Two men share securities regulation news

Breaking news and expert analysis on legal and compliance issues

[Back To Home][Back To Archives]

From Securities Regulation Daily, October 28, 2015

Zuckerberg’s ‘like’ didn’t ratify Facebook board’s self-dealing pay raise

By Anne Sherry, J.D.

Facebook directors’ decision to up their own pay was not entitled to the business judgment presumption, even though disinterested controlling shareholder Mark Zuckerberg informally approved the move. The Delaware Chancery Court, in a case of first impression, held that stockholders of a Delaware corporation cannot ratify an interested board’s decisions without adhering to the corporate formalities specified in the Delaware General Corporation Law. The defendants were denied summary judgment because they had not yet demonstrated that the pay decisions were entirely fair (Espinoza v. Zuckerberg, October 28, 2015, Bouchard, A.).

Board’s decision. Facebook’s board, in 2013, approved compensation for its outside, non-management directors. Six of the eight directors on the board were beneficiaries of this decision, each receiving restricted stock units worth approximately $300,000. The other two seats were held by Zuckerberg—who controlled over 61 percent of the voting power of Facebook’s common stock—and COO Sheryl Sandberg. Zuckerberg did not formally express his assent to this decision by voting at a stockholder meeting or acting by written consent, as required by the DGCL.

Zuckerberg’s testimony. The plaintiff shareholder filed a derivative complaint against all eight board members for breach of fiduciary duty, waste of corporate assets, and unjust enrichment. The defendants moved for partial summary judgment and partial dismissal. Alongside the motion, Zuckerberg filed an affidavit declaring that he would have approved the 2013 equity awards if given the chance, and stating that he still approves the grants. In his deposition, he testified, “I think that the compensation plan that we have is doing its job of attracting and retaining [the directors] over the long term.”

DGCL still rules. The defendants argued that Zuckerberg’s testimony effected ratification of the 2013 compensation, shifting the standard of review from entire fairness to the business judgment presumption. The court disagreed. For both methods of stockholder action—voting at a meeting of stockholders or consenting in writing—the DGCL sets forth formal requirements that ensure precision and transparency. The defendants’ authorities were of no avail; Lewis v. Vogelstein (Del. Ch. 1997), rather than endorsing common-law ratification, demonstrates the need for sensitivity to the peculiarities of the corporate context when applying general ratification principles. Other cited cases discussed ratification only as dictum or were otherwise inapposite to the Facebook situation.

The court acknowledged that no case explicitly precludes or permits the use of informal means to ratify an act in situations like this, but noted that many Delaware courts that have used ratification to apply the business judgment rule or to cure unauthorized conduct have done so when ratification occurred at a formal stockholders’ meeting. Gantler v. Stephens (Del. 2009), a foundational case, limited the scope of the ratification doctrine “to circumstances where a fully informed shareholder vote approves director action that does not legally require shareholder approval.” This reference to a shareholder vote was deliberate, in the chancery court’s view. The Supreme Court similarly used specific voting language to explain the doctrine of ratification in Corwin v. KKR Financial Holdings LLC (Del. Oct. 2, 2015).

Slippery slope. Although an affidavit is relatively formal expression, the possibilities for ambiguity are endless once the statutory framework is removed—if affidavits suffice, the court mused, what about meeting minutes, press releases, or hitting “Like” on a Facebook post of a proposed corporation action? Zuckerberg’s deposition testimony, which the defendants argued supports their theory of informal ratification, instead demonstrates this problem of ambiguity. It is far from clear that Zuckerberg intended the statement “These 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” as a definitive ratification of a specific corporate act.

Controlling owner not exempt. Other precedent suggests that compliance with statutory formalities is necessary even for an individual controlling stockholder. Even though minority shareholders cannot alter a controlling stockholder’s decisions, they are entitled to the benefits of the DGCL’s structures, including prompt notification of a written consent. This, in turn, enables them to stay informed of corporate decisions and hold boards and controlling stockholders accountable. Therefore, Zuckerberg’s undisputed control of Facebook did not alter the court’s reasoning. Because the defendants relied solely on a ratification defense, their motion for summary judgment on the breach-of-duty and unjust-enrichment claims was denied. The court did, however, dismiss the waste count for failure to state a claim.

The case is No. 9745-CB.

Attorneys: Kathaleen S. McCormick (Young Conaway Stargatt & Taylor, LLP) for Ernesto Espinoza. David E. Ross (Ross Aronstam & Moritz LLP) for Mark Zuckerberg and Facebook, Inc.

Companies: Facebook, Inc.

MainStory: TopStory CorporateGovernance DirectorsOfficers ExecutiveCompensation DelawareNews

Back to Top

Securities Regulation Daily

Introducing Wolters Kluwer Securities Regulation Daily — a daily reporting service created by attorneys, for attorneys — providing same-day coverage of breaking news, court decisions, legislation, and regulatory activity.

A complete daily report of the news that affects your world

  • View full summaries of federal and state court decisions.
  • Access full text of legislative and regulatory developments.
  • Customize your daily email by topic and/or jurisdiction.
  • Search archives for stories of interest.

Not just news — the right news

  • Get expert analysis written by subject matter specialists—created by attorneys for attorneys.
  • Track law firms and organizations in the headlines with our new “Who’s in the News” feature.
  • Promote your firm with our new reprint policy.

24/7 access for a 24/7 world

  • Forward information with special copyright permissions, encouraging collaboration between counsel and colleagues.
  • Save time with mobile apps for your BlackBerry, iPhone, iPad, Android, or Kindle.
  • Access all links from any mobile device without being prompted for user name and password.