Espinoza v. Zuckerberg & Facebook, Inc.: Challenging Non-Executive Board Compensation

In Espinoza v. Zuckerberg, No 9745-CB, 2015 BL 353714, (Del Ch. Oct. 28, 2015), Ernesto Espinoza (“Plaintiff”), a derivative stockholder of Facebook, Inc. (“Facebook”), filed a lawsuit on the behalf of Facebook against Facebook’s Board of Directors (“Board”) and Facebook’s CEO Mark Zuckerberg (“Zuckerberg”). The lawsuit against the Board and Zuckerberg (collectively, “Defendants”) sought damages and limits on board compensation. The Delaware Court of Chancery denied the Defendants’ requests for summary judgment regarding the breach of fiduciary responsibilities and unjust enrichment claims, but dismissed the claim for waste of corporate assets.

According to the allegations, Facebook’s Compensation Committee in August 2013 provided the Board recommendations on increasing the annual cash retainer for the Audit Committee members from $50,000 to $70,000 and provided non-employee directors an RSU grant equivalent of $300,000 per year.  Zuckerberg, a shareholder controlling over 61% of the company’s voting power, attended the meeting.  A few weeks later, the Board approved the recommendations.

In June 2014, Plaintiff filed a lawsuit.  The lawsuit asserted three claims against Defendants: (1) breach of fiduciary responsibilities by awarding excessive salaries and stock awards; (2) unjust enrichment of Board at Facebook’s expense; and (3) duty of care breach through waste of corporate assets. Specifically, Plaintiff alleged Defendants failed to meet approved stockholder ratification methods when it approved the Board’s 2013 compensation without a formal process and because the Board’s compensation was 43% higher than the average company in Facebook’s peer group.

Because the Board benefited from the decision, the duty of loyalty presumptively applied as the standard of review.  Defendants, however, argued that the transaction was approved by Zuckerberg, a controlling shareholder.  Defendants further asserted that approval constituted shareholder ratification, resulting in the application of the business judgment rule. Zuckerberg, according to the opinion, “expressed his approval of the 2013 compensation for the non-management directors in a deposition and an affidavit.”

For shareholders to act, they typically vote shares at a meeting.  In addition, Section 228 of the Delaware General Corporation Law, 8 Del. C. §228 (“Section 228”), sets out the authority for shareholders to act by consent in lieu of a meeting.  Under the provision, consents must be in writing.  According to the Delaware Court of Chancery, Section 228 was established to protect minority shareholder interests and provide transparency, including board compensation approvals.

The court did not treat Zuckerberg’s expression of approval as ratification. The court determined Zuckerberg, like any majority group of stockholders, must follow Section 228 requirements. Zuckerberg’s use of an affidavit did not meet statutory formalities.  As the court noted, “if affidavits are sufficient, what about meeting minutes, press releases, conversations with directors, or even ‘Liking’ a Facebook post of a proposed corporate action?”  Failing to adhere to corporate formalities also “impinges on the right of minority shareholders.”  Having relied only on ratification as a basis for summary judgment on the fiduciary duty claim, the court denied the motion.  For similar reasons, the court declined to grant the motion with respect to the claim for unjust enrichment. 

The court did, however, grant Defendants’ motion to dismiss Plaintiff’s claim for waste of corporate assets.  Specifically, the court found the Plaintiff failed to allege facts sufficient to show that the Board’s 2013 compensation was so extreme that Facebook did not receive adequate consideration for corporate duties.  Id.  (“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.”).   

For the above reasons, the court denied Defendants’ motions for summary judgment as to Plaintiff’s breach of fiduciary duty and unjust enrichment claims, but granted Defendants’ motion to dismiss Plaintiff’s waste of corporate assets claim.

The primary material for this post can be found on the DU Corporate Governance website.

Todd Johnson