Espinoza v. Zuckerberg
Not available (2015)
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Rule of Law:
To be legally effective in shifting the standard of judicial review from entire fairness to the business judgment rule, a disinterested controlling stockholder's ratification of an interested director transaction must be accomplished through the formal statutory methods of a stockholder vote or a written consent, not through informal expressions of assent.
Facts:
- Facebook, Inc. had a dual-class stock structure which gave Mark Zuckerberg control of approximately 61.6% of the company's total voting power.
- In 2013, Facebook's board of directors was comprised of eight members, six of whom were non-employee directors.
- On August 22, 2013, the board of directors unanimously approved a compensation plan providing for cash retainers and Restricted Stock Units (RSUs) for its non-employee directors.
- Zuckerberg, a director and the controlling stockholder, attended the meeting where the compensation was discussed but did not receive any of the compensation at issue.
- The six non-employee directors subsequently received RSU grants and other compensation for fiscal year 2013 pursuant to the board's approval.
- Zuckerberg never executed a formal stockholder written consent or called for a stockholder vote to approve the 2013 director compensation plan.
Procedural Posture:
- Ernesto Espinoza, a Facebook stockholder, filed a derivative complaint on behalf of Facebook against its eight directors in the Delaware Court of Chancery.
- The complaint alleged breach of fiduciary duty, unjust enrichment, and waste of corporate assets related to the 2013 compensation for non-employee directors.
- After the lawsuit was filed, Mark Zuckerberg provided a sworn affidavit and gave deposition testimony stating that he approved of the 2013 director compensation.
- The defendant directors moved for summary judgment on the breach of fiduciary duty and unjust enrichment claims, arguing that Zuckerberg's post-litigation statements constituted valid stockholder ratification.
- The defendants also moved to dismiss the waste claim under Court of Chancery Rule 12(b)(6) for failure to state a claim.
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Issue:
Does a disinterested controlling stockholder's informal expression of assent, made outside the statutory methods of a stockholder vote or written consent, validly ratify an interested director transaction and shift the standard of review from entire fairness to the business judgment rule?
Opinions:
Majority - Bouchard, C.
No. A disinterested controlling stockholder's informal expression of assent does not validly ratify an interested director transaction. Stockholder ratification of a self-dealing transaction must be accomplished formally, either by a vote at a meeting of stockholders or by written consent as prescribed by the Delaware General Corporation Law (DGCL), in order to shift the standard of review from entire fairness to the business judgment rule. The court reasoned that while general principles of agency law might permit informal ratification, such principles are ill-suited to the corporate context, which is governed by a formal statutory framework. The DGCL's requirements for stockholder action—such as voting at a meeting under DGCL § 211 or acting by written consent under DGCL § 228—serve the critical functions of ensuring precision and promoting transparency for all stockholders, including the minority. Allowing informal ratification would create ambiguity and undermine the rights of non-assenting stockholders to be formally notified of corporate actions. Therefore, even a single controlling stockholder must adhere to these corporate formalities when ratifying director action.
Analysis:
This decision establishes a bright-line rule that formal statutory procedures must be followed for stockholder ratification to have a cleansing effect on an interested transaction. It rejects a more flexible, intent-based standard, thereby prioritizing predictability and the protection of minority stockholder rights over the convenience of a controlling stockholder. The ruling reinforces the principle that all corporate actors, regardless of their voting power, are bound by the formal structures of corporate law. This holding creates a clear procedural hurdle for boards and controlling stockholders seeking to shift judicial review from the stringent entire fairness standard to the deferential business judgment rule for self-dealing transactions.
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