In Zuckerberg, Facebook did not even bother to argue that the case should be dismissed due to the demand failure because six of the eight members of the board received the cash and restricted stock options alleged to be excessive and, thus, each derived a personal benefit from the transaction.
In June, we blogged on the “excessive compensation” lawsuit filed against the directors of Facebook (including employee directors Zuckerberg and Sandberg) in Delaware Chancery Court “Litigation Over Executive and Director Compensation Takes Another Turn for the Worse.” Two weeks ago in Espinoza v. Zuckerberg, the Court refused to dismiss plaintiffs’ claims, allowing the case to go to trial. This case is different and, in some respects, even worse than some of those we have blogged about previously. In Calma v. Templeton [Citrix Systems] and Seinfeld v. Slager, for example, the courts refused to dismiss those cases for failure to file a demand on the board, as usually required by Delaware law before filing a shareholder derivative lawsuit, because those companies’ stock incentive plans contained no meaningful limits on awards to non-employee directors. In Zuckerberg, Facebook did not even bother to argue that the case should be dismissed due to the demand failure because six of the eight members of the board received the cash and restricted stock options alleged to be excessive and, thus, each derived a personal benefit from the transaction. As the Court summarized:
Directors are necessarily interested in their compensation, which is a benefit they receive that does not accrue to stockholders generally. Thus, where, as here, directors make decisions about their own compensation, those decisions presumptively will be reviewed as self-dealing transactions under the entire fairness standard rather than under the business judgment rule. A decision dominated by interested directors can gain the protection of the business judgment rule, however, if a fully-informed disinterested majority of stockholders ratifies the transaction. At that point, the doctrinal standard of review becomes one of waste.
I say that this may be worse because even a meaningful limit on awards to non-employee directors might not have saved Facebook from going to trial (although a compensation program approved by shareholders might have).
Facebook argued that Zuckerberg had ratified the directors’ compensation in his capacity as a Facebook’s majority stockholder “by virtue of statements he made in his affidavit and his deposition after this action was filed.” The Court did not agree, finding that Zuckerberg did not express assent as a stockholder in a manner consistent with Delaware General Corporation Law. Under the circumstance, the directors’ case was probably doomed from the start. However, the Court, it seemed to this reader, could resist taking a few shots at the behemoth, including:
“If Zuckerberg does not need to provide written consents to ratify the 2013 Compensation, why require written consents for any other action he takes?”
“. . . if affidavits are sufficient, what about meeting minutes, press releases, conversations with directors, or even ‘Liking’ a Facebook post of a proposed corporate action?”
“Zuckerberg may not opt out of the procedures by which stockholders may take corporate action in favor of a less formal method of his choosing.”
As always, stay tuned to this channel for further developments.