United Food and Commercial Workers Union v. Zuckerberg

Supreme Court of the State of Delaware
262 A.3d 1034 (2021)

ELI5:

Rule of Law:

A pre-suit litigation demand on a corporate board is excused as futile only if particularized allegations show that a majority of the board cannot impartially consider the demand under a universal three-part test. Allegations of purely exculpated breaches of the duty of care are insufficient to establish that a director faces a substantial likelihood of liability and therefore cannot, on their own, excuse demand.

Facts:

Mark Zuckerberg, Facebook's controlling shareholder, chairman, and CEO, proposed a stock reclassification to create non-voting shares that would allow him to sell stock for philanthropy while maintaining voting control.
Facebook's board of directors formed a Special Committee, consisting of Marc Andreessen, Erskine Bowles, and Susan Desmond-Hellmann, to evaluate the proposal.
During negotiations, Andreessen, a committee member, secretly sent text messages to Zuckerberg, providing live updates and coaching him on how to persuade the committee.
The Special Committee recommended, and the full board approved, the reclassification.
With Zuckerberg casting the deciding votes, Facebook's stockholders approved the reclassification, though more than three-quarters of the minority stockholders voted against it.
After other stockholders filed a class-action lawsuit to block the plan, Zuckerberg requested that the board abandon the reclassification, which it did.
As a result of the abandoned lawsuit, Facebook spent over $20 million in its own legal fees and paid over $68 million in attorneys' fees to the plaintiffs' counsel.
United Food and Commercial Workers Union (Tri-State), another Facebook stockholder, then initiated a new derivative action to recover those costs from the directors involved.

Procedural Posture:

After Facebook abandoned a proposed stock reclassification, it paid over $88 million in defense and settlement costs related to a prior class-action lawsuit that challenged the plan.
Tri-State filed a derivative complaint in the Delaware Court of Chancery, a court of first instance for corporate law, seeking to recover those costs from certain Facebook directors.
Tri-State did not make a litigation demand on Facebook's board, pleading that such a demand would have been futile.
The defendant directors moved to dismiss the complaint under Court of Chancery Rule 23.1 for failure to make a demand or adequately plead futility.
The Court of Chancery granted the motion and dismissed the complaint, finding that Tri-State had failed to establish demand futility.
Tri-State, as appellant, appealed the dismissal to the Delaware Supreme Court, the state's highest court.

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Issue:

Is a pre-suit litigation demand on a corporate board excused as futile where the complaint primarily alleges breaches of the duty of care for which the directors are exculpated from monetary liability by the company's charter?

Opinions:

Majority - Justice Montgomery-Reeves

No. A pre-suit litigation demand is not excused as futile where the complaint primarily alleges exculpated breaches of the duty of care. The central inquiry is whether a majority of the board faces a conflict that sterilizes their discretion, which is now determined by a universal three-part test. Under this test, directors protected by a Section 102(b)(7) exculpatory charter provision do not face a 'substantial likelihood of liability' for duty of care claims, and therefore such claims alone cannot excuse demand. The court formally adopts a test that asks on a director-by-director basis: (1) did the director receive a material personal benefit from the misconduct?; (2) does the director face a substantial likelihood of liability?; and (3) does the director lack independence from someone who fails prong (1) or (2)? Applying this test, the plaintiff failed to show that at least half of Facebook's nine-member board was disabled from impartially considering a demand. The plaintiff's allegations that certain directors lacked independence from Zuckerberg due to business ties, personal friendship, and shared philosophical beliefs were not sufficiently particularized to meet the standard. Therefore, demand was required, and the complaint was properly dismissed.

Analysis:

This landmark decision streamlines Delaware's complex demand futility jurisprudence by replacing the dual framework of Aronson and Rales with a single, universal three-part test. The ruling significantly strengthens the demand requirement by clarifying that exculpated duty of care claims cannot excuse demand, as they do not create a substantial likelihood of personal liability that would compromise a director's judgment. This makes it more difficult for plaintiffs to bypass the board in derivative litigation based on allegations of a flawed board process, shifting the focus squarely onto non-exculpated claims like breaches of loyalty or acts of bad faith.

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