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Chancery Sustains Stockholder Inspection Demands to Investigate Caremark Claims Arising from Facebook / Cambridge Analytica Scandal

In re Facebook Inc. Section 220 Litig., C.A. No. 2018-0661-JRS (Del. Ch. May 31, 2019).

A so-called Caremark Claim premised upon disinterested directors' failure to exercise appropriate oversight is one of the most difficult theories to litigate successfully.  Here, however, the Court of Chancery held that stockholder-plaintiffs had a sufficient “credible basis” to investigate Facebook’s documents concerning its alleged widespread but secret business practice of “whitelisting” – monetizing the personal data of Facebook users who accessed certain applications on Facebook, as well as that of their Facebook friends. 

The Court reasoned that the “credible basis” standard, which applies to stockholder demands under Section 220 of the Delaware General Corporation Law to investigate wrongdoing, imposes the lowest burden of proof in that the Court need only find “some evidence” of wrongdoing.  According to the Court, a board’s failure to ensure a corporation’s compliance with positive law, including regulatory mandates – as opposed to risks associated with normal business operations – could create liability.  Since 2011 Facebook has been subject to an FTC consent decree, which was required to be disseminated to its directors and officers, mandating that it take appropriate measures to secure users’ personal information.  The stockholder-plaintiffs pointed to an extensive and growing body of reports by regulators and the mainstream press supporting the allegation that Facebook flouted that duty, including by exempting its third-party data-sharing agreements from normal oversight processes, with the result that the company faced dozens of lawsuits and potential multi-billion dollar fines.  As such, Plaintiffs had demonstrated a credible basis to infer that actionable wrongdoing may have occurred.  While the Court narrowed the categories of documents required to be produced, it notably ordered the production of emails from Mark Zuckerberg, Sheryl Sandberg and other directors, reasoning that it appeared that Facebook’s directors regularly communicated in this manner regarding the issues at-hand, while the available board minutes were relatively uninformative.