In re Facebook, Inc. Section 220 Litig., C.A. No. 2018-0661-JRS (Del. Ch. May 30, 2019)
In this memorandum opinion, the Court of Chancery granted a stockholder demand to inspect certain categories of books and records relating to Facebook’s data privacy breaches in connection with plaintiffs’ Caremark–based claims.
Plaintiffs served a Section 220 demand on Facebook following reports that Cambridge Analytica, a British political consulting firm, poached the private data of 50 million Facebook users. At the time of the data breach, Facebook was subject to a consent decree entered by the FTC that required, among other things, Facebook to implement more robust and verifiable data security protocols. The implementation of the consent decree was to be monitored at the board level by Facebook’s Audit Committee.
Plaintiffs sought books and records to investigate potential breaches of fiduciary duty in connection with the data breach. Facebook argued that plaintiffs failed to plead a credible basis to infer that Facebook’s directors breached their duty of oversight under Caremark because the data breaches resulted from the unanticipated acts of third parties. The Court rejected Facebook’s “implicit suggestion” that it must adjudicate the merits of plaintiffs’ Caremark claim before allowing an otherwise proper demand for inspection to stand. The Court explained that the applicable “credible basis” standard is “the lowest burden of proof” in Delaware law, requiring only that plaintiffs present some evidence to support an inference of wrongdoing.
The Court ruled that plaintiffs satisfied this low burden of proof. The Court explained that the standard was more easily met where, as here, the underlying claims alleged that Facebook’s board failed to oversee the company’s obligation to comply with positive law (the consent decree), as opposed to allegations that a board failed to oversee the company’s efforts to avoid a business risk. The Court declined, however, to reach the merits of plaintiffs’ Caremark-based theory before allowing an otherwise proper demand for inspection to proceed, noting that the high standard required for plaintiffs to prove a Caremark claim should not alter the minimum burden of proof governing a stockholder books and records demand.
After determining that plaintiffs stated a credible basis, the Court went on to address the scope of inspection. The Court noted that the scope of plaintiffs’ demand shifted throughout the course of the litigation, including at trial. Although the Court expressed its frustration with plaintiffs’ lack of precision, it was satisfied that plaintiffs acted in good faith and that their stated purpose for inspection remained constant throughout the litigation. The Court thus found it proper to hold plaintiffs to the request for documents as stated in the pre-trial order, which was addressed by defendants in their pretrial brief and at trial and, therefore, properly joined for decision. The Court then substantially narrowed that list of documents—which it found “too broad” both temporally and substantively—to those “necessary and essential” to plaintiffs’ stated purpose.