McRitchie v. Zuckerberg
Unreported (2024)
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Rule of Law:
Directors of a Delaware corporation owe fiduciary duties to the corporation and its stockholders on a firm-specific basis, requiring them to seek to maximize the value of the corporation over the long-term. These duties do not extend to managing the corporation for the benefit of its stockholders in their capacity as diversified investors concerned with economy-wide effects or externalities.
Facts:
- Meta Platforms, Inc. (Meta) is the world's largest social media network, and its business model relies on maximizing user engagement to generate advertising revenue.
- Mark Zuckerberg founded Meta, serves as its CEO, and exercises majority voting control through a dual-class stock structure that gives his shares ten times the voting power of public shares.
- Zuckerberg, along with other Meta directors and officers like Sheryl Sandberg, hold a large portion of their personal wealth in Meta's stock, making them 'concentrated investors.'
- Most of Meta's public stockholders are institutional investors who hold diversified portfolios, meaning their financial returns are tied to the performance of the overall market and economy.
- Plaintiff James McRitchie alleges that Meta's business model, in prioritizing firm-specific profit, creates significant negative externalities, such as harming teenage mental health, facilitating the spread of misinformation, and allowing its platforms to be used for human trafficking.
- McRitchie alleges these negative externalities damage the broader economy, thereby harming the financial interests of Meta's diversified stockholders.
- Meta's corporate governance documents state a goal of 'enhancing long-term value for Meta shareholders,' and the Board has opposed shareholder proposals aimed at mitigating risks to diversified portfolios.
Procedural Posture:
- James McRitchie (Plaintiff) filed a lawsuit in the Delaware Court of Chancery against Mark Zuckerberg, other directors and officers, and Meta Platforms, Inc. (Defendants).
- The complaint alleged that the defendants breached their fiduciary duties by managing Meta for the benefit of concentrated investors at the expense of its diversified stockholders.
- The Defendants filed a motion to dismiss the complaint for failure to state a claim upon which relief can be granted pursuant to Court of Chancery Rule 12(b)(6).
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Issue:
Under Delaware law, do corporate directors' fiduciary duties require them to manage the corporation for the benefit of its stockholders as diversified investors, rather than for the benefit of the corporation and its stockholders on a firm-specific basis?
Opinions:
Majority - Laster, V.C.
No. Under Delaware law, corporate directors' fiduciary duties require them to manage the corporation for the benefit of the corporation and its stockholders on a firm-specific basis, not for the benefit of stockholders as diversified investors. The 'deep architecture' of Delaware corporate law reveals that directors owe firm-specific fiduciary duties, a point so basic that, like water to a fish, it is often unnoticed but is fundamental. This 'single-firm model' is implicitly established by numerous Delaware Supreme Court precedents, including Unocal and Revlon, which focus on the interests of the specific corporation and 'its' stockholders. The historical arc of corporate fiduciary law, since its inception in the 19th century, has consistently centered on protecting the capital entrusted to a specific firm. Furthermore, Delaware jurisprudence on conflicts of interest presumes that directors with large stockholdings have interests aligned with shareholders, a view directly contrary to the plaintiff's theory that such holdings create a conflict with diversified shareholders. The plaintiff’s concern about negative externalities is a matter for government regulation, not a reinterpretation of corporate law. Delaware law already supports such regulation by requiring corporations to operate lawfully. For those who desire a different fiduciary orientation, Delaware's flexible statutes permit private ordering through charter provisions, such as creating a public benefit corporation or adopting a limited purpose clause.
Analysis:
This decision decisively rejects the burgeoning academic and activist theory of 'portfolio welfarism,' which argues that corporate fiduciaries should manage for the benefit of diversified investors and the economy as a whole. It powerfully reaffirms Delaware's traditional, firm-specific model of shareholder value maximization, providing legal certainty for directors that their primary duty is to the long-term health of their own corporation. The opinion closes the door on using litigation to judicially reshape the purpose of the corporation, instead directing proponents of change to either legislative action for externality regulation or the use of private ordering tools within the existing corporate law framework. This ruling solidifies the legal foundation for directors to prioritize firm-specific strategies, even if those strategies have negative impacts on competitors or the broader market, so long as they are lawful.
