McRitchie v. Zuckerberg

• Docket Number: C.A. No. 2022-0890-JTL
• Decision Date: 30 April 2024
• Citation: McRitchie v. Zuckerberg, 315 A.3d 518 (Del. Ch. 2024)
• Parties: James MCRITCHIE, Plaintiff, v. Mark ZUCKERBERG, Sheryl K. Sandberg, Robert M. Kimmitt, Peggy Alford, Marc L. Andreessen, Andrew W. Houston, Nancy Killefer, Tracy T. Travis, Tony Xu, and Meta Platforms, Inc., Defendants.
• Court: Court of Chancery of Delaware

315 A.3d 518

James MCRITCHIE, Plaintiff,

v.Mark ZUCKERBERG, Sheryl K. Sandberg, Robert M. Kimmitt, Peggy Alford, Marc L. Andreessen, Andrew W. Houston, Nancy Killefer, Tracy T. Travis, Tony Xu, and Meta Platforms, Inc., Defendants.

C.A. No. 2022-0890-JTL

Court of Chancery of Delaware.

Date Submitted: December 20, 2023

Date Decided: April 30, 2024

Kurt M. Heyman, Gillian L. Andrews, HEYMAN ENERIO GATTUSO & HIRZEL LLP, Wilmington, Delaware; Attorneys for Plaintiff.

David E. Ross, R. Garrett Rice, Holly E. Newell, ROSS ARONSTAM & MORITZ LLP, Wilmington, Delaware; James N. Kramer, Alexander K. Talarides, ORRICK HERRINGTON & SUTCLIFFE LLP, San Francisco, California; Attorneys for Defendants.

OPINION GRANTING MOTION TO DISMISS

LASTER, V.C.

Under the standard Delaware formulation, directors owe fiduciary duties to the corporation and its stockholders.Implicitly, the "stockholders" are the stockholders of the specific corporation that the directors serve, i.e., "its" stockholders.The standard Delaware formulation thus contemplates a single-firm model (or firm-specific model) in which directors of a corporation owe duties to the stockholders as investors in that corporation.That point is so basic that no Delaware decisions have felt the need to say it.Fish don’t talk about water.¹

The plaintiff takes a different view.Capitalizing on the word "stockholders,"the plaintiff observes that stockholders are investors.The plaintiff then argues that under Modern Portfolio Theory, prudent investors diversify.Therefore, says the plaintiff, the law must operate on the assumption that a corporation’s stockholders are diversified.The plaintiff concludes that owing fiduciary duties to the corporation and its stockholders must mean owing duties that run to the corporation and its stockholders as diversified equity investors.²Furthermore, according to the plaintiff, because the returns that accrue to diversified equity investors should generally track the economy as a whole, complying with fiduciary duties oriented to diversified equity investors must mean managing the corporation based on what would be best for the economy as a whole.

The plaintiff contends that Delaware law currently follows a diversified-investor model.If not, then the plaintiff argues that Delaware law should change.To ameliorate the significance of reorienting Delaware law, the plaintiff proposes a pilot program in which the diversified-investor model applies to systemically significant corporations whose operations have an outsized effect on the economy.

The plaintiff points to Meta Platforms, Inc.("Meta" or the "Company") as the poster child for a systemically significant firm.The plaintiff has sued the directors, officers, and controller of Meta, claiming that they all breached their duties by managing Meta under a firm-specific model rather than a diversified-investor model.The complaint describes a litany of ways in which Meta’s fiduciaries have allegedly managed the corporation to generace firmspecific value at the expense of the economy as a whole.The complaint also points to the concentrated positions that Meta’s directors, officers, and controller own in its equity.The plaintiff contends that those holdings create a conflict of interest for those fiduciaries, meaning that the defendants must prove that their decisions were entirely fair.

The defendants have moved to dismiss the complaint for failing to state a claim on which relief can be granted.They acknowledge that they manage Meta under a firm-specific model.As their defense, they maintain that that is what Delaware law requires.

This decision grants the defendants’ motion.The "deep architecture" of Delaware corporate law reveals that directors owe firm-specific fiduciary duties.³Numerous Delaware Supreme Court authorities rest on that implicit proposition.So does American corporate law generally, which has taken a firm-specific approach since courts first treated directors as fiduciaries during the first half of the nineteenth century.

The plaintiff has not made a persuasive case for change.At most, he has shown that some academics—primarily from the law and economics school—have assumed that a diversified-investor model is the norm.He has also shown that some investor advocacy organizations would prefer that model.

The plaintiff’s principal argument rests on policy.According to the plaintiff, the single-firm model creates pathologies because directors can take actions that are value-promoting for the individual firm but that harm the economy as a whole.In short, the plaintiff has rediscovered the concept of externalities.The classic example is pollution.If a firm can generate profits using a process that creates pollution, and if there is no legal mechanism to force the firm to internalize the costs of the pollution, then the firm can profit by polluting.

The plaintiff believes that under a diversified-investor model, the outcome would be different.Directors would conclude that because they owe duties to diversified investors, they must consider the effect of their decisions on the economy as a whole.Because externality-creating activities harm the economy as a whole, directors would have a fiduciary obligation not to pursue them.Not only that, but because directors who own concentrated positions in their firm’s stock face a conflict of interest between the interests of firm-specific investors and those of diversified investors, stockholder plaintiffs could challenge decisions that inferably created firm-specific benefits at the expense of the economy.Directors could eliminate that conflict by holding diversified portfolios of shares, at which point their decisions would receive the protection of the business judgment rule.But if the directors held concentrated positions, stockholders could sue, entire fairness would apply, and courts would have to adjudicate whether the directors could prove that their actions did not harm the economy as a whole.

There are reasons to be skeptical.The academic literature indicates that a diversified-investor model has drawbacks of its own, and the case for imposing a different fiduciary model is far from clear.

Still, there is a way to achieve the plaintiff’s desired result.Delaware’s governance model is flexible enough to accommodate corporations where directors pursue the interests of diversified investors.The Delaware General Corporation Law(the "DGCL") authorizes private ordering and empowers corporate planners to tailor director duties through provisions in the certificate of incorporation.Using that authority, corporate planners who find the plaintiff’s arguments convincing can reori- ent director duties toward diversified stockholders.

In the face of Delaware Supreme Court precedent that rests implicitly on the single-firm model, it is not reasonably conceivable that Delaware corporate law currently operates on a diversified-investor model.Nor does this court have the freedom to adopt it, even assuming the concept was sound.The complaint is therefore dismissed.

I.FACTUAL BACKGROUND

The facts are drawn from the operative complaint and the documents it incorporates by reference.At this stage of the case, the complaint’s allegations are assumed to be true, and the plaintiff receives the benefit of all reasonable inferences.

A. Meta’s Business

Meta is the largest social media network in the world.It has four major social media platforms: Facebook, Instagram, Messenger, and WhatsApp.Approximately 3.59 billion people use those platforms every month, and 2.82 billion people use them every day.Those figures represent, respectively, 43% and 35% of the world’s population.Users send over 140 billion messages daily on Meta’s platforms.

Meta’s ubiquity allows the firm to generate spectacular topline revenues and bottom-line profit.In 2021, Meta generated $118 billion in revenue and $39.3 billion in profit.Advertising generates substantially all of Meta’s revenues.Meta’s ability to sell ads depends on user engagement with its platforms.Higher engagement levels result in users viewing more advertisements and generating more revenue for Meta.For Meta management, engagement is a key metric.

B. Meta’s Fiduciaries

Meta is a Delaware corporation with two classes of stock.Class A shares trade publicly and cany one vote per share.Class B shares are only held by insiders and carry ten votes per share.

Meta has a nine-member board of directors (the "Board").The directors are Mark Zuckerberg, Robert Kimmitt, Peggy Alford, Marc Andreessen, Andrew Houston, Nancy Killefer, Sheryl Sandberg.Tracy Travis, and Tony Xu.

Zuckerberg founded Meta and serves as its CEO.Zuckerberg owns shares of Meta common stock worth approximately $67.6 billion.His holdings include 350 million shares of Class B stock.Although his shares comprise only 13.6% of the outstanding equity, they enable Zuckerberg to exercise hard majority control over Meta.

Sandberg served as Meta’s Chief Operating Officer.In June 2022, she held about 1.4 million Class A shares worth just under $290 million.Those shares represented about 17% of her net worth at the time.About three-quarters of Sandberg’s wealth has come from sales of Meta stock over the years.

Under Meta’s stock ownership guidelines, directors must own Meta stock.Employee directors must own shares with a value of at least $4 million, a threshold that Zuckerberg and Sandberg easily clear.Non-employee directors must own shares with a value of at least $750,000.

In November 2016, the Board approved a stock repurchase program that started in January 2017.Every year since then, Meta has repurchased substantial amounts of stock.In 2021, for example, Meta repurchased shares with a market value of more than $44 billion.The repurchases increase the percentage ownership of the remaining stockholders.

The plaintiff alleges that Zuckerberg, Sandberg, and the other Meta directors are concentrated investors.By that,...