McRitchie v. Zuckerberg
Not yet reported (2024)
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Rule of Law:
Under Delaware law, corporate directors owe fiduciary duties to the corporation and its stockholders on a firm-specific basis. Directors are not required to manage the corporation for the benefit of its stockholders as diversified investors whose returns track the economy as a whole.
Facts:
- Meta Platforms, Inc. (Meta) is the world's largest social media network, generating nearly all its revenue from advertising, which depends on high user engagement.
- Mark Zuckerberg, Meta's founder, CEO, and controlling stockholder, owns a concentrated position in Meta stock worth approximately $67.6 billion.
- Other Meta directors and officers also hold concentrated positions in Meta stock, in part due to company ownership guidelines.
- The majority of Meta's public stockholders are diversified institutional investors whose portfolios are designed to track overall market performance.
- Plaintiff James McRitchie alleges that Meta's business model maximizes firm-specific value by increasing user engagement, but creates negative externalities—such as promoting misinformation and causing youth mental health issues—that harm the broader economy.
- McRitchie claims these negative externalities harm the financial portfolios of Meta's diversified stockholders, whose returns depend on the health of the overall economy.
- Meta's board has opposed stockholder proposals aimed at commissioning reports on the risks its business practices pose to the broader economy and diversified shareholders.
Procedural Posture:
- James McRitchie filed a lawsuit against Mark Zuckerberg, other directors and officers, and Meta Platforms, Inc. in the Delaware Court of Chancery.
- The complaint asserts three counts of breach of fiduciary duty against the directors, specific officers, and Zuckerberg as a controlling stockholder.
- The core allegation is that the defendants managed Meta according to a firm-specific model that generates negative externalities, thereby harming Meta's diversified stockholders.
- The defendants filed a motion to dismiss the complaint under Court of Chancery Rule 12(b)(6) for failure to state a claim upon which relief can be granted.
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Issue:
Does Delaware corporate law require directors to manage a corporation for the benefit of its stockholders as diversified equity investors, rather than for the benefit of the corporation and its stockholders on a firm-specific basis?
Opinions:
Majority - Laster, V.C.
No. Delaware corporate law requires directors to manage a 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 foundational principle of Delaware corporate law is that directors' fiduciary duties run to the specific corporation they serve and 'its' stockholders. Decades of precedent, including landmark takeover cases like Unocal and Revlon, implicitly rest on this single-firm model, emphasizing that directors may only consider non-stockholder constituencies instrumentally to advance the long-term value of the corporation for its stockholders. The plaintiff's theory, which would require directors to manage for the good of the entire economy to benefit diversified portfolios, is a radical departure from established law. This court lacks the authority to make such a change, and the argument itself is unpersuasive, as regulating externalities is the proper role of legislatures and regulators, not corporate fiduciary law. Moreover, Delaware law provides for private ordering, allowing corporations to adopt a different fiduciary orientation through charter provisions, such as those used by public benefit corporations.
Analysis:
This decision provides a powerful and explicit affirmation of the traditional, firm-specific model of corporate fiduciary duties in Delaware. It squarely rejects the emerging 'portfolio primacy' or 'diversified investor' theory, which argues that directors should manage a company to maximize value for a diversified shareholder's entire portfolio rather than just their investment in that specific company. The court clarifies that managing systemic harms or 'negative externalities' is a matter for public policy and regulation, not for a judicial re-engineering of corporate law. The opinion's detailed historical analysis and discussion of private ordering mechanisms, like public benefit corporations, reinforces the stability of Delaware's traditional corporate governance framework while highlighting its flexibility for those who wish to opt into different models.
