United Food And Commercial Workers Union And Participating Food Industry Employers Tristate Pension Fund v. Zuckerberg

Facts

In March 2015, D began working on an accelerated plan to complete the Giving Pledge by making annual donations of $2 to $3 billion worth of Facebook stock. Facebook's legal team cautioned D that he could only sell a small portion of his stock-$3 to $4 billion based on the market price-without dipping below majority voting control. Counsel advised D to issue a new class of non-voting stock that D could sell without significantly diminishing his voting power. The legal team recommended that the board form a special committee of independent directors to review and approve the plan and noted that litigation involving Google's reclassification resulted in a $522 million settlement. D formally proposed that Facebook issue a new class of non-voting shares, which would allow him to sell a substantial amount of stock without losing control of the company. Facebook established a special committee, which was composed of three purportedly-independent directors. The board charged the Special Committee with evaluating the Reclassification, considering alternatives, and making a recommendation to the full board. The board also authorized the Special Committee to retain legal counsel, financial advisors, and other experts. The Special Committee largely agreed to give D the terms that he wanted and did not consider alternatives or demand meaningful concessions. It did not try to place restrictions on D's ability to sell as much stock as he wanted, for whatever purpose, on any timetable that he desired. The Special Committee asked for only small concessions such as a sunset provision that was designed to discourage D from leaving the company despite the absence of any demonstrable reason to believe that D would step away from his existing Facebook duties. D then decided to publicly announce his plans before the Committee had made a decision. The Special Committee did not try to use the public announcement as leverage to extract more concessions. Throughout the negotiations about the Reclassification, Andreessen, a committee member, engaged in facially dubious back-channel communications with D about the Special Committee's deliberations. Andreessen sent D text messages during the meeting that provided live updates on which lines of argument were working and which were not. Desmond-Hellmann agreed that it appeared Andreessen had been 'coaching' D through the negotiations. On April 13, 2016, the Special Committee recommended that the full board approve the Reclassification. The next day, Facebook's full board accepted the Special Committee's recommendation and voted to approve the Reclassification. With D casting the deciding votes, Facebook's stockholders approved the Reclassification. Stockholders filed lawsuits alleging that Facebook's board of directors violated their fiduciary duties by negotiating and approving a purportedly one-sided deal that put D's interests ahead of the company's interests. Facebook withdrew the Reclassification and mooted the fiduciary-duty class action. Facebook spent more than $21.8 million defending against the class action and paid plaintiffs' counsel more than $68.7 million in attorneys' fees under the corporate benefit doctrine. P filed a derivative complaint in the Court of Chancery. P sought compensation for the money Facebook spent in connection with the prior class action. P alleged that D and the Special Committee members breached their fiduciary duties of care and loyalty by improperly negotiating and approving the Reclassification. P did not make a litigation demand on Facebook's board. P 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 D. Ds moved to dismiss P's complaint under Court of Chancery Rule 23.1, arguing that P did not make demand or prove that demand was futile. Both sides agreed that the demand futility test established in Aronson applied to P's complaint. In October 2020, the Court of Chancery dismissed P'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. It held that the complaint failed to raise a reasonable doubt that a majority of the demand board lacked independence from D. 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. P appealed. 

Issues

Rule of Law

Holding and Decision

Legal Analysis

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