United Food and Commercial Workers Union v. Zuckerberg

Mark Zuckerberg, widely known for seeking the best interests of humanity, pledged to give away his wealth. But most of his wealth was held in the form of Facebook stock. If he gave that away, he'd lose control of the company. It's a pickle we all find ourselves in at some point. You want to help people, but not if it interupts your quest for power.

Luckily, the Facebook board loved Zuckerberg. So they approved a reclassification plan that would let Zuckerberg give up some shares but still retain voting control of Facebook. They approved this reclassification and sent it to a shareholder vote. They were advised at the time that Google had tried something similar and ended up paying millions in a shareholder lawsuit.

So it won't surprise you to learn there was a shareholder lawsuit. Eventually, the board withdrew the reclassification proposal. But the shareholder suit claimed the board breached their fiduciary duties by approving the reclassification plan (even though they later withdrew it).

The facts are funny, but the law is a bit complicated. The court starts by explaining why we allow derivative suits---sometimes you can't trust the directors to manage litigation against themselves.

Here's the intuition. In a situation where the directors are fair and trustworthy, the directors should be left to manage the claim. A claim in litigation is an asset, and the board is charged with managing the corporation's assets. So if a shareholder wants to bring the claim, the shareholder is required to first make a "demand" on the board to bring the claim. And the board can accept or reject that demand.

But suppose the board is conflicted. Making a demand wouldn't make sense if the directors are being asked to sue themselves. It's never going to happen. So we just "excuse" the demand requirement when the directors are conflicted.

That's the intuition. If a board is capable of acting, we should let them act and stop shareholders from suing without the board's permission. If the board is conflicted, we don't trust their judgment to bring the claim or to allow shareholders to bring the claim, so we excuse shareholders from the requirement to first ask the board's permission to bring the claim.

So turning to this case. The court begins by talking about the Aronson test and the Rawles test. You might want to flag these when you first cross them because throughout the opinion the court references the tests without restating them. In the end, the two tests are merged into a three part test that you apply director-by-director. Forgive the spoilers. 

The other key point is how the court deals with exculpation clauses. That's in Section III.A. The court first addresses how to treat these in a motion to dismiss (brought under Chancery's rule 12(b)(6)).

The court then discusses how to handle exculpation clauses for derivative standing. Going back to our intuition, if a claim is exculpated, then directors aren't going to be liable either way (they're exculpated). So we can probably assume the directors are able to handle it, and we don't give the reins to the shareholders.