This case summary was prepared by Roe Granger.
Over the past few weeks the idiom “when it rains, it pours” has held especially true for social media giant Facebook. Amid antitrust scrutiny and numerous investigations by lawmakers, Facebook faced more bad news, this time coming from the Delaware Court of Chancery. In his Memorandum Opinion, In re Facebook, Inc. Section 220 Litigation, Vice Chancellor Slights ruled against Facebook and ordered the company to produce books and records designated as essential to Plaintiffs’ pursuit of their proper purpose.
Throughout the past few years, and continuing as recently as last week, several news outlets reported controversies regarding Facebook’s use of users’ private data. Following these reports, Facebook stockholders demanded to inspect the company’s books and records, including a wide range of board and committee materials, using DGCL § 220. Facebook initially objected to the demand, but did produce 1,694 pages of materials in hope of avoiding litigation. However, the materials produced were limited. Soon after, the stockholders filed a complaint with the Court of Chancery, which repeated the allegations stated in its § 220 demand. Facebook again objected, claiming that the plaintiffs lacked a proper purpose by failing to demonstrate a credible basis to infer Facebook’s directors breached their Caremark obligations, and that the plaintiffs sought an overbroad production of books and records.
In the months leading up to trial, the plaintiffs and Facebook met several times to discuss the scope of documents that the plaintiffs sought to inspect. Despite the meetings, the two sides could not come to an agreement, partially because the plaintiffs continued to change their requests for documents. By the start of the trial, the plaintiffs’ requested materials included everything from Facebook’s internal policies to information from government regulators. The request also demanded access to related emails from members of the Board and expanded the temporal scope from the beginning of 2011 to the present.
DGCL § 220 gives stockholders a right to inspect a corporation’s books and records “for any proper purpose.” A proper purpose is any purpose “reasonably related to such person’s interest as a stockholder.” In this case, the plaintiffs’ stated three purposes were “(1) to investigate potential breaches of fiduciary duties by Facebook’s Board; (2) to assess whether Facebook’s Board would impartially consider a demand for action, including filing a derivative lawsuit; and (3) to take appropriate action if Facebook’s Board did not discharge their fiduciary duties, including the preparation and filing of a shareholder derivative lawsuit.” Facebook contended the plaintiffs failed meet the appropriate burden of proof.
For DGCL § 220 claims premised on the investigation of wrongdoing, a stockholder must prove by a preponderance of evidence that a “credible basis from which the court can infer that mismanagement, waste or wrongdoing may have occurred” Vice Chancellor Slights noted that the “credible basis” standard is the lowest burden of proof. Accordingly, in ruling for the plaintiffs, the Court accepted the numerous news reports, a British Parliamentary Report, and a Consent Decree from the FTC as sufficient evidence to prove “legitimate issues of wrongdoing.” Particularly, the Court noted that the Consent Decree from the FTC was enough of a credible basis to infer that Facebook’s directors may have breached their Caremark duties.
Having decided that the plaintiffs surpassed the initial burden of proof, Vice Chancellor Slights then addressed the scope of document production. Here, the Court noted that the plaintiffs’ document demands “landed with the precision of buckshot,” and included more documents than are necessary, essential and sufficient to the plaintiffs’ purpose. Accordingly, the order limited the production of documents to only those from 2017 to the present.