United Food & Commercial Workers Union v. Zuckerberg

Supreme Court of the State of Delaware · 2021 · Corporations

CorporationsDemand futilityDerivative litigationBoard independenceSection 102(b)(7)derivative suitRule 23.1demand requirement

Facts

Facebook's board approved a reclassification that would allow Mark Zuckerberg to sell substantial stock while retaining voting control, and stockholders later challenged that transaction in a class action. Facebook ultimately abandoned the reclassification, but 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 against Zuckerberg and several directors, alleging breaches of fiduciary duty in negotiating and approving the reclassification, but it did not make a pre-suit demand on Facebook's 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

Demand is excused as futile if, on a director-by-director basis, the complaint pleads particularized facts showing that at least half of the demand board: (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 of the claims that would be the subject of the demand; or (iii) lacks independence from someone who received such a material personal benefit or would face such a substantial likelihood of liability. Exculpated duty-of-care claims do not satisfy demand futility 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.

Pine Harbor Systems, a Delaware corporation based in Seattle, has a charter provision eliminating directors' monetary liability for breaches of the duty of care to the fullest extent permitted by law. A stockholder files a derivative suit in Delaware without making demand, alleging only that six of the nine directors were grossly negligent in approving an acquisition because they failed to read key materials before voting.

Should demand be excused as futile?

Explanation. Demand futility is assessed director by director by asking whether at least half of the demand board received a material personal benefit, face a substantial likelihood of liability, or lack independence from someone who did. Where the corporation has a Section 102(b)(7)-type exculpatory provision, duty-of-care claims do not expose directors to a substantial likelihood of liability, so those allegations alone do not excuse demand. The focus is the board's ability to consider a demand impartially, not simply whether the transaction might fail business-judgment review. (Derived from United Food & Commercial Workers Union v. Zuckerberg (n.d.).)