{"id":893,"date":"2016-04-27T09:05:32","date_gmt":"2016-04-27T13:05:32","guid":{"rendered":"https:\/\/www2.law.temple.edu\/10q\/?p=893"},"modified":"2016-04-27T09:05:32","modified_gmt":"2016-04-27T13:05:32","slug":"facebook-compensation-row-delaware-corporate-formalities-held-indispensable","status":"publish","type":"post","link":"https:\/\/law.temple.edu\/10q\/facebook-compensation-row-delaware-corporate-formalities-held-indispensable\/","title":{"rendered":"In Facebook Compensation Row, Delaware Corporate Formalities Held Indispensable"},"content":{"rendered":"

Adhering to corporate formalities is often cited as a disadvantage of organizing a\u00a0business using the corporate form, but those formalities play a crucial role in protecting the\u00a0corporation\u2019s shareholders. This fact was made clear in the Delaware Court of Chancery\u2019s\u00a0October ruling in the case of Zuckerberg v. Espinoza<\/span>, 124 A.3d 47 (Del. Ch. 2015). The case,\u00a0which involved Facebook, its board of directors, and its founder\/CEO, Mark Zuckerberg,\u00a0presented a question of first impression for the court: \u201cCan a disinterested controlling\u00a0stockholder ratify a transaction approved by an interested board of directors, so as to shift the\u00a0standard of review from entire fairness to the business judgment presumption, by expressing\u00a0assent to the transaction informally without using one of the methods the Delaware General\u00a0Corporation Law prescribes to take stockholder action?\u201d<\/p>\n

At issue was the Facebook board of directors\u2019 approval of compensation for certain\u00a0outside directors who comprised a majority of the board. In approving their own compensation,\u00a0members of the board of directors suffered from a conflict of interest requiring the court to judge\u00a0whether the compensation was entirely fair to Facebook and its shareholders, instead of the more\u00a0deferential business judgment rule. Ernesto Espinoza, a Facebook stockholder, brought an action\u00a0challenging the board\u2019s approval of the compensation packages as a breach of fiduciary duty,\u00a0unjust enrichment, and corporate waste. The director defendants argued that Mark Zuckerberg,\u00a0who held 61% of the voting power of Facebook\u2019s common stock, approved the compensation in\u00a0a sworn deposition and affidavit.<\/p>\n

\n

In light of Zuckerberg<\/span>, boards of directors of Delaware corporations need to remain\u00a0vigilant in ensuring that corporate formalities are observed in ratifying transactions where there\u00a0are director conflicts of interest.<\/p>\n<\/blockquote>\n

Chancellor Bouchard found that Zuckerberg\u2019s informal approval of the compensation\u00a0packages was not enough to shift the standard of review from entire fairness to the business\u00a0judgment rule. Rather, corporate formalities had to be observed (i.e., a majority stockholder\u00a0vote). The court observed that stockholders are allowed to take action through personal or proxy\u00a0vote or through written consent, authorized under Section 228 of the Delaware General\u00a0Corporation Law (DGCL). The court then explained that even when there is no noticed vote and\u00a0action is taken by written consent, prompt notice of the action taken by written consent is still\u00a0required under Section 228. Thus, the DGCL ensures transparency of action for minority\u00a0shareholders\u2014a key reason to have formal procedures in the first place.<\/p>\n

After the opinion was issued, Facebook appealed the ruling to the Delaware Supreme\u00a0Court. The appeal was never heard and the case settled in early February. The terms of the\u00a0settlement involved two major components. First, Facebook\u2019s Compensation and Governance\u00a0Committee will now be required to engage an independent compensation consultant to conduct\u00a0an annual review of director compensation and then recommend to the board any changes to be\u00a0made. Second, the board of directors must submit proposals regarding director compensation to\u00a0the stockholders at the annual 2016 meeting. Such director \u201csay on pay\u201d requirements are rare\u00a0and place an additional, potentially costly burden on Facebook\u2019s board of directors.<\/p>\n

In light of Zuckerberg<\/span>, boards of directors of Delaware corporations need to remain\u00a0vigilant in ensuring that corporate formalities are observed in ratifying transactions where there\u00a0are director conflicts of interest. This is true even in situations similar to Facebook\u2019s, where\u00a0there is a controlling shareholder that has the ability to singularly ratify corporate actions. Given\u00a0the potential liability that could result from ignoring corporate formalities, going through the\u00a0process of a stockholder vote, whether in person, by proxy, or by written consent, is well worth\u00a0the effort.<\/p>\n

\n

The views expressed in this article are those of the authors and not\u00a0necessarily those of Richards, Layton & Finger or its clients.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Adhering to corporate formalities is often cited as a disadvantage of organizing a\u00a0business using the corporate form, but those formalities play a crucial role in protecting the\u00a0corporation\u2019s shareholders. This fact was made clear in the Delaware Court of Chancery\u2019s\u00a0October ruling in the case of Zuckerberg v. Espinoza, 124 A.3d 47 (Del. Ch. 2015). The case,\u00a0which<\/p>\n","protected":false},"author":5,"featured_media":894,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[12,14],"tags":[184,185],"coauthors":[182,183],"class_list":["post-893","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-alumni-authored","category-corporate-governance","tag-corporate-compensation","tag-facebook","masonry-post","generate-columns","tablet-grid-50","mobile-grid-100","grid-parent","grid-33"],"yoast_head":"\nIn Facebook Compensation Row, Delaware Corporate Formalities Held Indispensable - The Temple 10-Q<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/law.temple.edu\/10q\/facebook-compensation-row-delaware-corporate-formalities-held-indispensable\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"In Facebook Compensation Row, Delaware Corporate Formalities Held Indispensable - The Temple 10-Q\" \/>\n<meta property=\"og:description\" content=\"Adhering to corporate formalities is often cited as a disadvantage of organizing a\u00a0business using the corporate form, but those formalities play a crucial role in protecting the\u00a0corporation\u2019s shareholders. 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