to help establish that demand is futile, this Court agrees entirely with the Court of Chancery’s analysis. “These allegations suggest that Zuckerberg and Bowles had a collegial relationship, which is not sufficient to compromise Bowles’s independence.” 250 A.3d at 899; see also Beam, 845 A.2d at 1050 (noting that the existence of a “personal friendship” is insufficient to establish that a director is not independent).