Facebook’s Mark Zuckerberg Required to Follow Corporate Formalities

The Delaware Court of Chancery yesterday held, on a question of first impression, that a controlling stockholder must formally ratify a self-dealing transaction by a vote at a meeting of stockholders or by written consent in order to shift the standard of review from entire fairness to the business judgment rule.  In Espinoza v. Zuckerberg, et al., C.A. No. 9745-CB (Del. Ch. Oct. 28, 2015), Chancellor Bouchard stated that:  “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.”  This case involved Mark Zuckerberg, the controlling stockholder of the popular social media site Facebook, Inc.

Supplement: The venerable Professor Bainbridge, a friend of this blog and one of Delaware’s favorite corporate law professors, provides scholarly insight on this case here, as well as kindly linking to this post (and others).

UPDATE: The Court of Chancery recently certified an interlocutory appeal of this case. Ernesto Espinoza v. Mark Zuckerberg, et al. and Facebook, Inc., C.A. No. 9745-CB, order (Del. Ch. Nov. 20, 2015). This information initially came to our attention courtesy of The Chancery Daily, the unparalleled publication that chronicles every nuance and activity of the Court of Chancery. The next step in that process is for the Delaware Supreme Court to make an independent decision about whether they will accept the interlocutory appeal or not.

Supplement II:  Frank Reynolds of Thomson Reuters has also penned an article that describes many factual details of the case as well as providing commentary on the pending interlocutory appeal that was initiated on November 20.

Chancery Dismisses Challenge to Board Decision to Settle Claims

In Shaev v. Adkerson, C.A. No. 10436-VCN (Del. Ch. Oct. 5, 2015), the Delaware Court of Chancery dismissed claims for breach of fiduciary duty including the disclosure obligations of the board which granted stock units valued at approximately $35 million in connection with its decision to settle potential claims that could have been brought for more than $46 million. The most noteworthy aspects of this opinion can be highlighted as follows:

  • Unlike a legal decision that a board might make regarding enforceability of an agreement, the decision in this case to avoid a claim is entitled to the protection of the business judgment rule when the board is independent and well informed. See footnote 72.
  • Acquiescence was not found merely because a director approved an amendment to a bylaw which triggered claims under his employment agreement. See footnote 71.
  • The court relied on prior Delaware decisions for the truism that disclosure claims may be entitled to injunctive relief, but if a vote takes place without complete information such that there is no longer irreparable harm, at that point it is too late to seek a remedy. See page 30.
  • The court was skeptical of a claim that a board authorized to amend bylaws could be subject to a claim for breach of contract resulting from an amendment to those bylaws.

Death of Disclosure-Only Settlements in Delaware?

In a recent bench ruling, the Delaware Court of Chancery refused to approve a proposed class action settlement in which the benefit to the class was “disclosures only”, and the court dismissed the case as to the named plaintiff. The court was also critical of the broad release that was proposed. This case was filed in connection with Hewlett-Packard’s $2.7 billion acquisition of Aruba Networks. The case is styled In Re Aruba Networks, Inc. Stockholder Litigation, Cons. C.A. No. 10765-VCL (Del. Ch. Oct. 9, 2015)(Transcript). My gratitude is owed to Kyle Wagner Compton, the editor of the unparalleled scholarly publication called The Chancery Daily, for alerting me to the transcript, as well as for the TCD’s exemplary coverage of all things relating to the Court of Chancery.

The Aruba decision has already been explained in such extensive detail by Kevin LaCroix on his blog called The D&O Diary, that I encourage readers to review his treatment of the case at the foregoing link. In addition to linking to Liz Hoffman’s Wall Street Journal article about the Aruba ruling, he also refers to related decisions by Chancery in other disclosure-only cases, including the Riverbed opinion that was highlighted on these pagesThe only place online that one can find a more extensive and scholarly treatment of the Aruba case is on The Chancery Daily, which is available by subscription–and is well worth the price.

Supplement: Professor Stephen Bainbridge comments on this ruling.

Board-Centered Approach to Activist Investors

Frank Reynolds of Thomson Reuters has written an article that provides a detailed synopsis of the presentation last pileggi 2015 3week by Professor Jeffrey Gordon of Columbia Law School in which the good professor discusses the triumph of Delaware’s board-centered model in connection with activist investors. The speech was presented as the 31st Annual Francis G. Pileggi Distinguished Lecture in Law. Details about the Lecture and its history are included in Frank Reynolds’ article and also available on these pages. We highlighted a recent Chancery decision that discussed the board-centered approach to Delaware corporate law. Professor Gordon is shown in the photo. Supplement: The esteemed Professor Stephen Bainbridge, who a number of years ago presented this Annual Lecture, provides commentary on Professor’s Gordon topic.

Delaware Supreme Court Rules on Director Independence

The Delaware Supreme Court issued two decisions a few days ago, in the Sanchez and Corwin cases. The Sanchez case addressed the topic of director independence and when pre-suit demand is excused in the context of long-term personal relationships.

Prof. Usha Rodrigues provides scholarly insights on the Sanchez case that she graciously shared with us.  By way of comparison, Professor Bainbridge questions how practical it is, at a pre-trial stage, to distinguish between the nuances of a close long-term friendship and a “less close” social acquaintance of long duration. Both of these distinguished professors engaged in a friendly exchange about their different perspectives on this case.

Professor Rodrigues provides follow-up commentary to her initial analysis. Professor Bainbridge gave the “last word” to his friend in their good-natured online debate.

The Corwin case addressed the impact that a parent entity may have even if majority control is not present. Frank Reynolds of Thompson Reuters provides a helpful overview of both cases.

31st Annual F.G. Pileggi Distinguished Lecture in Law

The Delaware Journal of Corporate Law
of Widener University Delaware Law School
presents the 31st Annual Francis G. Pileggi Distinguished Lecture in Law

Title of Lecture: “Shareholder Activism: the Triumph of Delaware’s Board-Centered Model and the New Role for the Board of Directors”

Presented by: Professor Jeffrey N. Gordon
Richard Paul Richman Professor of Law, Columbia Law School;
Co-Director, Richman Center for Business, Law & Public Policy;
Co-Director, Ira M. Millstein Center for Global Markets and Corporate Ownership; Co-Director, Center for Law and Economic Studies

Friday, October 16, 2015

8:00 a.m. Breakfast; 8:45 a.m. Lecture

Hotel DuPont, Green Room
11th and Market Streets
Wilmington, Delaware 19801

One substantive CLE credit available in DE and PA

Online registration form available at delawarelaw.widener.edu/pileggi2015

For additional information or for accessibility and special needs requests, contact Rose E. Callahan at recallahan@widener.edu or 302-477-2014.

Prior lectures in this series have been highlighted on these pages.

Delaware Supreme Court Addresses Standard of Review for Board’s Consideration of Stockholder Demand

The Delaware Supreme Court’s opinion in Espinoza v. Dimon, et al., No. 425, 2015 (Del. Sept. 15, 2015), addressed a certified question of corporate law from the United States Court of Appeals for the Second Circuit. Although the Delaware Supreme Court refused to provide a complete answer to the precise question presented, based on factual issues that it could not determine, the court did provide guidance for Delaware corporate litigators generally on the issue of the applicable standard used by the court to review the response by a board of a stockholder demand in order to determine whether the decision of an independent board committee considering that demand should be set aside.

The Delaware Supreme Court explained that:

Delaware law on whether a board considered a stockholder demand in a grossly negligent fashion is settled, and requires that the decision of an independent committee to refuse a demand should only be set aside if particularized facts are pled supporting an inference that the committee, despite being comprised solely of independent directors, breached its duty of loyalty, or breached its duty of care, in the sense of having committed gross negligence.  The burden to plead gross negligence is a difficult one, particularly when, as seems to be undisputed here, the independent committee did a time-consuming investigation with the advice of its own advisors, and prepared a detailed written report of its investigation.

The determination of gross negligence is fact-specific under Delaware law, and because there was no adequate factual record presented, and the Supreme Court could not determine those factual issues, it could not provide a case-specific answer to the precise question presented.

Chancery To Be Less Likely to Approve Fees in Disclosure Only Cases

In re Riverbed Technology, Inc., Stockholders Litigation, Cons. C.A. No. 10484-VCG (Del. Ch. Sept. 17, 2015). This Delaware Court of Chancery opinion is noteworthy because it provides notice to corporate litigators in Delaware that any future requests for court approval of a class action settlement, or for attorneys’ fees in connection with a class action settlement–in which the benefit is “disclosures only,” will be met with more intense scrutiny than in the past.

This short opinion, relative to other Chancery decisions, deserves a lengthy analysis and no doubt many learned commentators will provide that analysis. Some have already written about its potential for being labeled as a watershed moment or a landmark decision.  See, e.g., two articles already written here and here, by respected court watchers, as well as the unparalleled expert insights and analysis provided in The Chancery Daily.  For present purposes, I will highlight two or three key points that Court of Chancery observers must be aware of:

The court in this case was hesitant to approve the fee request that it ultimately allowed, but did so based in part on the reliance by the parties on the past practice of the Court of Chancery in which settlements were approved and fees were awarded when the parties negotiated a remedy in good faith that was limited to mere disclosures only.  Because the settlement was consummated on that basis with a reasonable expectation that the court would approve terms as it had done in the past, the court reluctantly approved it but also provided a warning for future litigants that there were two major problems that would be subject to further scrutiny in the future that might make it more difficult to obtain court approval in the future in these types of cases.

Litigants are now on notice regarding the following two points:  First, the release negotiated in connection with the consideration provided was extremely broad.  The breadth of that release has sometimes been referred to in the past as inter-galactic.  Footnote 20 observed however, that whether it was inter-galactic or, perhaps merely “solar-systemic, Jovian or just global, it is a broad release of existing claims arising from the merger, known and unknown.”  The court was very concerned that the release extended far beyond the necessary scope of the modest claims made in proportion to the release granted.  The court noted that many recent Chancery decisions expressed the same concern about overly broad releases.  See footnote 21 (listing those recent Chancery decisions).

The court observed that:  “The breadth of the release is troubling.  It is hubristic to believe that upon this record I can properly evaluate, and dismiss as insubstantial, all potential Federal and State claims.  If it were not for the reasonable reliance of the parties on a formerly settled practice in this court, which I have found above, the interests of the Class might merit rejection of a settlement encompassing a release that goes far beyond the claims asserted and the results achieved.”  See slip op at 15.

A second notable aspect of this case that also provides notice for future litigants, was the request for attorneys’ fees in the context of what the court referred to as a “peppercorn amount of benefit.”

The court conducted the classic analysis of the prerequisites for seeking approval of attorneys’ fees in connection with the settlement of a class action, and the factors, well known to readers of this blog, the court will consider based on the Sugarland case.  The requested fees of $500,000 were discounted to an approved amount of $329,881.61.  The court discounted the fee request in “consideration of the modest benefit conferred” albeit after considerable effort.  The parties engaged in expedited discovery including two depositions and document requests.  Based on a January 15 amended complaint and a motion to expedite filed on Feb. 15, the parties reached an agreement on Feb. 26 in principle.

The court provided thoughtful reasoning in connection with the public policy considerations and the “near-ubiquity” of litigation in connection with public company mergers.  See footnote 29.  It remains safe to say, based on this decision, that fee requests in connection with settlements of class actions when the benefit is mere additional disclosure will be subject to more increased scrutiny in the future – – which will likely to result in reduced, if any fee awards, depending on the circumstances, at least for requests presented to the author of this opinion.

Recent Developments at Intersection of D & O Coverage and Delaware Corporate Litigation

Courtesy of Frank Reynolds of Thomson Reuters, we have highlights of the American Conference Institute’s two-day D&O Liability Insurance conference, that addresses recent developments in corporate litigation, including Delaware court decisions, that have an impact on the insurance industry. An excerpt from Frank’s article, hyperlinked above, should be of interest:

Corporate and insurance law specialists have long paid close attention to litigation and legislative developments in Delaware, where two-thirds of the nation’s Fortune 500 companies are incorporated and most shareholder legal battles are fought.

A recent Delaware Chancery Court ruling held Dole Foods CEO David Murdock and his general counsel personally liable for $148 million for conspiring to cheat the shareholders in a buyout — even though the company’s directors followed the rules for negotiating a fair deal.  In re Dole Food Co. Stockholder Litig.; In re Appraisal of Dole Food Co., Nos. 8703 and 9079, 2015 WL 5052214 (Del. Ch. Aug. 27, 2015).

Somewhat Rare Denial of Advancement Claim in Chancery

In a rare denial of a claim for advancement, the Delaware Court of Chancery in the opinion styled Charney v. American Apparel, Inc., C.A. No. 11098-CB (Del. Ch., Sept. 11, 2015), rejected the claims by a former chairman and CEO (and founder), based on the provisions for advancement in the company’s charter and in an indemnification agreement.

Why this Case is Noteworthy

Although generally speaking it has been rare, at least in the past few years, for a Chancery decision to deny a claim for advancement, this is the second decision in as many weeks that has denied such a claim.  In the decision last week, highlighted on these pages here, another unrelated Chancery decision also denied an advancement claim that arose after the term of office of the former officer had been terminated. [The Chancery Daily, an exemplary publication that tracks Chancery cases in more detail than any other, also grappled with a description of what would otherwise be a rare event, compared with cases over the last few years–except for the occurrence twice in two weeks.]

This opinion involves a familiar fact pattern that includes a founder and former CEO/chairman who is forced out of the company, and then seeks advancement. The claims in this case arose after the term of the CEO had ended.  Similar to claims for advancement that have been denied in other cases based on a dispute regarding the former officer’s employment agreement, this dispute arose out of a separate agreement that addressed conduct occurring after the position of the former director and CEO had ended.


The highlights of this decision that would be applicable to the widest range of readers interested in this type of corporate litigation, include the following:  First, in order to understand this decision, a  few key facts need to be considered.  The specific provisions interpreted by the court in this case included different criteria for benefits afforded to current as opposed to former directors and officers.  Moreover, the coverage provided to former directors and officers was not coterminous with the advancement provisions that apply to current directors and officers.  Whether or not that was a drafting error or an intentional exclusion, it was nonetheless fatal to the claim by the former founder and CEO/chairman in this case.

The foregoing interpretation was buttressed by the terms of DGCL § 145(e) which also makes an important distinction between current and former officers, and allows a corporation more latitude to provide advancement to current officers, but allows more conditions to be imposed on the benefit granted to former directors and officers.  See Slip op. at 14-16.

DGCL § 145(f) allows a separate agreement to be the basis for advancement but nonetheless, the indemnification agreement and the provisions of advancement in this case failed to provide coverage for advancement.

The court conducted an extensive discussion of the condition that the suit against the officer be filed “by reason of the fact” of his official position, and found that the claimant might otherwise satisfy that prerequisite, but based on the facts of this case the court found that the claims arose after the term of the plaintiff as an officer and director had concluded.  See footnote 42.

Key Takeaway:  As noted in the Chancery decision of Sept. 5, 2015, highlighted on these pages and linked above, the following important principle in this case needs to be remembered for those interested in this aspect of Delaware corporate law:  notwithstanding the allowance under DGCL § 145(f) for contract-based advancement rights, the advancement right granted in that contract will be limited by the requirement that it not exceed the boundaries of–and that it satisfy the minimum standards imposed by–DGCL § 145(a) and § 145(b).