Delaware Business Litigation Report

In Recent Facebook Decisions, Chancery Permits Demand-Futility Plaintiffs to Proceed Before Demand-Refused Plaintiff

Feuer v. Zuckerberg, C.A. No. 2019-0324-JRS & In re Facebook, Inc. Deriv. Litig., Consol. C.A. 2018-0307 (Del. Ch. Oct. 5, 2021), rearg. denied (Del. Ch. Nov. 8, 2021). 
Recent decisions in the Facebook derivative litigation addressed issues of case management where competing groups of derivative plaintiffs disagree about whether making a pre-litigation demand upon the board was futile, and where disputes are raised about whether the suits should be consolidated, and which theories should proceed first.

Several plaintiffs brought derivative actions against officers and directors of Facebook for “alleged pursuit of a business strategy that violated the Company’s obligations to protect user privacy and data.” All but one plaintiff alleged that a demand would be futile; the other made a demand, which he alleged Facebook’s board wrongfully refused. The defendants sought to consolidate the two actions, or alternatively, to stay the demand-refused action while the demand-futility actions proceeded. Both groups of plaintiffs opposed consolidation, and each sought to proceed with its claims.

The Court concluded that it would consider the allegations that demand was futile before addressing a demand-refused claim that implicitly acknowledged the independence of the board. The Court’s reasoning tracked that of then-Chancellor Bouchard in the recent Boeing derivative litigation, which presented a similar question of case management. 

The Court reasoned that, while there was no “[r]igid rule” in this regard, “in most instances, certain practical considerations will justify a preference for allowing demand-futility claims to proceed ahead of demand-refused claims.” Demand futility claims are generally more likely to survive a motion to dismiss and move meritorious actions forward, particularly given that the threshold demand-futility test more closely tracks the test for an underlying fiduciary breach. If the demand futility claims survived, then that would inform the Court’s decision of which plaintiff group was better suited to represent the company. And if the demand futility claims failed, then that would leave the demand-refused complaint as the operative pleading. The Court reasoned that such a preference could give way in a specific case where, for example, “the demand futility allegations are only half-heartedly pled or are missing altogether.” In addition, the Court reasoned that consolidation was not warranted because the vastly different legal standards for the claims would have led to complicated, inefficient proceedings. The Court subsequently denied the demand-refused plaintiff’s motion for reargument of this ruling.

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