Feuer v. Zuckerberg, C.A. No. 2019-0324-JRS (Del. Ch. Oct. 5, 2021) (Slights, V.C.)
In this memorandum opinion, the Court of Chancery denied a motion to consolidate derivative claims brought by one plaintiff alleging that his demand had been wrongfully refused with derivative claims brought by multiple plaintiffs alleging that demand upon the board of directors would have been futile. The Court instead stayed the demand-refused claims pending resolution of the demand-futility actions. In so ruling, the Court described the differing legal standards for demand-futility and demand-refused cases, ultimately determining that consolidation of the cases would not advance the best interests of the company and its stockholders.
Several sets of plaintiffs (the “Demand-Futility Plaintiffs”) brought derivative actions on behalf of Nominal Defendant Facebook, Inc. (“Facebook”) against certain officers and directors of Facebook alleging that these fiduciaries were responsible for harm caused to Facebook following its failure to protect the privacy of user data. The Demand-Futility Plaintiffs did not make a demand on Facebook’s board of directors (the “Board”) to pursue the claims, alleging instead that demand would have been futile. Plaintiff Robert A. Feuer (“Feuer”), however, made a written demand on the Board to pursue similar claims and later alleged in his complaint that the Board wrongfully refused that demand.
Facebook moved for an order consolidating Feuer’s claims with those of the Demand-Futility Plaintiffs or, alternatively, for an order staying Feuer’s demand-refused claims while the demand-futility claims were resolved. Facebook argued that Feuer’s action was substantially similar to the demand-futility actions, and that the actions should be consolidated to prevent waste caused by duplicative litigation. The Demand-Futility Plaintiffs opposed consolidation, but supported a stay of the Feuer demand-refused action, arguing that Feuer’s action should be stayed because he failed to show that he would be prejudiced by a continuation of the existing stay. Feuer opposed both consolidation and a stay of his case. Feurer argued that staying his claims would do violence to Chancery Rule 23.1, which sets forth the demand requirements for derivative actions, by implicitly endorsing a rule that gives preference to demand-futility complaints over demand-refused complaints, even though Rule 23.1 expresses no such preference.
The Court compared the differing legal standards applied in demand-futility and demand-refused cases, explaining that, when a stockholder makes a demand on a board, the stockholder concedes the independence of a majority of the board so that, after the board refuses the demand, the only issues to be examined are the good faith and reasonableness of its investigation. In contrast, when demand futility is alleged, the basis for such a claim is that at least half of the board is interested or not independent. Because the legal standards for each type of case are so different, the Court held that consolidation of the cases, particularly in advance of pleading-stage dispositive motion practice, was unwarranted.
On the other hand, the Court explained that Feuer failed to demonstrate why lifting the stay would advance the best interests of Facebook and its stockholders, or how an extension of the stay would prejudice him. Addressing Feuer’s arguments about the potential effect the ruling would have on Rule 23.1, the Court acknowledged that, if there existed an “unspoken rule” that “demand-futility plaintiffs always go before demand-refused plaintiffs, there is a risk that stockholders will be less inclined to exercise their right to make a demand on the board to pursue claims, even in cases where a demand may be justified,” which could “blunt the optionality of Rule 23.1.” Nevertheless, the Court determined that in most instances, practical considerations will justify a preference for allowing demand-futility claims to proceed ahead of demand-refused claims, noting that a board’s decision to refuse a demand is afforded the protection of the business judgment rule and, as a result, challenges to such decisions have a higher chance of “never leaving the starting gate.” The Court further explained that, if demand-futility plaintiffs are able to plead with particularity a reasonable doubt that a majority of the board can properly consider a demand, those pled facts will likely enhance the pleading of the underlying breach of fiduciary duty.