Jones v. Zuckerberg (In re Facebook, Inc. , IPO Sec. & Derivative Litig.)
| Decision Date | 20 December 2013 |
| Docket Number | MDL No. 12-2389,Case Relates to: 13 Civ. 2830 |
| Court | U.S. District Court — Southern District of New York |
| Parties | IN RE FACEBOOK, INC., IPO SECURITIES AND DERIVATIVE LITIGATION, GAYE JONES, and HOLLY MCCONNAUGHEY, Derivatively on Behalf of FACEBOOK, INC., Plaintiffs, v. MARK ZUCKERBERG, MARC L. ANDREESSEN, ERSKINE B. BOWLES, JAMES W. BREYER, DONALD E. GRAHAM, REED HASTINGS, SHERYL K. SANDBERG, PETER A. THIEL, DAVID EBERSMAN, CIPOLA HERMAN, MORGAN STANLEY & CO. LLC, J.P. MORGAN SECURITIES LLC and GOLDMAN, SACHS & CO., Defendants. - and - FACEBOOK, INC., a Delaware corporation, Nominal Defendant. |
APPEARANCES:
Attorneys for Plaintiffs
ROBBINS GELLER RODMAN & DOWD LLP
By: Samuel H. Rudman, Esq.
Darren J. Robbins, Esq.
PRICKETT, JONES & ELLIOTT, P.A.
By: Michael Hanrahan, Esq.
Paul A. Fioravanti, Jr., Esq.
Patrick W. Flavin, Esq.
Attorneys for Nominal Defendant Facebook
KIRKLAND & ELLIS LLP
By: Andrew B. Clubok, Esq.
Brant W. Bishop, Esq.
Susan E. Engel, Esq.
Joseph Cascio, Esq.
Kellen S. Dwyer, Esq,
WILLKIE FARR & GALLAGHER LLP
By: Richard D. Bernstein, Esq.
Tariq Mundiya, Esq.
Todd G. Cosenza, Esq.
Elizabeth J. Bower, Esq.
Sameer Advani, Esq.
Pursuant to the transfer order from the United States Judicial Panel on Multidistrict Litigation (the "MDL Panel"), entered on October 4, 2012, 41 actions stemming from the May 18, 2012 initial public offering ("IPO") of Facebook, Inc. ("Facebook") are presently before this Court.
The instant motions relate to Plaintiffs Gaye Jones ("Jones") and Holly McConnaughey ("McConnaughey") (collectively, the "Plaintiffs") shareholder derivative actions against the named Defendants1 and Nominal Defendant Facebook, Inc. ("Facebook," the "Company" or "Nominal Defendant") (collectively, the "Defendants") alleging breaches of fiduciary duty, insider trading, unjust enrichment and other violations of Delaware corporate law.
Plaintiffs move to remand their shareholder derivative actions ("Removed Actions") to the Court of Chancery of theState of Delaware, pursuant to 28 U.S.C. § 1447(c), Plaintiffs originally filed the Removed Actions in the Delaware Chancery Court, asserting claims against the Defendants for breaches of fiduciary duty, insider trading, unjust enrichment and other violations of Delaware corporate law. Defendants removed the Removed Actions to the District Court of Delaware, and the MDL Panel transferred the Removed Actions to this Court.2
Nominal Defendant contends that certain threshold grounds for dismissal should be considered before Plaintiffs' motion to remand. Facebook has accordingly moved to dismiss the Removed Actions on the grounds of standing and ripeness pursuant to Rules 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure, and the standing and demand requirements of Rule 23.1 of the Federal Rules of Civil Procedure.
Upon the facts and conclusions set forth below, Facebook's threshold grounds for dismissal will be resolved first, and their motion to dismiss is granted in part and denied in part. Having granted Facebook's motion to dismiss in part,Plaintiffs' motion to remand is denied as moot.
Actions stemming from the May 18, 2012 IPO of Facebook are presently before this Court. Pursuant to this Court's December 6, 2012 Opinion, the actions alleging violations of the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act") were consolidated (collectively, the "Securities Class Actions") and Lead Plaintiffs were appointed. The class actions against the NASDAQ OMX Group Inc. and The NASDAQ Stock Market LLC (collectively "NASDAQ") were also consolidated alleging federal securities (the "NASDAQ Securities Actions") and negligence claims (the "NASDAQ Negligence Actions") (collectively, the NASDAQ Actions"). The cases alleging derivative claims (the "Derivative Actions") are currently not consolidated, and individual plaintiffs in the Derivative Actions have brought separate actions. The instant motions relate to two of the Derivative Actions.
On February 13, 2013, the first four of the Derivative Actions, filed by Plaintiffs Childs, Levy, Cole and Hubuschman were dismissed (the "Dismissed Derivative Actions"). In reFacebook. IPO Sec. & Derivative.....Litig., 922 F. Supp. 2d 445, 475 (S.D.N.Y. 2013) ("Derivative Opinion" or "Derivative Op."). Those Dismissed Derivative Actions were dismissed on standing and ripeness grounds. Id. The plaintiffs' leave to replead within twenty days was granted. Id. The parties then entered into a stipulation, approved by the Court on March 7, 2013, which permitted those four plaintiffs to "either file an amended complaint or notify Defendants that such Plaintiff does not intend to file an amended complaint by 20 days after this Court's resolution of Defendants' forthcoming motion(s) to dismiss" the consolidated securities class action. (Cascio Decl. Ex. B).
A fifth plaintiff, Robert Crocitto, filed another shareholder derivative suit in this Court on February 4, 2013, claiming that he owned an "interest[]" in Facebook shares before the IPO based on his alleged purchase of units in an investment vehicle that converted into stock "upon the IPO." Crocitto v. Zuckerberg Compl., No. 13-ev-0786, ¶ 7. In light of the February 13, 2013 dismissal of the Childs, Levy, Cole, and Hubuschman actions, the parties entered into a similar stipulation with Plaintiff Crocitto, deferring the filing of an amended complaint until 20 days after the resolution of the motion to dismiss the consolidated Securities Class Actions.(Cascio Decl. Ex. B.)
On March 1, 2013, Plaintiffs Jones and McConnaughey commenced the instant Removed Actions in the Delaware Court of Chancery. On April 2, 2013, the cases were consolidated, with the Jones action deemed the operative complaint. The Jones Complaint alleges breaches of fiduciary duty, insider trading, unjust enrichment and other violations of Delaware corporate law by Defendants. (Compl. ¶ 1.) Defendants removed to the United States District Court for the District of Delaware on April 5, 2013, and the MDL panel transferred Jones to this Court on April 18, 2013, after Plaintiffs filed no opposition to the Conditional Transfer Order.
On April 23, 2013, Plaintiffs filed their motion to remand to the Delaware Court of Chancery. The hearing for the motion to remand was scheduled for September 25, 2013. Nominal Defendant filed its motion to dismiss the Removed Actions on June 7, 2013.
Oral arguments were held on October 8, 2013, and the motions were marked fully submitted on the same day.
The allegations in the Complaint involve the events surrounding and arising out of Facebook's May 18, 2012 IPO.3 On February 1, 2012, in preparation for its IPO, Facebook filed a Form S-1 Registration Statement (the "Feb 1 Registration Statement") with the U.S. Securities Exchange Commission (the "SEC"). Facebook subsequently amended the registration statement several times before filing their final Form S-l/A on May 16, 2012 (the "Registration Statement").4
From the Feb 1 Registration Statement to the final Registration Statement, Facebook emphasized the importance of the increased use of mobile devices to access Facebook, (Compl. ¶ 53); see also Registration Statement, at 4 ().
The Registration Statement noted:
Worldwide mobile MAUs [monthly active users] increased by 69% from 288 million as of March 31, 2011 to 488million as of March 31, 2012. In all regions, an increasing number of our MAUs [monthly active users] are accessing Facebook through mobile devices, with users in the United States, India, Indonesia, and Brazil representing key sources of mobile growth over this period. We estimate that approximately 83 million mobile MAUs [monthly active users] accessed Facebook solely through mobile apps or our mobile website during the month ended March 31, 2012, and we believe that mobile-only users increased relative to the same period in the prior year. The remaining 405 million mobile MAUs [monthly active users] accessed Facebook from both personal computers and mobile devices during that month. . . . Improving our mobile products and increasing mobile usage of Facebook are key company priorities that we believe are critical to help us maintain and grow our user base and engagement over the long term.
Registration Statement, at 50.
The Registration Statement also stated that:
While most of our mobile users also access Facebook through personal computers, we anticipate that the rate of growth in mobile usage will exceed the growth in usage through personal computers for the foreseeable future . . . .
The Registration Statement included warnings regarding its Facebook's business risks including:
• Growth in use of Facebook through our mobile products, where our ability to monetize is unproven, as a substitute for use on personal computers may negatively affect our revenue and financial results. Id., at 5.
• We had 488 million MAUs [monthly active users] who used Facebook mobile products in March 2012. While most of our mobile users also access Facebook through personal computers, we anticipate that the rate of growth in mobile usage will exceed the growth in usage through personal computers for the foreseeable future, in part due to our focus on developing mobile products to encourage mobile usage of Facebook. We have historically not shown ads to users accessing Facebook through mobile apps or our mobile website. In March 2012, we began to include sponsored stories in users' mobile News Feeds. However, we do not currently directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven. We believe this increased usage of Facebook on mobile devices has contributed to the recent trend of our daily active users (DAUs...
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