Ernesto Espinoza v. Mark Zuckerberg , 124 A.3d 47 ( 2015 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
ERNESTO ESPINOZA, derivatively )
on behalf of FACEBOOK, INC., )
)
Plaintiff, )
)
v. ) C.A. No. 9745-CB
)
MARK ZUCKERBERG, SHERYL K. )
SANDBERG, DONALD E. GRAHAM, )
PETER A. THIEL, MARC L. )
ANDREESSEN, REED HASTINGS, )
ERSKINE B. BOWLES, and SUSAN D. )
DESMOND-HELLMANN, )
)
Defendants, )
)
and )
)
FACEBOOK, INC., a Delaware )
corporation, )
)
Nominal Defendant. )
OPINION
Date Submitted: July 28, 2015
Date Decided: October 28, 2015
Kathaleen St. J. McCormick and Nicholas J. Rohrer of YOUNG CONAWAY
STARGATT & TAYLOR, LLP, Wilmington, Delaware; Brian J. Robbins, Felipe J.
Arroyo and Jenny L. Dixon of ROBBINS ARROYO LLP, San Diego, California;
Attorneys for Plaintiff.
David E. Ross and S. Michael Sirkin of ROSS ARONSTAM & MORITZ LLP,
Wilmington, Delaware; Attorneys for Defendants and Nominal Defendant.
BOUCHARD, C.
This case presents a question of first impression: Can a disinterested controlling
stockholder ratify a transaction approved by an interested board of directors, so as to shift
the standard of review from entire fairness to the business judgment presumption, by
expressing assent to the transaction informally without using one of the methods the
Delaware General Corporation Law prescribes to take stockholder action? In my
opinion, the answer to this question is no. Stated in the affirmative, I conclude for the
reasons explained below that stockholder ratification of a self-dealing transaction must be
accomplished formally by a vote at a meeting of stockholders or by written consent in
order to shift the standard of review that otherwise would apply to such a transaction.
In this derivative action, a stockholder of Facebook, Inc. challenges the decision of
Facebook’s board of directors in 2013 to approve compensation for its outside, non-
management directors, who comprised six of the eight directors on Facebook’s board at
the time. The stockholder asserts claims against the defendant directors for breach of
their fiduciary duties, unjust enrichment, and waste of corporate assets.
The parties agree that the board’s decision to approve the 2013 compensation
would be governed by the entire fairness standard of review in the first instance as a self-
dealing transaction. After the filing of this lawsuit, however, Mark Zuckerberg, who did
not receive the disputed 2013 compensation and who controlled over 61% of the voting
power of Facebook’s common stock, expressed his approval of the 2013 compensation
for the non-management directors in a deposition and an affidavit. Based on these sworn
statements, the defendants seek summary judgment against the fiduciary duty and unjust
enrichment claims on the theory that Zuckerberg, in his capacity as a disinterested
1
stockholder, ratified the 2013 compensation, thereby shifting the standard of review
governing that transaction from entire fairness to the business judgment presumption.
Defendants also seek to dismiss the waste claim for failure to state a claim upon which
relief can be granted.
The fundamental issue here is whether Zuckerberg’s approvals were in a form
sufficient to constitute stockholder ratification. Zuckerberg did not make use of a formal
method of expressing stockholder assent, namely by voting at a stockholder meeting or
acting by written consent in compliance with Section 228 of the Delaware General
Corporation Law. According to plaintiff, stockholder ratification may be invoked only
by one of these two methods. Defendants counter that it is sufficient that Zuckerberg,
acting as a disinterested controlling stockholder, expressed his will to approve the
transaction even if he did not adhere to corporate formalities.
The controlling stockholder of a Delaware corporation wields significant power,
including the power in some circumstances to ratify interested directors’ decisions and
thereby limit judicial scrutiny of such actions. But a controlling stockholder should not,
in my view, be immune from the required formalities that come with such power.
Although traditional agency law allows a principal to ratify an agent’s conduct through
informal assent, this tradition is ill-suited to the context of corporate law ratification,
where formal structures govern the collective decision-making of stockholders who
coexist as principals. These formalities serve to protect the corporation and all of its
stockholders by ensuring precision, both in defining what action has been taken and
establishing that the requisite number of stockholders approved such action, and by
2
promoting transparency, particularly for non-assenting stockholders. I therefore conclude
that stockholders of a Delaware corporation—even a single controlling stockholder—
cannot ratify an interested board’s decisions without adhering to the corporate formalities
specified in the Delaware General Corporation Law for taking stockholder action.
Given this conclusion, the entire fairness standard applies to the board’s approval
of the 2013 compensation. As such, and given that defendants have not thus far
demonstrated that the directors’ compensation decisions were entirely fair, their motion
for summary judgment is denied. Plaintiff has failed to state a reasonably conceivable
claim for waste, however, and thus that claim is dismissed.
I. BACKGROUND 1
A. The Parties
Nominal Defendant Facebook, Inc. (“Facebook” or the “Company”) is a Delaware
corporation with headquarters in California. Hundreds of millions of people use
Facebook’s social networking website and mobile applications. Facebook has a dual-
class capital structure. Its Class B common stock has ten votes per share and its Class A
common stock has one vote per share.
Defendant Mark Zuckerberg is the founder of Facebook. Zuckerberg has served
as Facebook’s Chief Executive Officer since July 2004 and as the Chairman of
Facebook’s board of directors since January 2012. Zuckerberg, principally due to his
ownership of the super-voting Class B shares, controlled approximately 61.6% of the
1
Unless noted otherwise, the facts recited in this opinion are based on the allegations of
the Verified Complaint, the parties’ submitted affidavits, and the exhibits thereto.
3
total voting power of Facebook’s common stock as of February 28, 2014. 2 Defendant
Sheryl K. Sandberg has served as Facebook’s Chief Operating Officer since March 2008
and as a Facebook director since June 2012.
Defendants Donald E. Graham, Peter A. Thiel, Marc. L. Andreessen, Reed
Hastings, Erskine B. Bowles, and Susan D. Desmond-Hellmann were members of
Facebook’s board of directors when the Verified Complaint was filed on June 6, 2014,
and at all times relevant to this opinion. All of the defendant directors other than
Zuckerberg and Sandberg were non-employee directors.
Plaintiff Ernesto Espinoza alleges he has been a Facebook stockholder at all
relevant times.
B. Facebook Adopts the 2012 Equity Incentive Plan
Since 2008, Facebook has granted restricted stock units (“RSUs”) to new members
of its board of directors who were not Facebook investors or employees. 3 Beginning in
2011, new non-employee directors typically received 20,000 RSUs upon joining the
board, and an annual retainer of $50,000. From 2011 until mid-2013, the Audit
Committee Chair received an extra $20,000.
In a prospectus filed before Facebook’s initial public offering, Facebook
announced that its board of directors and stockholders had adopted the 2012 Equity
Incentive Plan, which became effective upon filing the prospectus in May 2012, and
2
Sirkin Aff. Ex. 12 (Facebook 2014 Definitive Proxy Statement), at 36 (filed March 31,
2014).
3
Zuckerberg Aff. ¶ 3.
4
which replaced the 2005 Stock Plan. 4 The 2012 Equity Incentive Plan authorizes
Facebook’s board of directors to provide stock-based compensation to Facebook’s
employees, officers, directors, and consultants. 5 The Compensation Committee of
Facebook’s board administers the 2012 Equity Incentive Plan, except for grants to non-
employee directors, which are determined by the full board. 6 The 2012 Equity Incentive
Plan caps awards at 2,500,000 shares of Facebook stock per individual recipient per year
and 25,000,000 shares (plus certain adjustments and additional shares from prior award
programs) for the entire program. 7 New employees are eligible to receive up to
5,000,000 shares in their first year of employment. 8
C. The Board Approves Compensation for Non-Employee Directors
On August 21, 2013, the Compensation Committee, consisting of Graham and
Thiel, discussed the compensation of Facebook’s non-management directors. 9 The
following day, Facebook’s board considered the topic at a regular meeting and
unanimously approved a proposal to increase the annual cash retainer paid to Audit
Committee members from $50,000 to $70,000, to raise the annual cash retainer paid to
4
Sirkin Aff. Ex. 7 (Facebook Prospectus (Form 424B4)), at 134 (filed May 18, 2012).
5
Id. at 135.
6
Compl. ¶ 16; Sirkin Aff. Ex. 18 (Exhibit 10.4 to Facebook Prospectus) § 4.1.
7
Compl. ¶ 16; Sirkin Aff. Ex. 18 (Exhibit 10.4 to Facebook Prospectus) §§ 2.1, 3.
8
Id. § 3.
9
Sirkin Aff. Ex. 20 (Facebook Compensation Committee Meeting Minutes, Aug. 21,
2013) ¶ 11.
5
the Audit Committee Chair from $70,000 to $100,000, and to provide non-employee
directors with annual RSU grants at a value of $300,000 per year, subject to the board’s
approval of an implementation plan. 10 Zuckerberg attended this meeting. 11 A few weeks
later, the Facebook board formally approved a plan implementing the proposal by
unanimous written consent. 12
As a result of the board’s approval of the compensation plan, Facebook’s six non-
employee directors received RSU grants in 2013 (the “2013 Compensation”). In fiscal
year 2013, Graham, Thiel, Andreessen, Hastings, and Bowles each received 7,742 RSUs
with a grant date fair value of $387,874. 13 Desmond-Hellmann, who joined Facebook’s
board in March 2013, received 27,742 RSUs with a grant date fair value of $935,874. 14
The difference in her compensation level was due to the 20,000 RSUs she received upon
joining Facebook’s board in 2013. Plaintiff does not allege that employee directors
Sandberg or Zuckerberg received any compensation for their board service.
10
Sirkin Aff. Ex. 21 (Facebook Board of Directors Meeting Minutes, Aug. 22, 2013)
¶ 13.
11
Id. at 1.
12
Sirkin Aff. Ex. 22 (Action by Unanimous Written Consent of the Board of Directors of
Facebook, Sept. 13, 2013).
13
Compl. ¶¶ 8-12.
14
Compl. ¶ 13.
6
D. Procedural Posture
On June 6, 2014, plaintiff filed a derivative complaint on behalf of Facebook
against the eight members of its board of directors concerning the 2013 Compensation.
The complaint asserts three causes of action: breach of fiduciary duty “for awarding
and/or receiving excessive compensation at the expense of the Company” (Count I),
waste of corporate assets (Count II), and unjust enrichment (Count III). 15 Each of these
claims is asserted against all eight members of the board. Plaintiff does not distinguish
any of his claims against Zuckerberg and Sandberg even though they did not receive any
of the 2013 Compensation, and defendants have submitted collective briefing that
generally treats the directors as a unit. 16 Thus, for purposes of this motion, the claims
will be analyzed without making any distinction between the two inside directors
(Zuckerberg and Sandberg) and the six non-employee directors. 17
Plaintiff did not make a demand on Facebook’s board before filing this action,
alleging that demand was excused because, among other reasons, six of the eight
members of the board received the challenged compensation and thus derived a personal
15
Compl. ¶¶ 26-37.
16
Defendants distinguish Zuckerberg by focusing on his interests as a stockholder to
argue that the 2013 Compensation was ratified by a disinterested majority of
stockholders. Defs.’ Op. Br. 27-29.
17
See Sample v. Morgan, 914 A.2d 647, 669 (Del. Ch. 2007) (grouping insider directors
and other directors together for purposes of motion to dismiss because the “directors
[had] not tried to distinguish themselves,” while acknowledging that directors must be
assessed individually in any potential future findings of liability).
7
benefit from the transaction at issue in this case. 18 In the face of these allegations,
defendants have not asserted any defense under Court of Chancery Rule 23.1 for failure
to make a demand.
On August 18, 2014, defendants moved for summary judgment under Court of
Chancery Rule 56 on Counts I and III, the claims for breach of fiduciary duty and unjust
enrichment. They also moved to dismiss Count II, the waste claim, under Court of
Chancery Rule 12(b)(6). 19 On the same day, Zuckerberg filed an affidavit in support of
the summary judgment motion declaring as follows:
10. Regardless of the capacity in which I have considered the issue,
my view of the compensation of Facebook’s Non-Executive Directors has
never changed. I approve of all 2013 equity awards to Facebook’s Non-
Executive Directors, as well as Facebook’s plan for compensation of Non-
Executive Directors going forward (pursuant to the Annual Compensation
Program). . . .
11. Although I was never presented with an opportunity to approve
formally the 2013 equity awards to Facebook’s Non-Executive Directors or
the Annual Compensation Program in my capacity as a Facebook
stockholder, had an opportunity presented itself, I would have done so. If
put to a vote, I would vote in favor of the 2013 equity awards to Facebook’s
Non-Executive Directors, as well as the Annual Compensation Program,
and if presented with a stockholder written consent approving them, I
would sign it. 20
On February 18, 2015, plaintiff deposed Zuckerberg. During his deposition,
Zuckerberg testified as follows regarding Facebook’s board of directors:
18
Compl. ¶¶ 23-24.
19
Defs.’ Mot. Summ. J.
20
Zuckerberg Aff. ¶¶ 10-11.
8
These are the people who I want and – and who I think will serve the
company best, and I think that the compensation plan that we have is doing
its job of attracting and retaining them over the long term. 21
Zuckerberg never executed a written consent under 8 Del. C. § 228, which would have
triggered an obligation to notify non-consenting stockholders of the action taken. 22
On July 28, 2015, I heard oral argument on defendants’ motions to dismiss and for
summary judgment.
II. LEGAL ANALYSIS
A. Legal Standard
Under Court of Chancery Rule 56, the Court shall grant summary judgment when
“there is no genuine issue as to any material fact and . . . the moving party is entitled to a
judgment as a matter of law.” 23 The Court must assess “whether the evidence, when
viewed in the light most favorable to the nonmoving party, presents any dispute of
material fact.” 24 “If a rational trier of fact could find any material fact that would favor
the non-moving party in a determinative way . . ., summary judgment is inappropriate.” 25
Under Court of Chancery Rule 12(b)(6), the Court will only dismiss for failure to
state a claim upon which relief can be granted if “plaintiff could not recover under any
21
Zuckerberg Dep. 63:7-11, Feb. 18, 2015.
22
8 Del. C. § 228(e).
23
Ct. Ch. R. 56(c).
24
Telxon Corp. v. Meyerson, 802 A.2d 257, 262 (Del. 2002).
25
Cerberus Int’l, Ltd. v. Apollo Mgmt., L.P., 794 A.2d 1141, 1150 (Del. 2002).
9
reasonably conceivable set of circumstances susceptible of proof.” 26 In making such a
determination, the Court will “accept all well-pleaded factual allegations in the
Complaint as true . . . .” 27
I first address Counts I and III, the claims for breach of fiduciary duty and for
unjust enrichment, against which defendants seek summary judgment. I then address
Count II, the claim for waste of corporate assets, which defendants seek to dismiss.
B. Count I: Breach of Fiduciary Duty
Plaintiff asserts in Count I that defendants violated their fiduciary duty of loyalty
“by awarding and/or receiving” the 2013 Compensation, thereby causing injury to
Facebook. 28 Plaintiff argues that the entire fairness standard must apply to this
transaction because six of the eight board members received the 2013 Compensation, and
thus a majority of the board was interested in the transaction. A brief review of some
basic legal principles, the applicability of which is not disputed, frames the parties’ key
point of disagreement.
Directors are necessarily interested in their compensation, which is a benefit they
receive that does not accrue to stockholders generally. 29 Thus, where, as here, directors
26
Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Holdings LLC, 27 A.3d 531, 536
(Del. 2011).
27
Id.
28
Compl. ¶¶ 27-28.
29
See Rales v. Blasband, 634 A.2d 927, 936 (Del. 1993) (“A director is considered
interested where he or she will receive a personal financial benefit from a transaction that
is not equally shared by the stockholders.”).
10
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. 30 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. 31 At that point, the doctrinal standard of
review becomes one of waste. 32
Here, defendants contend that the business judgment rule should apply to their
approval of the 2013 Compensation on the theory that Zuckerberg, who indisputably
holds a majority of the voting power of Facebook’s common stock, and who did not
receive any of the 2013 Compensation, ratified the 2013 Compensation in his capacity as
a Facebook stockholder by virtue of statements he made in his affidavit and his
30
See Telxon, 802 A.2d at 265 (“Like any other interested transaction, directoral self-
compensation decisions lie outside the business judgment rule’s presumptive protection,
so that, where properly challenged, the receipt of self-determined benefits is subject to an
affirmative showing that the compensation arrangements are fair to the corporation.”);
Seinfeld v. Slager, 2012 WL 2501105, at *12 (Del. Ch. June 29, 2012) (“While the
Defendant Directors may be able to show that the amounts they awarded themselves are
entirely fair, their motion to dismiss must be denied with respect to [a compensation-
related claim].”).
31
See Cambridge Ret. Sys. v. Bosnjak, 2014 WL 2930869, at *7-9 (Del. Ch. June 26,
2014) (reviewing cases and holding that directors’ self-interested equity awards fell under
business judgment presumption due to approval by a disinterested majority of
stockholders, and finding that relevant proxy statements were not materially misleading);
Steiner v. Meyerson, 1995 WL 441999, at *7 (Del. Ch. July 19, 1995) (Allen, C.)
(applying business judgment presumption to self-interested transaction because
stockholders had approved stock option compensation plan at annual meeting).
32
See Calma on Behalf of Citrix Sys., Inc. v. Templeton, 114 A.3d 563, 587 (Del. Ch.
2015) (compiling authorities).
11
deposition after this action was filed. 33 Plaintiff responds that these acts do not constitute
a valid form of stockholder ratification (and thus do not permit invocation of the business
judgment rule) because Zuckerberg did not express assent as a stockholder in a manner
permitted by the Delaware General Corporation Law (“DGCL”). 34 Before considering
the authorities on which defendants rely, I review the provisions of the DGCL governing
the taking of stockholder action.
1. The Methods for Taking Stockholder Action Under the DGCL
The DGCL provides two methods for stockholders to express assent on a matter
concerning the affairs of the corporation: (1) by voting in person or by proxy at a
meeting of stockholders, or (2) by written consent. In both cases, the statute contains a
number of formal requirements that, with the reinforcement of this Court’s precedents,
ensure precision in stockholder voting and transparency to all stockholders.
Before 1937, with limited exceptions, 35 stockholders of Delaware corporations
could express assent only by voting in person or by proxy at a meeting of stockholders. 36
33
Defs.’ Reply Br. 4 (“Defendants rely exclusively upon Mr. Zuckerberg’s actions as a
stockholder (i.e., his affidavit and deposition) to establish ratification.”); Defs.’ Reply Br.
9 (“In both his sworn affidavit and his deposition, Mr. Zuckerberg specifically
‘approve[d] of all 2013 equity awards to Facebook’s Non-Executive Directors . . . .’”).
34
Pl.’s Ans. Br. 27-30. Regarding the additional ratification requirements that the
ratifying stockholders be fully informed and disinterested, plaintiff appears to dispute the
latter but not the former. Pl.’s Ans. Br. 36-37. Because I determine that Zuckerberg did
not use an appropriate method to express assent in order to ratify the disputed
compensation, I do not address whether he was fully informed and disinterested.
35
For instance, stockholders could act by unanimous written consent to dissolve the
corporation. See An Act Providing a General Corporation Law, 21 Del. Laws ch. 273,
12
The DGCL presently contemplates that Delaware corporations will hold annual meetings
of stockholders and permits the holding of special meetings of stockholders.37
“Whenever stockholders are required or permitted to take any action at a meeting, a
written notice of the meeting shall be given which shall state the place, if any, date and
hour of the meeting, . . . and, in the case of a special meeting, the purpose or purposes for
which the meeting is called.” 38 Such notice must be provided in writing to stockholders
entitled to vote at the meeting “not less than 10 nor more than 60 days before the date of
the meeting . . . .” 39 Under Delaware law, moreover, directors have a duty to disclose to
stockholders material information concerning any matter on which they are asked to
vote. 40
§ 34 (1899) (“Whenever all the stockholders shall consent in writing to a dissolution, no
meeting or notice thereof shall be necessary . . . .”).
36
See S. Samuel Arsht, A History of Delaware Corporation Law, 1 Del. J. Corp. L. 1, 11-
12 (1976) (discussing the first adoption of unanimous written consents by the Legislature
in 1937).
37
8 Del. C. § 211(c) (Court of Chancery may summarily order that meeting of
stockholders be held upon the application of any director or stockholder when, among
other events, no date has been designated for a period of thirteen months after the last
annual meeting); 8 Del. C. § 211(d) (“Special meetings of the stockholders may be called
by the board of directors or by such person or persons as may be authorized by the
certificate of incorporation or by the bylaws.”).
38
8 Del. C. § 222(a).
39
8 Del. C. § 222(b).
40
See Lynch v. Vickers Energy Corp., 383 A.2d 278, 281 (Del. 1977) (holding that
directors are required to provide, with complete candor, “information such as a
reasonable shareholder would consider important in deciding whether to” tender shares);
Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944-45 (Del. 1985) (applying Lynch v. Vickers
13
To ensure accurate recordkeeping of actions taken at stockholder meetings, the
DGCL specifically requires every Delaware corporation to have one officer with “the
duty to record the proceedings of the meetings of the stockholders and directors in a book
to be kept for that purpose.” 41 The corporation also must prepare a list of stockholders
entitled to vote in a given meeting, which list must be open to examination by any
stockholder for any purpose germane to the meeting. 42 Corporations with publicly traded
securities, moreover, must appoint an inspector to determine the number of shares
outstanding and represented at a stockholders meeting, and to tabulate the results of any
votes that take place at the meeting. 43
In 1937, the DGCL was amended to permit stockholders to approve by unanimous
written consent any action that was required to be taken, or that could be taken, at an
disclosure standard to stockholders’ decision to vote for a merger); In re Anderson,
Clayton S’holders Litig., 519 A.2d 680, 689-90 (Del. Ch. 1986) (“It is established by our
law that one element of the fiduciary duty that directors of a Delaware corporation owe to
shareholders is the duty to provide full and honest disclosure of material facts relating to
any transaction that requires shareholder approval.”).
41
8 Del. C. § 142(a). Notably, this is the only duty of an officer that is specifically set
forth in the statute. Otherwise, the duties of officers are left to “be stated in the bylaws or
in a resolution of the board of directors . . . .” Id. See also 8 Del. C. § 211(a)(2)(b)(iii)
(“[I]f any stockholder or proxyholder votes or takes other action at the meeting by means
of remote communication, a record of such vote or other action shall be maintained by
the corporation.”).
42
8 Del. C. § 219(a).
43
8 Del. C. § 231(a)-(b). This requirement does not apply to companies that are unlisted
and have 2,000 stockholders or fewer. 8 Del. C. § 231(e).
14
annual or special meeting of stockholders. 44 In 1967, the statute was further amended to
remove the unanimity requirement for companies that chose to waive the requirement in
their certificate of incorporation. 45 In 1969, non-unanimous consent became the default
rule rather than an option requiring an enabling charter provision. 46 Although taken for
granted now, non-unanimous written consent troubled the prominent drafter of the 1967
revision of the DGCL, who saw the potential for abuse. 47 Today, under Section 228 of
the DGCL, unless the certificate of incorporation restricts the use of written consents, any
action that may be taken at any annual or special meeting of stockholders may be taken
by majority stockholder consent (or whatever other voting threshold applies for a
particular act) “without a meeting, without prior notice and without a vote.” 48
44
41 Del. Laws ch. 131, § 6 (1937) (“Whenever the vote of stockholders at a meeting
thereof is required or permitted to be taken in connection with any corporate action, by
any Section of this Chapter, the meeting and vote of stockholders may be dispensed with,
if all of the stockholders who would have been entitled to vote upon the action if such
meeting were held, shall consent in writing to such corporate action being taken . . . .”).
45
56 Del. Laws ch. 50, § 228 (1967); 1 Edward P. Welch et al., Folk on the Delaware
General Corporation Law § 228.08, at 7-340 (6th ed.).
46
57 Del. Laws ch. 148, § 16 (1969).
47
See Ernest L. Folk, III, Corporation Law Developments—1969, 56 Va. L. Rev. 755,
783 (1970) (“It is apparent that this procedure can be abused where a large block of stock
is held in a conveniently small number of hands. It permits the control block to take
action in virtual secrecy and then present the minority shareholders with a fait acompli
when it fulfills the minimal state statutory obligation of giving them ‘prompt’ notice of
the action taken.”).
48
8 Del. C. § 228(a).
15
Significantly, although Section 228 permits stockholders to take action by written
consent without prior notice, “[p]rompt notice of the taking of the corporate action” by
written consent must be provided to the non-consenting stockholders. 49 Thus, Section
228 ensures some level of transparency for non-consenting stockholders. Indeed, this
Court has refused to make a written consent effective under Section 228 when the
consenting stockholders failed to provide the required prompt notice to the non-
consenting stockholders, until the failure to provide notice was remedied. 50
This Court has recognized more broadly that, “[b]ecause Section 228 permits
immediate action without prior notice to minority stockholders, the statute involves great
potential for mischief and its requirements must be strictly complied with if any
semblance of corporate order is to be maintained.” 51 In that vein, the Delaware Supreme
Court has held that the statute must be “given its plain meaning,” which requires
adherence to the condition that “any corporate action taken under [Section] 228 is
effective only upon the delivery of the proper number of valid and unrevoked consents to
49
8 Del. C. § 228(e). Delaware courts have not precisely defined the scope of disclosure
required by this notification obligation. See Dubroff v. Wren Holdings, LLC, 2011 WL
5137175, at *9 (Del. Ch. Oct. 28, 2011) (“[T]he precise parameters of the disclosure
required by § 228(e) have not yet been delineated”); In re Nine Sys. Corp. S’holders
Litig., 2014 WL 4383127, at *37 (Del. Ch. Sept. 4, 2014) (discussing disclosure
principles under 8 Del. C. § 228(e) “[w]ithout rigidly defining the scope of information
that must be disclosed”).
50
See Di Loreto v. Tiber Holding Corp., 1999 WL 1261450, at *5 (Del. Ch. June 29,
1999).
51
Carsanaro v. Bloodhound Techs., Inc., 65 A.3d 618, 641 (Del. Ch. 2013) (internal
quotation marks omitted).
16
the corporation.” 52 This Court also has recognized the need for strict compliance with the
ministerial requirements of Section 228, such as the dating of the consent by each
consenting stockholder. 53 Thus, even if a controlling stockholder manifests a clear intent
to ratify a decision outside of a stockholder meeting, the ratification will not be effective
unless it complies with the technical requirements of Section 228.
In sum, the provisions of the DGCL governing the ability of stockholders to take
action, whether by voting at a meeting or by written consent, 54 demonstrate the
importance of ensuring precision, both in defining the exact nature of the corporate action
to be authorized, and in verifying that the requirements for taking such an action are met,
including that the transaction received enough votes to be effective. They also
52
Allen v. Prime Computer, Inc., 540 A.2d 417, 420 (Del. 1988). See also 8 Del. C. §
228(a) (“[Consents] shall be delivered to the corporation by delivery to its registered
office in [Delaware], its principal place of business or an officer or agent of the
corporation having custody of the book in which proceedings of meetings of stockholders
are recorded. Delivery made to a corporation’s registered office shall be by hand or by
certified or registered mail, return receipt requested.”).
53
See H-M Wexford LLC v. Encorp, Inc., 832 A.2d 129, 152 (Del. Ch. 2003) (refusing to
dismiss claim that consents were invalid because the consents were not individually
dated, and “the date requirement set forth by Section 228(c) must be strictly enforced”);
Carsanaro, 65 A.3d at 641 (holding that stockholder must possess the exhibits
incorporated by reference into consent in order for that stockholder’s consent to be valid
under Section 228).
54
The recently adopted Section 204 provides another example of formalities required for
stockholder action. This provision permits validation of otherwise defective corporate
acts through board ratification and stockholder approval. 8 Del. C. § 204. When their
approval is required, stockholders must receive notice twenty days before the stockholder
meeting to approve the defective act, and the notification must include all relevant
information regarding the defective act and the directors’ resolution to ratify it. Id.
§ 204(d). The defective act is only ratified upon completion of this process. Id. § 204(f)-
(h).
17
demonstrate the importance of providing transparency to stockholders, whose rights are
affected by the actions of the majority. In particular, stockholders have the right to
participate in a meeting at which a vote is to be taken after receiving notice and all
material information or, in the case of action taken by written consent, to receive prompt
notice after the fact of the action taken.
2. Defendants’ Authorities Are Inapposite and Do Not Warrant Deviation
from the Corporate Formalities of the DGCL
Defendants argue that Zuckerberg, as Facebook’s controlling stockholder, should
be permitted to ratify the decision of an interested board of directors without complying
with the formalities of the provisions of the DGCL for taking stockholder action.
According to defendants, Zuckerberg’s expressions of assent to the 2013 Compensation
in his deposition and in his affidavit are each sufficient to ratify that transaction and shift
the judicial standard of review from one of entire fairness to business judgment.
Defendants advance several arguments in an attempt to make this case, beginning
with reliance on general principles of ratification under the law of agency. 55 In
particular, defendants assert that Chancellor Allen’s decision in Lewis v. Vogelstein 56
affirms the applicability of common law ratification in the corporate context.
55
In agency law, “[r]atification is the affirmance of a prior act done by another, whereby
the act is given effect as if done by an agent acting with actual authority.” Restatement
(Third) of Agency § 4.01 (2006). When effective, “ratification retroactively creates the
effects of actual authority.” Id. § 4.02.
56
699 A.2d 327 (Del. Ch. 1997).
18
In Vogelstein, stockholders challenged certain option grants made under a stock
option compensation plan for the directors of Mattel, Inc., which plan had been approved
by the stockholders of the company at an annual meeting. Because the challenged
transaction had been approved at a formal meeting of stockholders, the Court had no
occasion to consider the question presented here, to wit, whether assent expressed outside
the mechanisms prescribed by the DGCL can form the basis for a valid act of stockholder
ratification. The Court’s inquiry focused instead on the legal effect of a concededly valid
form of stockholder ratification on judicial review of the option grants in question. 57 In
analyzing this question, Chancellor Allen explained how “[r]atification is a concept
deriving from the law of agency,” but went on to elaborate that “[a]pplication of these
general ratification principles to shareholder ratification is complicated by three other
factors,” namely (1) the lack of a single individual acting as principal—a factor not
present here, (2) a purpose to demonstrate compliance with fiduciary duties rather than to
validate unauthorized conduct, and (3) the existence of the DGCL as a statutory
overlay. 58 The Chancellor commented that these “differences between shareholder
57
After explaining the diverging views on this issue at the time, Chancellor Allen
expressed his view that “informed, uncoerced, disinterested shareholder ratification of a
transaction in which corporate directors have a material conflict of interest has the effect
of protecting the transaction from judicial review except on the basis of waste.” 699
A.2d at 336.
58
See Lewis v. Vogelstein, 699 A.2d at 335.
19
ratification of director action and classic ratification by a single principal . . . lead to a
difference in the effect of a valid ratification in the shareholder context.” 59
I do not read Vogelstein as a wholesale endorsement of importing general
principles of common law ratification into the corporate context, as defendants suggest.
To the contrary, the decision demonstrates the need to be sensitive to the peculiarities of
the corporate context when applying general principles of ratification. To the list of
complicating factors Chancellor Allen identified in Vogelstein, I would add that deviation
from the corporate formalities of the DGCL could lead to (1) imprecision concerning
what action has been ratified and whether (when no single controlling stockholder exists)
the requisite level of approval has been obtained, and (2) a lack of transparency to non-
assenting stockholders. The importance of these factors in the corporate context is
discussed further below, in Section II.B.3.
Focusing on ratification in the corporate context, defendants acknowledge that
“ratification is commonly achieved through a formal stockholder vote” but argue that “no
formal vote is required,” citing this Court’s decision in the Mother African Union case.60
That decision is of no help to defendants.
In Mother African Union, which involved a nonstock corporation, the Court
determined that a church had validly disaffiliated from its conference because “the
59
Id.
60
Defs.’ Op. Br. 25 (citing Mother African Union First Colored Methodist Protestant
Church v. Conference of African Union First Colored Methodist Protestant Church, 1992
WL 83518, at *3 (Del. Ch. Apr. 22, 1992), aff’d, 633 A.2d 369 (Del. 1993)).
20
plaintiffs [had] established that the membership vote . . . met the requirements of [8 Del.
C.] § 215(c) and therefore was valid.” 61 The Court went on to note that, “[i]n addition, a
majority of the [church’s] total membership later ratified the membership vote to
disaffiliate (although it is not clear whether that was accomplished at a formal meeting
called for that purpose).” 62 Because the original vote of the nonstock corporation’s
members was statutorily valid, ratification was unnecessary and the Court’s comment on
that subject was dictum. If anything, the Court’s parenthetical pause to question whether
an act of ratification had taken place at a formal meeting suggests that the Court, having
found the vote valid on independent grounds, was uncertain whether the ratification
would have been effective had it hypothetically been necessary, since the Court did not
know whether it had occurred in a formal context. Mother African Union thus seems to
undermine defendants’ position more than it helps it.
Next, defendants point to the Delaware Supreme Court’s 1943 decision in Frank v.
Wilson & Co. 63 for the proposition that a stockholder’s conduct, including even inaction,
may constitute a valid form of stockholder ratification. The form of “ratification” at issue
in Frank, however, bears no resemblance to the form of ratification at issue here, where
the action of one stockholder (Zuckerberg) is being asserted to impact the rights of other
stockholders.
61
Mother African Union, 1992 WL 83518, at *3.
62
Id.
63
32 A.2d 277 (Del. 1943).
21
In Frank, a Class A stockholder (Frank) challenged a recapitalization plan that
converted his Class A stock into common stock. The recapitalization plan had been
specifically approved at a meeting of stockholders, but Frank did not consent to the
plan. 64 In a previous decision, the Supreme Court found the recapitalization plan to be
void insofar as it forced the elimination of accrued past dividends for non-consenting
stockholders, 65 thus permitting such stockholders (like Frank) to challenge it on that
basis. 66 When Frank sued, however, the Supreme Court, affirming an opinion of the
Court of Chancery, held that by virtue of Frank’s conduct—his acceptance of common
stock dividends “for upwards of two years” as though his Class A stock had been
converted—he “must be held to have ratified the conversion of his Class A shares into
common shares pursuant to the plan of recapitalization by his voluntary and decisive acts
with full knowledge of the facts.” 67 Thus, the issue before the Court was whether Frank’s
conduct precluded him as an equitable matter from being able to assert a claim for relief.
64
Id. at 278-79.
65
Keller v. Wilson & Co., 190 A. 115, 126 (Del. 1936).
66
Indeed, in a separate suit, the Court of Chancery refused to dismiss the complaint of
another dissenting stockholder that had more clearly expressed its intent to challenge the
same recapitalization plan and that did not receive common stock dividends. Bay
Newfoundland Co. v. Wilson & Co., 4 A.2d 668, 670, 673 (Del. Ch. 1939).
67
Frank, 32 A.2d at 281, 283.
22
Critically, unlike here, the “ratification” found in Frank had no impact on the rights of
any other stockholder. 68
Turning to a case involving a limited liability company, defendants cite the
Superior Court’s decision in Chantz Enterprises, LLC v. JHL Brighton Design/Decor
Center, LLC for the proposition that ratification may be carried out through affidavits. 69
In Chantz, a member of a defunct LLC had attempted to reinstate the LLC’s charter and
restore it to good standing. 70 Plaintiffs contested the member’s ability to do so
unilaterally, without the support of the LLC’s other members. The Superior Court found
that affidavits submitted by other members “prove[d] that [the member] did not
unilaterally restore the company to good standing absent his co-members’ agreement, and
to the extent that it could be argued otherwise, 75% of the membership have now ratified
68
The Supreme Court in Frank noted that the Court of Chancery’s decision seemed to be
“founded on the doctrine of acquiescence.” 32 A.2d at 281. It further recognized that
“[a]cquiescence and ratification are closely related,” but appears to have chosen to apply
the term “ratification” to address Frank’s conduct based on the fact that “[a]cquiesence
properly speaks of assent by words or conduct during the progress of a transaction, while
ratification suggests an assent after the fact.” Id. at 283. The doctrine of acquiescence
recently was defined as a defense that applies when a claimant “has full knowledge of his
rights and the material facts and (1) remains inactive for a considerable time; or (2) freely
does what amounts to recognition of the complained of act; or (3) acts in a manner
inconsistent with the subsequent repudiation, which leads the other party to believe the
act has been approved.” Klaassen v. Allegro Dev. Corp., 106 A.3d 1035, 1047 (Del.
2014) (holding that former CEO had acquiesced to his removal by his recognition of the
removal and his subsequent conduct). Applying the standard articulated in Klaassen, the
conduct referred to in Frank as ratification would appear to be more accurately described
today as evidence of acquiescence.
69
2010 WL 2642885 (Del. Super. June 30, 2010).
70
Id. at *3.
23
that action.” 71 Thus, the Court’s primary finding, based on the affidavits submitted, was
that a sufficient number of members had formally agreed to reinstate the charter in the
first place. The putative act of “ratification” appears to have been at most a secondary
consideration stated in dictum.
The Superior Court’s reference to ratification has little bearing on this case for two
additional reasons. Chantz involved the ratification of one LLC member’s allegedly
unauthorized actions by the other members—in other words, all principals, no agents. It
did not involve the situation presently before the Court, where a principal (Zuckerberg as
a stockholder) seeks to ratify the actions of the corporation’s agents (Facebook’s
directors). The case is also inapplicable because LLCs have a greater degree of
flexibility in privately ordering their affairs than do corporations governed by the DGCL.
For instance, by default, LLC members may vote by written or electronic consents
without the formalities of DGCL Section 228, 72 and “an LLC’s members have wide
latitude to craft the members’ rights and obligations.” 73 As the Supreme Court recently
noted, these are stark differences from corporate law that may result in different legal
outcomes. 74
71
Id. at *4.
72
6 Del. C. § 18-302(d).
73
Paul v. Del. Coastal Anesthesia, LLC, 2012 WL 1934469, at *2 (Del. Ch. May 29,
2012).
74
See Corwin v. KKR Fin. Holdings LLC, – A.3d –, 2015 WL 5772262, at *1 n.3 (Del.
Oct. 2, 2015) (noting that “in cases involving [alternative] entities, distinctive arguments
24
Finally, defendants suggest that stockholder acts such as tendering shares serve as
an example of less formal ratification. 75 This suggestion is unpersuasive, because
expressing approval of the sale of a company by tendering shares is not analogous to
stockholder ratification. “Approving” a two-step transaction by tendering a sufficient
number of shares in a tender offer is a functional requirement for completing such a
transaction. Directors cannot tender stockholders’ shares for them, so stockholders are
not ratifying the transaction, but effectuating it in the first instance. A stockholder who
chooses to sell her shares via a tender offer, moreover, may do so with minimal
involvement from directors, due to “the lack of any explicit role in the General
Corporation Law for a target board of directors responding to a tender offer.” 76 Thus
tendering shares bears no meaningful resemblance to a post hoc ratification of directors’
actions.
For the reasons explained above, defendants’ authorities are inapposite and do not
persuade me that it would be sensible to deviate from the formal mechanisms available in
the DGCL for expressing stockholder approval when seeking to ratify an action taken by
a corporation’s directors.
often arise due to the greater contractual flexibility given to those entities under our
statutory law”).
75
In re Orchid Cellmark Inc. S’holder Litig., 2011 WL 1938253, at *13 (Del. Ch. May
12, 2011); Matador Capital Mgmt. Corp. v. BRC Holdings, Inc., 729 A.2d 280, 294 (Del.
Ch. 1998) (“[T]he BRC stockholders are being asked to decide to approve the sale of
their corporation as a part of their decision whether or not to tender shares in the first-step
tender offer.”).
76
In re CNX Gas Corp. S’holders Litig., 4 A.3d 397, 407 (Del. Ch. 2010).
25
3. Existing Authority and the Policies Underlying the Stockholder Approval
Provisions of the DGCL Suggest that Formalities Must Be Followed to
Effectuate Ratification in the Corporate Context
Defendants observe that there “is no case or statute that requires a stockholder
vote or written consent for ratification purposes if the approval of a stockholder majority
can be expressed another way.” 77 Although no case has been identified that explicitly
precludes (or permits) the use of informal means to ratify an act in a case like this, it is
notable that many Delaware courts that have used stockholder ratification to apply the
business judgment rule or to cure unauthorized conduct, have done so when the act of
ratification occurred at a formal meeting of stockholders. 78 More importantly, references
77
Defs.’ Reply Br. 7.
78
See, e.g., Michelson v. Duncan, 407 A.2d 211, 219 (Del. 1979) (addressing stock
option grant that was ratified by stockholders at annual meeting) (“It is the law of
Delaware, and general corporate law, that a validly accomplished shareholder ratification
relates back to cure otherwise unauthorized acts of officers and directors.”); Sample v.
Morgan, 914 A.2d at 656, 663-64 (rejecting ratification defense for compensation plan
ratified by a stockholder vote at annual stockholder meeting, due to allegedly overbroad
plan parameters and disclosure failures) (“When uncoerced, fully informed, and
disinterested stockholders approve a specific corporate action, the doctrine of ratification,
in most situations, precludes claims for breach of fiduciary duty attacking that action.”);
Lewis v. Vogelstein, 699 A.2d at 336 (reviewing compensation plan that was ratified by
stockholders at annual meeting) (“In all events, informed, uncoerced, disinterested
shareholder ratification of a transaction in which corporate directors have a material
conflict of interest has the effect of protecting the transaction from judicial review except
on the basis of waste.”); In re Wheelabrator Techs., Inc. S’holders Litig., 663 A.2d 1194,
1198, 1203 (Del. Ch. 1995) (addressing approval of merger at special stockholders
meeting) (“Approval by fully informed, disinterested shareholders pursuant to
§ 144(a)(2) invokes the business judgment rule . . . .”) (internal quotation marks omitted);
Lewis v. Hat Corp. of Am., 150 A.2d 750, 753 (Del. Ch. 1959) (addressing ratification by
vote at a special meeting of stockholders) (“It is clearly established in Delaware that
stockholder ratification of corporate action which is not per se void renders such action
immune from minority stockholder attack . . . .”); Gerlach v. Gillam, 139 A.2d 591, 593
(Del. Ch. 1958) (also addressing ratification by vote at a special meeting of stockholders)
26
in existing case law to ratification in the context of a stockholder “vote,” as well as policy
considerations underlying the provisions of the DGCL for taking stockholder action,
support the conclusion that adherence to formalities should be required in this context.
One foundational case is Gantler v. Stephens. 79 As the Supreme Court recently
noted, Gantler is “a narrow decision focused on defining a specific legal term,
‘ratification.’” 80 In Gantler, the Supreme Court held that the scope of “the shareholder
ratification doctrine must be limited . . . to circumstances where a fully informed
shareholder vote approves director action that does not legally require shareholder
approval in order to become legally effective.” 81 In my view, Gantler’s use of the phrase
“fully informed shareholder vote” in defining the concept of ratification was deliberate
and was not intended to mean something less formal than an actual stockholder vote (or
an action by written consent in lieu thereof). 82
(“[W]here a majority of fully informed stockholders ratify action of even interested
directors, an attack on the ratified transaction normally must fail.”).
79
Gantler v. Stephens, 965 A.2d 695 (Del. 2009).
80
Corwin v. KKR, 2015 WL 5772262, at *5.
81
Gantler, 965 A.2d at 713.
82
Cf. J. Travis Laster, The Effect of Stockholder Approval on Enhanced Scrutiny, 40 Wm.
Mitchell L. Rev. 1443, 1445 (2014) (discussing Gantler and noting that a stockholder or
other second decision maker can “ratify the original decision by agreeing formally with
the first decision maker”) (emphasis added). Notably, Justice Jacobs, who wrote the
opinion in Gantler, was the same jurist who as a Vice Chancellor decided the Mother
African Union case, which, as discussed above, implied the need for a “formal meeting”
to effectuate a ratification.
27
Recently, in Corwin v. KKR, which confirmed that stockholder approval from a
statutorily required vote can be used to invoke the business judgment rule the same way
an approval from a voluntary vote can, the Supreme Court again used specific voting
language to explain the doctrine of ratification in the corporate context. 83 Specifically,
the Supreme Court stated that “the doctrine applies only to fully informed, uncoerced
stockholder votes,” thereby implicitly excluding less formal methods of stockholder
approval. 84
Another example is 8 Del. C. § 144(a)(2), which prevents the voiding of a
director’s interested transaction if the “transaction is specifically approved in good faith
by vote of the stockholders.” 85 In describing that process, this Court stated in
Wheelabrator that “[a]pproval by fully informed, disinterested shareholders pursuant to
§ 144(a)(2) invokes the business judgment rule and limits judicial review to issues of gift
83
Corwin v. KKR, 2015 WL 5772262, at *6.
84
See id.
85
The Fletcher Cyclopedia of the Law of Corporations similarly states that, as a matter of
general corporate law doctrine, ratification takes place at a stockholder meeting. See
3 William Meade Fletcher, Fletcher Cyclopedia of the Law of Corporations § 982, at
626-27 (perm. ed., rev. vol. 2010) (“The [interested] transaction may be ratified by a
majority of the shareholders at a meeting of the shareholders, or by all the shareholders
independent of any meeting, and a contract made by the directors of a corporation, which
was either authorized or subsequently ratified by a majority vote of the shareholders in a
meeting regularly assembled, is not affected by the fact that one or more of the directors
had an interest in such contract other than as shareholders in the corporation.”); id. § 979,
at 618-20 (“The parties asserting the defense of shareholder ratification have the burden
of proving the vote was an informed one and that there was full disclosure.”) (emphasis
added).
28
or waste with the burden of proof upon the party attacking the transaction.” 86 Although
the statutory language plainly refers to the need for a “vote of the stockholders,”
Wheelabrator simply uses the word approval to indicate this formal requirement,
suggesting again that Delaware courts naturally assume that stockholder approval
requires adherence to formalities. 87
Precedent also suggests that compliance with statutory formalities is necessary
even for an individual controlling stockholder. In Ravenswood Investment Co., L.P. v.
Winmill & Co., Inc., for example, this Court scrutinized the written consent of an
individual controlling stockholder (who held all of the voting power in the company) to
approve a stock plan that would have been invalid without stockholder approval. 88 A
holder of non-voting stock sought to invalidate the written consent for failing to comply
with Section 228 because the consent was only dated with a single pre-printed “as of”
date, suggesting a date of effectiveness, rather than with an individual signature date for
the controlling stockholder. 89 Although the Court ultimately upheld the consent because
86
In re Wheelabrator, 663 A.2d at 1203 (emphasis added) (internal quotation marks
omitted).
87
In the analogous context of Section 144(a)(1), which allows for approval of interested
transactions by fully informed, disinterested directors, this Court has suggested that such
approval must occur at a formal meeting of directors. See Lewis v. Fuqua, 502 A.2d 962,
970 (Del. Ch. 1985) (noting party’s concession that 8 Del. C. § 144 did not apply because
“the approval did not take place at a formal Board meeting or necessarily after full
disclosure of all material facts”).
88
2013 WL 6228805, at *1 (Del. Ch. Nov. 27, 2013).
89
Id.
29
one reading of it suggested compliance with the technical requirements of Section 228,
the Court’s close scrutiny demonstrates that compliance with formalities was imperative
even when there was no question concerning the wishes of the sole voting stockholder. 90
In my opinion, the policies underlying the DGCL provisions governing the taking
of stockholder action further support the conclusion that stockholders—including
controlling stockholders like Zuckerberg—must observe statutory formalities when
seeking to ratify director action. Doing so will avoid ambiguity and misinterpretation by
ensuring that actions taken by stockholders are defined with precision and—where a
single controlling stockholder is not present—that the requisite level of approval was
obtained, and will promote transparency for the benefit of all stockholders. As the
Delaware Supreme Court recently stated, “[c]ertainty and efficiency are critical values
when determining how stockholder voting rights have been exercised.” 91
Defendants contend that formal processes such as a stockholder vote or a written
consent can be convenient methods of ratification for groups of stockholders, who may
suffer from collective action difficulties, but that they are not necessary for a controlling
stockholder whose will can be clearly expressed without formalities. They argue that
permitting many sorts of acts to constitute ratification poses no problem of imprecision,
because “[b]y virtue of his voting control, Mr. Zuckerberg can be the singular voice of
90
See id. at *2.
91
Crown EMAK Partners, LLC v. Kurz, 992 A.2d 377, 395 (Del. 2010) (dispute over
election of directors).
30
Facebook’s stockholders . . . .” 92 I disagree. Although an affidavit is a relatively formal
expression, once the statutory framework is removed, the possibilities for ambiguity in
expressing approval are seemingly limitless—if affidavits are sufficient, what about
meeting minutes, press releases, conversations with directors, or even “Liking” a
Facebook post of a proposed corporate action? 93 Such an approach would require
directors, stockholders, and courts to engage in the inefficient exercise of divining the
intentions of a controlling stockholder, and would cut away at the certainty and precision
that make the formalities of stockholder meetings or statutorily compliant written
consents beneficial.
Zuckerberg’s deposition testimony illustrates the problem. Discussing Facebook’s
board of directors, Zuckerberg testified that “[t]hese are the people who I want . . . and
who I think will serve the company best, and I think that the compensation plan that we
have is doing its job of attracting and retaining them over the long term.” 94 It is far from
clear that Zuckerberg intended that statement to be a definitive ratification of a specific
corporate act. The year of the compensation in question is not mentioned, and
Zuckerberg provides no language indicating final approval of a past compensation act.
Yet the defendants assert that Zuckerberg’s deposition testimony constitutes an
92
Defs.’ Reply Br. 8.
93
See Definition of Facebook “Like” Button, WhatIs.com Glossary,
http://whatis.techtarget.com/definition/Facebook-Like-button (last visited Oct. 27, 2015).
94
Defs.’ Reply Br. 9-10 (quoting Zuckerberg Dep. 63:7-11).
31
independent act of ratification. 95 After a controlling stockholder is no longer affiliated
with the corporation, moreover, the problems of ambiguity and the potential for
misinterpretation are compounded because the source of the ratifying act may no longer
be available to explain what precisely was intended.
Failing to adhere to corporate formalities to effect stockholder ratification also
impinges on the rights of minority stockholders. In traditional agency relationships, a
single principal’s ratification of an agent’s conduct comes at a cost to that principal only.
But in the corporate context, the ratification decisions of a controlling stockholder affect
the minority stockholders. Although minority stockholders have no power to alter a
controlling stockholder’s binding decisions absent a fiduciary breach, they are entitled to
the benefits of the formalities imposed by the DGCL, including prompt notification under
Section 228(e). 96 This requirement promotes transparency and enables minority
stockholders to stay abreast of corporate decision-making and maintain the accountability
of boards of directors and controlling stockholders. In this vein, this Court has
commented that the written consent procedure keeps minority stockholders’ voting rights
95
Defs.’ Reply Br. 9 (referring to both Zuckerberg’s deposition statement and his
affidavit as specific approvals); id. at 4 (noting that defendants “rely exclusively” upon
Zuckerberg’s deposition and affidavit to establish ratification). Zuckerberg’s affidavit,
which states that he “approve[s] of all 2013 equity awards to Facebook’s Non-Executive
Directors,” does not suffer from such problems of ambiguity, although “approving of” an
action is less definitive than simply “approving” it. See Zuckerberg Aff. ¶ 10.
96
8 Del. C. § 228(e) (“Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those stockholders or
members who have not consented in writing and who, if the action had been taken at a
meeting, would have been entitled to notice of the meeting . . . .”).
32
intact, even if those rights are rendered moot when a majority stockholder executes a
decision. 97
It is therefore of no moment that Zuckerberg undisputedly controls Facebook.
Although he can outvote all other stockholders and thus has the power to effect any
stockholder action he chooses, he still must adhere to corporate formalities (and his
fiduciary obligations) when doing so, because his rights as a stockholder are no greater
than the rights of any other stockholder—he simply holds more voting power.
Consequently, just as a majority group of stockholders must follow the requirements of
Section 228 in fairness to the minority stockholders, a single holder of a majority of
voting power must do so as well.
Defendants offer no policy rationale to explain why a controlling stockholder need
not adhere to the rules of stockholder meetings or Section 228 for ratification specifically,
as opposed to corporate action generally. They do not explain whether ratification should
require less formality than other stockholder actions, and if it should, why. In my view,
since ratification can shield the transactions of interested directors and provide them
authorization to take sweeping action, it is equally as powerful a tool as any other direct
stockholder action. If Zuckerberg does not need to provide written consents to ratify the
2013 Compensation, why require written consents for any other action he takes? Such a
97
Matulich v. Aegis Commc’ns Grp., Inc., 2007 WL 1662667, at *6 (Del. Ch. May 31,
2007), aff’d, 942 A.2d 596 (Del. 2008) (“The purpose of written consent is not to
invalidate the voting rights of minority shareholders, but rather to spare a corporation the
expense of otherwise unnecessary corporate formalities. A shareholder’s entitlement to
vote does not disappear when a majority shareholder exercises a right to written consent.
What disappears is the need for the corporation to deal administratively with that vote.”).
33
regime would essentially negate most requirements under Delaware law to notify
stockholders of meaningful events.
Balanced against the informational costs of a less formal system of stockholder
approval are the financial costs of formalities. Defendants argue that Facebook chose to
avoid “the added expense of a stockholder vote or action by written consent” since it was
not obliged to follow those legal requirements when securing Zuckerberg’s ratification. 98
But Section 228 already serves as a convenient method of avoiding the expense of a
stockholder vote. Although its requirements are strictly construed, they are not numerous
or burdensome. Indeed, the burden and expense of this litigation undoubtedly dwarf the
burden of Zuckerberg signing an appropriate form of consent in this case. In any event,
regardless of whether Section 228 may be more or less costly than informal alternatives
in a particular situation, 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.
*****
For the reasons stated above, I hold that stockholder ratification of an interested
transaction, so as to shift the standard of review from entire fairness to the business
judgment presumption, cannot be achieved without complying with the statutory
formalities in the DGCL for taking stockholder action. Consequently, neither
Zuckerberg’s affidavit nor his deposition testimony ratified the Facebook board’s
decision to approve the 2013 Compensation, which decision remains subject to entire
98
Defs.’ Reply Br. 9 n.8.
34
fairness review because a majority of the board was personally interested in that
transaction.
The entire fairness standard of review requires defendants to establish that the
“transaction was the product of both fair dealing and fair price.” 99 Because defendants
relied solely on a ratification defense, they did not attempt to produce evidence of entire
fairness sufficient to show an entitlement to judgment as a matter of law, nor have they
demonstrated that there is no genuine issue of material fact as to the entire fairness of the
2013 Compensation. I therefore deny their motion for summary judgment as to Count I.
C. Count III: Unjust Enrichment
Plaintiff asserts in Count III that defendants were unjustly enriched by the 2013
Compensation, which they received as a result of the alleged breaches of their fiduciary
duties. Defendants move for summary judgment on this count as well.
A claim for unjust enrichment requires “(1) an enrichment, (2) an impoverishment,
(3) a relation between the enrichment and impoverishment, (4) the absence of
justification, and (5) the absence of a remedy provided by law.” 100 In arguing for
summary judgment, defendants rely entirely on the principle that, if plaintiff’s claim for
breach of fiduciary duty fails, his claim for unjust enrichment on the basis of such breach
must fail as well. 101 The corollary to that argument plays out here. If defendants’ sole
99
Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993).
100
Nemec v. Shrader, 991 A.2d 1120, 1130 (Del. 2010).
101
Defs.’ Op. Br. at 33-34; Defs.’ Reply Br. at 14.
35
basis for summary judgment on a duplicative unjust enrichment claim is the failure of the
underlying claim for breach of fiduciary duty, then the survival of the fiduciary duty
claim logically allows the claim for unjust enrichment to survive as well. 102 For this
reason, I deny defendants’ motion for summary judgment as to the unjust enrichment
claim.
D. Count II: Waste of Corporate Assets
Plaintiff asserts in Count II that the 2013 Compensation constituted a waste of
corporate assets. 103 Defendants counter that the extreme test for waste is not satisfied
here. 104 I agree with defendants.
“[W]aste entails an exchange of corporate assets for consideration so
disproportionately small as to lie beyond the range at which any reasonable person might
be willing to trade.” 105 Thus, to state a claim for waste, “a plaintiff must allege
particularized facts that lead to a reasonable inference that the director defendants
authorized an exchange that is so one sided that no business person of ordinary, sound
102
The survival of one claim resulting in the survival of a duplicative claim often occurs
at the motion to dismiss stage. See, e.g., Calma, 114 A.3d at 592 (Del. Ch. 2015)
(concluding that because fiduciary duty claim survived motion to dismiss, duplicative
unjust enrichment claim could also survive); McPadden v. Sidhu, 964 A.2d 1262, 1276-
77 (Del. Ch. 2008) (declining to dismiss a duplicative unjust enrichment claim despite the
fact that, if plaintiff later prevailed on both claims, he would then “have to elect his
remedies”). Defendants have moved for summary judgment on the claim for unjust
enrichment rather than to dismiss it. Nonetheless, I apply the same rationale here.
103
Compl. ¶¶ 30-33.
104
Defs.’ Op. Br. 34-36.
105
Lewis v. Vogelstein, 699 A.2d at 336.
36
judgment could conclude that the corporation has received adequate consideration.” 106
The test for waste is extreme and rarely satisfied. 107 Consequently, even if a plaintiff
successfully raises questions concerning the fairness of director compensation, he does
not necessarily succeed in pleading “the rare type of facts from which it is reasonably
conceivable” that the compensation awards constituted corporate waste. 108
In support of the waste claim, plaintiff argues that the average compensation for
Facebook’s non-employee directors is 43% higher than the average compensation for
directors in a specified peer group of companies, despite Facebook’s lower-than-average
net income and revenue, and stock price movement that plaintiff views as insufficient to
justify the compensation awarded. 109 Such allegations are essentially complaints that
some portion of defendants’ 2013 Compensation was above and beyond what they
deserved for their performance. As such, the allegations fall far short of demonstrating
that such compensation constitutes a gift or gratuity for which the corporation received
no consideration. 110 Under this Court’s precedents, allegations that compensation is
106
Seinfeld v. Slager, 2012 WL 2501105, at *3 (quoting In re Citigroup Inc. S’holder
Deriv. Litig., 964 A.2d 106, 136 (Del. Ch. 2009)) (internal quotation marks omitted).
107
Cambridge Ret. Sys., 2014 WL 2930869, at *9.
108
Calma, 114 A.3d at 591.
109
Compl. ¶¶ 2, 17, 18.
110
Lewis v. Vogelstein, 699 A.2d at 335-36.
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“excessive or even lavish, as pleaded here, are insufficient as a matter of law to meet the
standard required for a claim of waste.” 111
Plaintiff wisely refrains from alleging that the all-star cast on Facebook’s board is
so lacking in talent or exerts so little effort that Facebook receives nothing in return for
compensating its members. Without any such allegations, which presumably could not
be made in good faith, the claim that Facebook paid its directors more than it should have
relative to an alleged peer group of companies fails to state a legally cognizable claim for
waste of corporate assets.
III. CONCLUSION
For the foregoing reasons, defendants’ motion for summary judgment as to Counts
I (breach of fiduciary duty) and III (unjust enrichment) is denied, and defendants’ motion
to dismiss Count II (waste of corporate assets) is granted.
IT IS SO ORDERED.
111
See In re 3COM Corp. S’holders Litig., 1999 WL 1009210, at *5 (Del. Ch. Oct. 25,
1999).
38