I posted about In re Facebook Derivative Litigation, 2018-0307, way back in in 2023, when the Delaware Court of Chancery denied a motion to dismiss. The action has become a sprawling set of claims arising out of Facebook’s violation of its FTC consent decree regarding data privacy, and the resulting scandal and penalties that followed. The parties just filed their pretrial briefing and let’s just say this thing might actually go to trial – a first for Caremark.

I’ve posted about the Caremark doctrine and its tensions multiple times, and I also address them in my draft paper, The Legitimation of Shareholder Primacy (which really, really needs to be updated because it was posted before the recent amendments to the DGCL). The main issue being, Caremark (including its sister doctrine, Massey) represents a hard limit on directors’ ability to seek profits: they may not do so by intentionally violating the law (or intentionally turning a blind eye to legal violations). That may be a necessary doctrine in order for corporate law to maintain its social legitimacy, but it sits uneasily aside the principle of shareholder primacy, not to mention the reality that corporations can organize wherever they like, and therefore will not choose jurisdictions that limit their ability to benefit shareholders. So this trial – coming at a moment when a number of corporations have threatened to leave Delaware over its (allegedly) too-strict policies – is awkwardly timed.

There are a number of different, but related, allegations in the action, some of which fit more neatly into the shareholder wealth maximization box than others. The most traditional one, and therefore the most boring, is that Zuckerberg traded on inside information; he sold stock knowing the company’s violations were going to be revealed. Another claim, which is novel in application but traditional in its basic outlines, is that the company agreed to pay a higher penalty in exchange for letting Zuckerberg personally off the hook with the FTC. That’s an unusual allegation but its shape – a company paid to benefit a controlling stockholder financially – fits within traditional parameters.

From a legal perspective, then, the headline claims are the ones that come squarely within Caremark: that the officers of Facebook intentionally violated the law in order to make money for the company, and the directors (including Marc Andreessen, Reed Hastings, and Peter Thiel) turned a blind eye. Obviously, of course, Facebook’s violation of its FTC consent decree resulted in financial harm to shareholders – the company paid a penalty, there was scandal, stock price drop, etc – but normally, if business decisions result in a loss, we don’t say it’s something shareholders can sue over; we assume boards took a risk and it didn’t pay off. Caremark, uniquely, provides you can’t do that for illegal conduct. Plus, of course, Caremark prohibits any argument by the board that, sure, maybe there was a loss in the end, but the profits were so enormous initially that shareholders came out ahead – which is something you could argue for an ordinary business decision. (At least, I don’t think Caremark allows that argument; we’ve never had a trial and a damages award so who knows.) So Caremark is an odd duck in a shareholder primacist framework: no, it says, boards of directors cannot do everything in their power to earn profits.

Clearly the Facebook plaintiffs are aware of this, because they try to suggest the lawbreaking wasn’t just about profiting Facebook: they also argue certain board members benefitted personally from Facebook’s practices because their related companies used the data shared by the company (Andreessen, Hastings, Thiel). That move is an attempt to shoehorn a more traditional financial conflict of interest into the Caremark claims in order to render them more palatable to the Delaware courts.

Anyway, the recent changes to Delaware law, which in general make it harder (impossible) for shareholders to bring any kind of lawsuit, do not, formally, apply to this case. That said, the trial (if it happens) and the appeal (inevitable) will operate in the shadow of a fairly obvious legislative rebuke to the Delaware judiciary, and quite frankly, I have no idea which way that will cut.