Securities Regulation Daily Facebook stockholder sues D&Os over Cambridge Analytica scandal
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Thursday, May 2, 2019

Facebook stockholder sues D&Os over Cambridge Analytica scandal

By Anne Sherry, J.D.

The lengthy complaint filed in Delaware state court alleges that Mark Zuckerberg, Sheryl Sandberg, and other Facebook officials breached their fiduciary duties in connection with a series of data-privacy woes and insider trades.

An individual shareholder filed a nearly 200-page derivative complaint in Delaware Chancery Court against Facebook officers and directors, including Mark Zuckerberg and Sheryl Sandberg. The plaintiff alleges that the defendants breached their fiduciary duties and made misrepresentations and omissions relating to Facebook’s handling of user data and relating to sales of Facebook shares by Zuckerberg, Sandberg, and WhatsApp founder Jan Koum (Feuer v. Zuckerberg, May 1, 2019).

Directors Marc Andreessen, Peter Thiel, Reed Hastings, Susan Desmond-Hellman, and Erskine Bowles are also named as defendants. The complaint brings counts against all defendants for breach of fiduciary duty, contribution and indemnification, and breach of the duty of candor. The plaintiff also advances claims for misappropriation and breach of fiduciary duty for insider sales against Zuckerberg, Sandberg, and Koum.

A series of missteps. The complaint’s allegations center around Facebook’s privacy issues, chiefly those revealed in the Cambridge Analytica matter. The plaintiff also notes that Facebook sustained an undisclosed amount of damages in a lawsuit by the IRS for underpayment of taxes; was fined by the European Commission for falsely stating that it was impossible to combine user data collected by Facebook and WhatsApp; and continues to track and store data on nonmembers despite Belgian and French cease-and-desist orders.

Before the Cambridge Analytica matter became public, in 2018 Zuckerberg, Sandberg, and Koum sold Facebook holdings totaling nearly $1.5 million in the aggregate. The plaintiff alleges that these defendants knew of the activities of Cambridge Analytica and had been "putting out a growing number of privacy-related fires." The stock sales helped them avoid near-future losses that would result the matter became a public scandal, as well as potential future losses that may still result from governmental intervention.

One of these risks involves the consent decree entered into between Facebook and the Federal Trade Commission in November 2011. According to the complaint, Facebook’s data-sharing agreements with device makers and telecommunication companies violated this consent decree, and the FTC is investigating Facebook’s assurances to users that third-party apps would not be allowed to access their data. The complaint also alleges that Facebook’s acquisition of WhatsApp violated E.U. merger rules and that Zuckerberg’s testimony before the U.S. Senate was misleading.

The defendants allegedly breached their duty of candor by violating Exchange Act Section 14(a) and Rule 14a-9 by causing Facebook to issue certain misleading proxy statements. In further breach of their fiduciary duties to the company and its stockholders, the defendants violated Section 10(b) and Rule 10b-5 by issuing materially false or misleading statements.

Board independence and demand futility. The complaint alleges that demand would be futile because a majority of Facebook directors face a substantial risk of liability for the alleged violations of law or for exposing Facebook to sanctions for violating the FTC consent decree. The complaint paints a picture of a board beholden to the wishes of Zuckerberg. For example, it alleges that Netflix CEO Hastings has a strong incentive to help Zuckerberg maintain control of Facebook due to the companies’ advertising business relationship. Desmond-Hellman initially opposed Zuckerberg’s plan to issue new shares with no voting rights, the plaintiff further alleges, but later voted in favor of the plan.

However, last June the plaintiff made a written demand on the board, which went unanswered. Under Delaware case law, by making a presuit litigation demand, a stockholder tacitly concedes that a majority of the board is disinterested and independent for purposes of considering the demand (see, e.g., City of Tamarac Firefighters’ Pension Trust Fund v. Corvi (Del.Ch. Feb. 12, 2019).

The case is No. 2019-0324.

Attorneys: Richard D. Greenfield (Greenfield & Goodman LLC) for Robert A. Feuer.

Companies: Facebook, Inc.

MainStory: TopStory CorporateGovernance CorpGovNews GCNNews CyberPrivacyFeed PolicyIndustryPractices DirectorsOfficers FiduciaryDuties FraudManipulation DelawareNews

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