On October 28, Chancellor Andre G. Bouchard held in Espinoza v. Zuckerberg (available here) that a disinterested controlling stockholder cannot informally ratify a transaction approved by an interested board of directors and thereby shift the standard of review from entire fairness to the business judgment presumption. Thus, stockholder ratification must occur via a stockholder vote or written consent.
The board of directors of Facebook, Inc., a Delaware corporation, awarded itself a compensation package in 2013. Plaintiff sued alleging the package was a self-interested transaction unfair to Facebook. After the filing of the lawsuit, Facebook’s controlling (61%) stockholder, Mark Zuckerberg, expressed his approval of the compensation package in an affidavit and a deposition. Defendants argued that Zuckerberg had thereby “ratified” the compensation package and, therefore, the business judgment presumption should apply and summary judgment should be granted in their favor.
The Court noted that ratification of the compensation packages could have been accomplished by voting at a stockholder meeting or, less intrusively, by a written consent in compliance with 8 Del. C. § 228. It is unclear to the reader (and quite possibly to the Chancellor) why Zuckerberg did not take the latter step. As the court observed, “the burden and expense of this litigation undoubtedly dwarf the burden of Zuckerberg signing an appropriate form of consent in this case.”
The Court stated it was “far from clear” that Zuckerberg intended his deposition statement to be a “definitive ratification of a specific corporate act” – Zuckerberg only testified (relevantly) that “‘the compensation plan that we have is doing its job of attracting and retaining them over the long term’”. The Court noted that even written consent required prompt notice to the other stockholders, while defendants’ informal ratification methods did not involve notice to other stockholders at all.
The Court disagreed with defendants, holding that “stockholder ratification of a self-dealing transaction must be accomplished formally by a vote at a meeting of stockholders or by written consent”. The Court expressed concern that allowing affidavits or deposition testimony to constitute ratification would become a slippery slope to “press releases, conversations with directors, or even ‘Liking’ a Facebook post of a proposed corporate action” being argued to be ratification, where it may not be clear exactly what actions are being ratified.
Filed under: Controlling Stockholder, Court of Chancery, Fiduciary Duties
Delaware Corporate Law Update 