United Food and Commercial Workers Union Pension Fund v. Zuckerberg

Supreme Court of the State of Delaware · 2021 · Corporations

CorporationsDemand futilityDerivative litigationBoard independenceDGCL 141(a)DGCL 102(b)(7)demand futilityderivative suit

Facts

Facebook's board approved a stock reclassification that would allow Mark Zuckerberg to sell substantial stock while maintaining voting control. After stockholder litigation challenged the reclassification, Facebook abandoned it, spent about $21.8 million defending the litigation, and paid $68.7 million in attorneys' fees under the corporate benefit doctrine. Tri-State then brought a derivative suit alleging fiduciary breaches in negotiating and approving the reclassification, but it did not make a pre-suit demand on the board. When Tri-State filed, the nine-member demand board included Zuckerberg, Andreessen, Bowles, Desmond-Hellman, Hastings, Thiel, Sandberg, Chenault, and Zients.

Issue

Whether Tri-State adequately pleaded demand futility under Rule 23.1 without making a pre-suit demand on Facebook's board. More specifically, whether exculpated duty-of-care claims can satisfy Aronson's second prong and whether the complaint pleaded particularized facts showing that a majority of the demand board lacked independence or otherwise could not impartially consider a demand.

Rule

Courts should assess demand futility on a director-by-director basis by asking whether each director (i) received a material personal benefit from the alleged misconduct that would be the subject of the demand, (ii) faces a substantial likelihood of liability on any claim that would be the subject of the demand, or (iii) lacks independence from someone who received such a benefit or faces such liability. If the answer is yes for at least half of the demand board, demand is excused as futile. Exculpated duty-of-care claims do not satisfy Aronson's second prong because they do not expose directors to a substantial likelihood of liability.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Blue Mesa Robotics, Inc., a Delaware corporation based in Denver, has a charter provision eliminating directors' monetary liability for duty-of-care breaches to the fullest extent permitted by law. A stockholder files a derivative suit without making demand, alleging only that five of the nine directors were grossly negligent in approving a supply contract because they failed to read key reports before voting.

Is demand most likely excused as futile?

Explanation. Demand futility is assessed by asking director-by-director whether each director received a material personal benefit, faces a substantial likelihood of liability, or lacks independence from someone who did. Where the charter contains a Section 102(b)(7) exculpation provision, exculpated care claims do not create a substantial likelihood of liability. So allegations of gross negligence alone, without non-exculpated loyalty or bad-faith claims or independence allegations, do not excuse demand. (Derived from United Food and Commercial Workers Union Pension Fund v. Zuckerberg (n.d.).)