Nature of the Case
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Facts
Meta is the largest social media network in the world. It has four major social media platforms: Facebook, Instagram, Messenger, and WhatsApp. Approximately 3.59 billion people use those platforms every month, and 2.82 billion people use them every day. Those figures represent, respectively, 43% and 35% of the world's population. Users send over 140 billion messages daily on Meta's platforms. Meta's ubiquity allows the firm to generate spectacular topline revenues and bottom-line profit. In 2021, Meta generated $118 billion in revenue and $39.3 billion in profit. Advertising generates substantially all of Meta's revenues. Meta's ability to sell ads depends on user engagement with its platforms. Higher engagement levels result in users viewing more advertisements and generating more revenue for Meta. For Meta management, engagement is a key metric. Meta is a Delaware corporation with two classes of stock. Class A shares trade publicly and carry one vote per share. Class B shares are only held by insiders and carry ten votes per share. Zuckerberg (D) founded Meta and serves as its CEO. Zuckerberg (D) owns shares of Meta common stock worth approximately $67.6 billion. His holdings include 350 million shares of Class B stock. Although his shares comprise only 13.6% of the outstanding equity, they enable Zuckerberg (D) to exercise hard majority control over Meta. Directors must own Meta stock. Employee directors must own shares with a value of at least $4 million. Non-employee directors must own shares with a value of at least $750,000. In November 2016, the Board approved a stock repurchase program. In 2021, for example, Meta repurchased shares with a market value of more than $44 billion. The repurchases increase the percentage ownership of the remaining stockholders. Ps claim that Ds hold a large portion of their wealth in Meta common stock such that they will benefit if Meta outperforms the market and that Zuckerberg (D) is the pivotal concentrated investor at Meta. Because he controls the company, the incentives created by his concentrated ownership stake dominate Meta's direction. Meta's public stockholders are broadly diversified institutional investors. Institutional investors owned 75% of Meta's publicly traded Class A common stock, with the top five institutional holders owning 28%. Many of the institutions are legally required to diversify. For diversified investors, returns primarily track overall market performance, not the performance of individual companies. A diversified portfolio should rise and fall over time with GDP. P contends that Ds are concentrated investors who benefit when Meta outperforms the market. P alleges that Meta's other stockholders are diversified investors who benefit when the market as a whole does well. The interests of concentrated investors and diversified investors can diverge when a company's business generates negative externalities. Externalities can be positive or negative. A positive externality confers benefits to third parties, meaning that the person engaging in the activity does not internalize all of the benefits. A negative externality does the opposite. It harms third parties, meaning that the person engaging in the activity does not internalize all of the costs and, all else equal, will engage in more of the activity than is socially desirable. P contends that Meta's business generates negative externalities. It was reported that resharing posts have degraded political discourse with misinformation, toxicity, and violent content. It is known that drug cartels and human traffickers use Meta's platforms for illegal activities. P basically claims that Ds are simply anti-social psychopaths who just don't care about anything other than money. Ds know of these problems and many more and yet they could care less. P contends that Meta consciously and openly prioritizes company-specific value over harm to the economy and society. Its risk management strategy focuses on community safety, human rights, and similar concerns, but only if they pose risks to the Company itself. The plaintiff complains that the Board has not established any mandate to monitor or mitigate risks that the Company's operations pose to the economy or diversified stockholders. The Board provides executives with large grants of equity, which incentivize executives to pursue initiatives that promote Meta's value at the expense of the economy, society, and the portfolios of diversified stockholders. In 2022, the Board opposed four stockholder proposals that focused on the types of harms that negatively impact diversified investment portfolios. Instead, the funds deployed for stock buybacks dwarfed any kind of pablum for the public Meta spent on social issues and problems created by Meta's drive for profits. Meta's safety expenditures of $5 billion in 2021 were dwarfed by the $44 billion it spent on stock buybacks. P sued Ds. P alleges that the directors failed to consider 'how Meta's activities and policies effect society and the economy at large and thus the portfolios of its diversified stockholders.' P alleges that Ds 'acted with gross negligence and consciously disregarded the threat posed to the interests of the Company's diversified stockholders as investors.” P contends that all three groups of Meta fiduciaries have breached their duties: (i) Ds (ii) Zuckerberg (D) and Sandberg (D) as Meta officers, and (iii) Zuckerberg (D) as Meta's controller. P assumes that fiduciary duties apply. Ds have moved for dismissal under Rule 12(b)(6). P contends that Ds breached their fiduciary duties by making decisions that benefitted concentrated investors rather than diversified investors. Because Ds owned concentrated holdings of Meta common stock, they faced a conflict of interest that subjected their decisions to review under the entire fairness standard.
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