elan v. zuckerberg et al - class action complaint.pdf

8/17/2019 Elan v. Zuckerberg et al - class action complaint.pdf

http://slidepdf.com/reader/full/elan-v-zuckerberg-et-al-class-action-complaintpdf 1/29

{FG-W0408049.}

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

KENNETH ELAN, Individually and onBehalf of all Others Similarly Situated,

Plaintiff,

v.

MARK ZUCKERBERG, MARCANDREESSEN, PETER THIEL,REED HASTINGS, SUSANDESMOND-HELLMANN, ERSKINEBOWLES, SHERYL SANDBERG,

JAN KOUM and FACEBOOK, INC.,

Defendants.

C. A. No. __________

VERIFIED CLASS ACTION COMPLAINT

Plaintiff Kenneth Elan (“Plaintiff”), asserts claims for breach of fiduciary

duty on behalf of himself, as a class action on behalf of the public stockholders of

Facebook, Inc. (“Facebook” or the “Company”), against Facebook’s board of

directors (the “Director Defendants”), including Mark Zuckerberg, Facebook’s

founder, Chairman, Chief Executive Officer, and controlling stockholder.1

1 Plaintiff’s allegations are made upon personal knowledge as to himself and his

own acts, and upon information and belief as to all other matters, based upon theinvestigation conducted by and through his attorneys, which included, inter alia, areview of documents filed by Defendants with the United States Securities andExchange Commission (the “SEC”), news reports, and other publicly availabledocuments.

EFiled: May 06 2016 12:02PM EDTTransaction ID 58965095

Case No. 12303-



{FG-W0408049.}

2

I. SUMMARY OF THE ACTION

1. This action challenges a giveaway of unprecedented dimension—

future control over Facebook, Inc. (“Facebook” or the “Company”), the fifth most

valuable public corporation in the world. By approving and declaring advisable

charter amendments that will facilitate the issuance of a massive number of non-

voting shares to current stockholders (the “Share Issuance”), Facebook’s board of

directors has agreed to give future control over Facebook to its founder and current

controlling stockholder, Mark Zuckerberg.

2. Zuckerberg owns 14.8% of the total outstanding shares of Facebook.

Zuckerberg controls Facebook by virtue of his ownership of 76.1% of Facebook’s

Class B shares, which have ten votes per share (unlike Facebook’s Class A shares,

which have one vote per share). Through an irrevocable proxy from a co-founder,

Zuckerberg controls the vote of another 8.9% of the Class B shares. Overall,

Zuckerberg controls 60.1% of the total voting power of Facebook shares.

3. If he wished, Zuckerberg could control Facebook indefinitely by

holding the great bulk of his shares and not issuing additional shares. But holding

the great bulk of his shares is not Zuckerberg’s ambition. In December 2010,

Zuckerberg announced that he had signed up for the “Giving Pledge,” an initiative

set up by Bill Gates that asks signatories to commit to donating the majority of



{FG-W0408049.}

3

their wealth. At the time, Zuckerberg publicly announced that he wanted to donate

great wealth sooner rather than later in life:

People wait until late in their career to give back. But why wait whenthere is so much to be done? With a generation of younger folks whohave thrived on the success of their companies, there is a bigopportunity for many of us to give back earlier in our lifetime and seethe impact of our philanthropic efforts.

4. Zuckerberg’s interest in donating a significant proportion of his

personal wealth created a tremendous opportunity for public stockholders of

Facebook. As Zuckerberg liquidated his personal holdings over time, control over

Facebook would pass to the public. Investors in Facebook’s 2012 initial public

offering could reasonably expect that Zuckerberg would eventually divest his

control of Facebook.

5. In December 2015, Zuckerberg announced that he and his wife,

Priscilla Chan, would, within their lifetime, donate 99% of their Facebook shares

through a personal philanthropic vehicle, the Chan Zuckerberg Initiative LLC.

6. But Zuckerberg did not want to relinquish control over Facebook.

Zuckerberg was confronted with a dilemma.

7. Zuckerberg’s dilemma created its own opportunity for Facebook.

Facebook’s Board could insist that Zuckerberg pay for the power to exert control

in the future, or insist that Zuckerberg face the diminution of his control over time.



{FG-W0408049.}

4

Just as you can’t have your cake and eat it too, you can’t retain corporate control

while donating your shares to charity. The Board possessed the power to say no.

8. Zuckerberg’s hand-picked directors had no interest in saying no to

Zuckerberg. They acquiesced to Zuckerberg’s desire to retain control over

Facebook indefinitely, even decades after Zuckerberg gives away most of his

wealth to philanthropic and public advocacy initiatives that he and his wife will

oversee, regardless of Facebook’s performance over those decades. The massive

issuance of non-voting Class C shares—and Zuckerberg’s ability to sell those

shares without also selling voting shares—will allow him to retain a majority of the

voting power over Facebook even if he reduces his personal shareholdings from

14.8% to 5%. Given expected future financings, acquisitions, and equity awards

using newly issued non-voting stock, Zuckerberg can expect to retain control over

Facebook even as his percentage ownership of the Company further decreases.

9. The Board is creating a radically new control structure for the

Company. Zuckerberg is being granted power to control the Company for decades

after he divests the bulk of his wealth, even if he is no longer CEO, and after he

has established a massive philanthropic endeavor. Current directors have no

reliable means to predict whether Zuckerberg’s unfettered control over the

Company will be beneficial decades hence, when the Company will be operating in



{FG-W0408049.}

5

a new environment, Zuckerberg’s economic stake in the Company will be far

diminished, and his attention to the Company’s affairs may also be far diminished.

10. There was no arms-length bargaining between Zuckerberg and the

Board of Directors over whether Zuckerberg could retain control and at what price.

The Special Committee was established for the express purpose of arriving at a

transaction structure that would “maintain our founder-controlled structure.” The

Chairperson of the Special Committee was Susan Desmond-Hellmann, the Chief

Executive Officer of the Bill & Melinda Gates Foundation, who has a massive

professional interest in facilitating the transfer of Zuckerberg’s wealth to charitable

ends. Its most financially sophisticated member was Marc Andreessen, a venture

capitalist, who relies heavily on his prestigious association with Facebook to

capture deal flow, and markets his firm, Andreessen Horowitz, as “enabl[ing]

founders to run their own companies.” The members of the Special Committee

convinced themselves that it was a “critical benefit[]” to Facebook that the

Company remain under Zuckerberg’s control “even as [he] sells or transfers a

significant number of his shares.”

11. Having taken that position, the Special Committee did not bother

negotiating for anything of value from Zuckerberg in return. The Special

Committee waxes triumphant that Zuckerberg will now be newly required to

relinquish his high-vote Class B share in the event that he resigns or is terminated



{FG-W0408049.}

6

for cause and upon his death. But none of the new provisions create any practical

restraint commensurate with the grant of future control:

a. Zuckerberg has publicly stated that he plans to remain CEO of

Facebook for “many, many years to come.” Even so, Zuckerberg has

been granted the contractual freedom to remain in control of Facebook

so long as he is an “Approved Executive Officer,” a term defined

loosely to include service as “Executive Chairman of the Board of

Directors” or service in a “policy making function.” Zuckerberg may

even take a leave of absence to serve in a government position without

triggering conversion of his high-vote shares.

b. Termination for cause requires a finding of bad faith by 75% of the

independent directors, after which time Zuckerberg is afforded sixty

days to cure the condition, followed by another vote by 75% of the

independent directors (who Zuckerberg may replace in the interim).

c. Required conversion of the high-vote shares within three years of

Zuckerberg’s death has little import, given Zuckerberg’s relative

youth and his intent to donate the bulk of his wealth in the near term.

There was never any likelihood that Zuckerberg’s descendants would

exercise what the proxy statement refers to as “multi-generational

majority voting control of the company.”



{FG-W0408049.}

7

12. Zuckerberg and the other directors chose not to afford the public

stockholders an opportunity to register a veto or a voice over the desirability of

granting him future control over Facebook. Zuckerberg, as the controlling

stockholder, will exercise the voting power to amend the charter at the upcoming

annual meeting, without any need to obtain approval of a majority of the

unaffiliated stockholders. Facebook chose to announce the proposed charter

amendments in conjunction with a report of record quarterly earnings, rendering

the stock price reaction to the charter amendments unknowable.

13. Zuckerberg timed his bid for untethered future control over Facebook

when he was at the zenith of his influence. His success as founder and CEO of a

company now worth over $337 billion is unparalleled. But past performance is no

guarantee of future results. The Board of Directors abdicated their responsibilities,

unfairly benefited Zuckerberg at the Company’s expense, and acted for an

improper purpose when they agreed to grant Zuckerberg free future control over

Facebook, knowing that Zuckerberg will be divesting himself of a commensurate

economic interest in the Company, knowing that he will be undertaking new

responsibilities apart from Facebook that may end up consuming the bulk of his

attention, and knowing that history is filled with examples of individuals who

could not sustain early success. The Board’s grant of future control to Zuckerberg

is as reckless as it is unprecedented and vast.



{FG-W0408049.}

8

14. Delaware fiduciary duty law is predicated on the principle that Boards

of Directors must exercise stewardship over the business and affairs of the

corporation. Facebook’s Board of Directors unlawfully acquiesced to the grant of

future control to the Company’s controller. Absent an injunction of the issuance of

the Class C non-voting shares, the public stockholders will become subject to a

single individual’s unconstrained exercise of control in circumstances never

previously authorized.

II.

PARTIES

15. Plaintiff Kenneth Elan is, and at all relevant times has been, a

stockholder of Facebook.

16. Defendant Mark Zuckerberg is Facebook’s founder, CEO, Chairman,

and controlling stockholder.

17.

Defendant Sheryl Sandberg has been a Facebook director since 2012.

She has served as the Company’s Chief Operating Officer since 2008. In 2015, the

Company paid Sandberg over $18 million in cash, stock, and other compensation.

18. Defendant Jan Koum has been a Facebook director since 2014. He

serves as Chief Executive Officer of WhatsApp Inc. (“WhatsApp”), a wholly-

owned subsidiary of Facebook that provides mobile messaging services. When

Koum joined Facebook as an employee in October 2014, he was given 24,853,468



{FG-W0408049.}

9

restricted stock units that will vest and settle over a four-year quarterly vesting

schedule, as long as Mr. Koum remains employed by the Company.

19. Defendant Peter Thiel has been a Facebook director since 2005. Thiel

is a venture capitalist who has served as a Partner of Founders Fund, a venture

capital firm, since 2005. He was a co-founder of PayPal.

20. Defendant Marc Andreessen has been a Facebook director since 2008.

Andreessen is the co-founder and general partner of Andreessen Horowitz, a

venture capital firm. He was a co-founder of Netscape.

21. Defendant Reed Hastings has been a Facebook director since June

2011. He is the founder, CEO and Chairman of Netflix.

22. Defendant Susan Desmond-Hellmann has been a Facebook director

since 2013. She is the CEO of the Bill & Melinda Gates Foundation.

23.

Defendant Erskine Bowles has been a Facebook director since 2011.

He served as President of the University of North Carolina from 2005 to 2010.

24. Nominal defendant Facebook, Inc. is a Delaware corporation

headquartered in Menlo Park, California. Facebook’s core business is a popular

social media platform that generates substantially all of its revenues through the

sale of advertising. Its current market capitalization exceeds $330 billion.

Facebook is named as a defendant because Plaintiff seeks to enjoin Facebook from

implementing the Share Issuance.



{FG-W0408049.}

10

III. SUBSTANTIVE ALLEGATIONS

A. Negotiation Of The Share Issuance

25. According to the Preliminary Proxy, discussions regarding the Share

Issuance began no later than August 2015 and were sparked by Zuckerberg’s

concerns that he might lose control over the Company:

During August 2015, Mr. Zuckerberg discussed with our board ofdirectors that if he were to donate or otherwise dispose of a significantnumber of his shares of our capital stock to further his philanthropicaims, if we were to make one or more large stock-based acquisitions,

or if we were to issue a significant amount of equity-basedcompensation awards to our service providers, we might no longer befounder-controlled.

26. On August 20, 2015, the Board of Directors created the Special

Committee to evaluate a potential reclassification and appointed Desmond-

Hellman, Andreessen and Bowles as its members. The Special Committee hired

Evercore Group LLC (“Evercore”) and Wachtell, Lipton, Rosen & Katz

(“Wachtell”) as its financial and legal advisors, respectively.

27. The Preliminary Proxy makes no reference to Evercore issuing a

fairness opinion.

28. The Preliminary Proxy contains limited information about its

negotiations with Zuckerberg. There is no recounting of offers or counter-offers.

The following three paragraphs are essentially all that is disclosed about the

negotiations:



{FG-W0408049.}

11

Since its formation in August 2015, the Special Committee has metnumerous times and also has had frequent conversations. The SpecialCommittee has sought advice from its advisors (i) in evaluating the

benefits and disadvantages of the company implementing areclassification versus maintaining the status quo and (ii) in assistingthe Special Committee in its deliberations and negotiations withrespect to the terms of a potential reclassification. The SpecialCommittee has considered, and received advice from its advisors on,the likely effects of a reclassification on our share price, capitalstructure, governance, management, operations, and investor relations.Furthermore, the Special Committee has reviewed and discussedseveral recent reclassifications effected by other founder-controlledcompanies with dual-class common stock and has considered theterms of those reclassifications as well as the effects of those

transactions on the reclassifying company’s share price, capitalstructure, governance, management, operations, and investor relations.…Throughout the course of the negotiations, the Special Committeeexercised this power and leverage to insist that, in connection withany Reclassification, (i) we implement the New Certificate, (ii) wemake certain amendments to our corporate governance guidelines(which amendments are described under ‘Executive Officers,Directors, and Corporate Governance—Board of Directors— Controlled Company Status’) and (iii) we enter into the FounderAgreement with Mr. Zuckerberg and certain of his affiliates that holdshares of our capital stock (which agreement is described under‘Founder Agreement’ below). The Special Committee believed thatthe New Certificate, the amendments to our corporate governanceguidelines and the Founder Agreement help achieve certain benefits tothe company and its stockholders, including by (i) linking Mr.Zuckerberg's control of our company to Mr. Zuckerberg’s continuedservice in a leadership role (subject only to certain limited exceptionsfor government service or office) and (ii) conferring certain new

protections and benefits not available under the Current Certificate.See ‘Reasons for the Reclassification’ below.

Moreover, during the course of these negotiations, the SpecialCommittee and Mr. Zuckerberg engaged in sustained negotiationswith respect the terms of the Reclassification. Among other matters,



{FG-W0408049.}

12

the Special Committee negotiated to include the four new automatic‘sunset’ triggers described in Proposal 7D, to reduce the length of the‘sunset’ transition period proposed originally by Mr. Zuckerberg forseveral of the ‘sunset triggers’ described in Proposal 7D and to reducethe scope of certain exceptions to the ‘sunset’ trigger for voluntaryleaves of absence or a resignation as an Approved Executive Officer

by Mr. Zuckerberg, as a result of which Mr. Zuckerberg can avoidtriggering an automatic ‘sunset’ only if he takes a voluntary leave ofabsence or resigns in connection with government service or office,subject to certain terms and conditions. The Special Committee madeclear to Mr. Zuckerberg that it would not negotiate further withrespect to these terms and that they were essential to their being ableto recommend the Reclassification. Mr. Zuckerberg agreed to theSpecial Committee’s proposals. At the conclusion of these

negotiations, the Special Committee was satisfied that the proposedterms of the Reclassification were in the best interests of our companyand our minority stockholders. At the conclusion of thesenegotiations, the Special Committee was satisfied that the proposedterms of the Reclassification were in the best interests of our companyand our minority stockholders. See ‘Reasons for the Reclassification’

below.

29. In short, the Special Committee acquiesced in a give-away of future

control to Zuckerberg, allowing Zuckerberg to achieve his dual objectives of

liquidating and divesting the great bulk of his ownership stake while also

maintaining voting control over Facebook. The Special Committee extracted no

control premium or payment from Zuckerberg and allowed him to obtain voting

control without paying for it or retaining his economic stake in Facebook.

30. On April 13, 2016, the Special Committee recommended approval of

the Share Issuance. On April 22, 2016, the Board of Directors voted unanimously

to approve the Share Issuance, with the employee directors abstaining.



{FG-W0408049.}

13

B. The Special Committee Obtained Meaningless Concessions

31. The Special Committee did not obtain any meaningful limits on

Zuckerberg’s future exercise of control. The Special Committee failed to obtain a

majority-of-the-minority vote on the Share Issuance. The concessions that the

Special Committee did obtain were window-dressing.

32. First , Zuckerberg agreed to a “Founders Agreement,” which provides

that (i) if Zuckerberg sells down his Class B stock below a majority, he must

convert all Class B stock into Class A stock; (ii) Zuckerberg cannot vote for or

tender into any merger, consolidation, or acquisition that would give differential

treatment to any class of stock; and (iii) Zuckerberg must, from time to time,

discuss succession planning with the Board.

33. Second , Zuckerberg agreed to amendments to the certificate of

incorporation to provide that all shares of Class B common stock will

automatically convert into Class A common stock within specified periods of time

following (i) the death or qualifying disability of Zuckerberg; (ii) his for-cause

termination as an “Approved Executive Officer”; or (iii) his voluntary resignation

as an “Approved Executive Officer” (except in the case of a resignation for

Zuckerberg to serve in government).



{FG-W0408049.}

14

34. None of these restrictions impose meaningful limits on Zuckerberg’s

exercise of control over the Company for as long as he wishes. The benefits to

public stockholders are entirely illusory.

35. Termination for cause would require a finding of bad faith by 75% of

the independent directors, after which time Zuckerberg is afforded sixty days to

cure the condition, followed by another vote by 75% of the independent directors

(who Zuckerberg may replace in the interim). “Approved Executive Officer,” is

defined so loosely as to include service as “Executive Chairman of the Board of

Directors” or service in a “policy making function.” Zuckerberg may even take a

leave of absence to serve in a government position without triggering conversion

of his high-vote shares. Finally, the required conversion of his shares within three

years of his death is meaningless, given his stated goal of donating 99% of those

shares within his lifetime.

C. The Special Committee Has Given Zuckerberg The Right To Sell

The Bulk of His Minority Economic Interest in Facebook While

Maintaining Lifelong Control

36. The Share Issuance is a massive gift of future control to Zuckerberg.

It allows him to reduce his personal shareholdings from 14.8% to 5% while

maintaining control.

37. As Facebook issues additional non-voting shares for corporate

purposes, Zuckerberg’s percentage ownership will be further reduced without



{FG-W0408049.}

15

affecting his control position. As one large Facebook investor noted in an April

28, 2016 Bloomberg report, “[i]ssues of share dilution come up much sooner for

[technology] companies, which offer a large portion of compensation through

stock.” Moreover, Facebook has a history of making large acquisitions with

significant stock components.

38. Absent the Share Issuance, Zuckerberg’s control would be steadily

eroded by dilutive issuances for employee compensation and acquisitions.

Moreover, absent the Share Issuance, the market could fairly expect that

Zuckerberg would sell stock over time, further reducing his control.

39. The Share Issuance fundamentally changes that dynamic and,

effectively, gives Zuckerberg perpetual control of Facebook. Not only does the

Share Issuance give Zuckerberg a way to liquidate his own stake without reducing

his control, it means that Facebook will now be able to use Class C stock for future

acquisitions and employee compensation—halting the natural erosion of

Zuckerberg’s control through future dilutive issuances.

D. Giving Zuckerberg Perpetual Control Is Not A “Get” for

Shareholders

40.

Zuckerberg’s newfound ability to sell his Class C stock without

sacrificing control is an immense benefit or “give” of control rights to Zuckerberg.

The “get” for public stockholders is far from apparent.



{FG-W0408049.}

16

41. The Preliminary Proxy makes clear that the Special Committee and

Director Defendants are claiming that the extension of Zuckerberg’s control is

itself the primary benefit of the Share Issuance. The first two headings under

“Reasons for the Reclassification” refer to extending Zuckerberg’s control:

• “Allow Us to Maintain Focus on Mr. Zuckerberg’s Long-Term Vision forour Company”

• “Encouraging Mr. Zuckerberg to Remain Involved with Our Company in aLeadership Role”

42.

Under the first heading, the Preliminary Proxy explicitly recites the

Director Defendants’s claim that public stockholders will benefit from

Zuckerberg’s continued control:

The Reclassification will provide our board of directors with theability to prolong the period of time during which Mr. Zuckerbergmaintains majority voting control over us, which, as noted above, the

Special Committee and the board of directors believe is in the bestinterest of us and our stockholders (other than Mr. Zuckerberg and hisaffiliated entities, as to whom no determination is made). TheReclassification will allow Mr. Zuckerberg to sell or transfer shares ofClass C capital stock without affecting Mr. Zuckerberg's majorityvoting control over us, and will also allow us to make one or morelarge stock-based acquisitions and to continue to grant equity awardsto our service providers, without affecting Mr. Zuckerberg's majorityvoting control over us. Being able to issue shares of Class C capitalstock in the future, instead of shares of Class A common stock or

Class B common stock, will enable our board of directors to issueshares of capital stock without affecting our existing voting andgovernance structure.

The Special Committee and our board of directors believe theReclassification is an appropriate way to make it more likely that



{FG-W0408049.}

17

Mr. Zuckerberg will remain in a position to influence our direction formany years, and we believe that this influence has been and will be

beneficial to our growth, strategy, and stability. Mr. Zuckerberg willstill lose voting power when he sells or transfers shares of Class Acommon stock or Class B common stock, or when we issue additionalClass A common stock or Class B common stock, which we maychoose to do from time to time.

43. Zuckerberg himself is even more blunt. In an April 27, 2016 “Note”

on the Facebook website,2 Zuckerberg summarized the Share Issuance as follows:

Today, Facebook’s board of directors is announcing a proposal tocreate a new class of stock that will allow us to achieve both goals. I’ll

be able to keep founder control of Facebook so we can continue to build for the long term, and Priscilla and I will be able to give ourmoney to fund important work sooner. Right now, there are amazingscientists, educators and doctors around the world doing incrediblework. We want to help them make a bigger difference today, not 30 or40 years down the road.

44. Even assuming that Zuckerberg’s continued leadership of Facebook in

the best interests of the Company over the foreseeable future, it is not obvious why

Zuckerberg’s control over Facebok should be cemented over his lifetime, into the

far, unforeseeable future. Zuckerberg will turn 32 years of age on May 14, 2016.

He potentially could retain control over Facebook for the next six decades, long

after his percentage ownership of the Company could be miniscule. Zuckerberg’s

accomplishments to date do not justify cementing his control for the next sixty

2 Available at: http://newsroom.fb.com/news/2016/04/marknote/



{FG-W0408049.}

18

years. The well-publicized troubles of AOL,3 Yahoo!,

4 MySpace,

5 Groupon,

6

Zynga,7

LinkedIn,8

Twitter,9

and others make plain that past results are no

guarantee of future performance—particularly in the fast-changing technology

sector.

45. Very few companies remain at the cutting-edge of innovation for

decades.10 At some point, Facebook will confront challenges that other mature

technology companies, such as Apple or Microsoft, face in which case different

skill sets and perspectives may be deemed essential. The Board of Directors has

foreclosed a future board from having the power to make hard decisions about the

future leadership of the Company, even after Zuckerberg may have sold off his

3 See, e.g., Tim Arango, How the AOL-Time Warner Merger Went So Wrong, N.Y.Times (Jan. 10, 2010).4 See, e.g., Nicholas Carlson, MARISSA MAYER AND THE FIGHT TO SAVE YAHOO!(2015).5 See, e.g., Eyder Perelta, News Corp. Takes Huge Loss, Selling Myspace for $35million, NPR (June 29, 2011).6 See, e.g., Jason Del Rey, Groupon Founder Says Groupon Is ‘Like Morphine.’

New CEO Says It’s Just Misunderstood , RE/CODE (November 21, 2015).7 See, e.g., Kieren McCarthy, Zynga CEO resigns—again—after terrible results,THE R EGISTER (Mar. 2, 2016).8 See, e.g., Jim Cramer, What the LinkedIn disaster means to you, CNBC (Feb. 8,2016).9 See, e.g., Christopher Williams, Hard and hurting: what now for Twitter , TheTelegraph (Jan. 25, 2016).10 See, e.g., Jim Collins, HOW THE MIGHTY FALL (2011).



{FG-W0408049.}

19

Class C stock and may have radically misaligned incentives. The Share Issuance

disables the stockholders and Board from taking action in the future to replace

Zuckerberg as CEO without cause.

E. The Board And Special Committee Were Conflicted

46. The Board’s acquiescence to Zuckerberg’s demand for guaranteed

control divested from ownership is no surprise, considering the makeup of

Zuckerberg’s hand-picked Board. Zuckerberg has stacked the Board with true

believers in the prerogatives of founders – persons who would be loathe to cross

Zuckerberg and challenge his demand for guaranteed future control.

47. The eight-person Board includes: Zuckerberg: two lavishly

compensated Facebook employees, Sandberg and Koum, the latter of whom was

the co-founder of WhatsApp; three other founders, Hastings, Thiel, and

Andreessen, two of whom espouse a pro-founder business approach and each of

whom has benefited professionally from their ties to Zuckerberg; plus Desmond-

Hellman, who is closely tied to Bill Gates and the facilitation of tech founder

philanthropy.

48. Hastings is the founder and CEO of Netflix, a key business partner of

Facebook. Through the so-called “Friends and Community” initiative, Facebook

users can share data about their Netflix viewing habits with their Facebook

“friends”—driving further users to Netflix. This partnership is so important to



{FG-W0408049.}

20

Netflix that Hastings personally lobbied Congress for an amendment to the Video

Privacy Protection Act of 1988 to permit this form of sharing. When the initiative

was launched in March 2013, Netflix shares shot up by over 6%.

49. Thiel, one of Facebook’s earliest investors and a co-founder of

PayPal, is a strong advocate of giving control to founders. In his book, Zero to

One: Notes on Startups or How to Build the Future, Thiel writes approvingly of a

system of autocratic control for founders:

[C]ompanies that create new technology often resemble feudalmonarchies rather than organizations that are supposedly more‘modern.’ A unique founder can make authoritative decisions, inspirestrong personal loyalty, and plan ahead for decades. Paradoxically,impersonal bureaucracies staffed by trained professionals can lastlonger than any lifetime, but they usually act with short time horizons.

Since its inception in 2005, Mr. Thiel’s venture capital fund, The Founders Fund,

has marketed itself as uniquely deferential to founders. The firm’s manifesto—

“What Happened To The Future”11 —boasts of the Founders Fund’s efforts to

cement founders’ control over outside investors: “we have often tried to ensure that

founders can continue to run their businesses through voting control mechanisms,

as Peter Thiel did with Mark Zuckerberg and Facebook.”

50.

A February 2016 story by Business Insider described Thiel as a

“mentor and longtime friend” of Zuckerberg’s. A September 2012 story by

11 Available at: http://foundersfund.com/the-future/



{FG-W0408049.}

21

Business Insider stated that “for Thiel, the appeal of being on Facebook’s board is

obvious. As one source who has discussed Facebook with him put it, ‘Is it that bad

to be on the board of a $40 billion company?’ No, it is not that bad. Especially for

a startup investor like Thiel, who gets good deal flow thanks to his high profile.”

51. Andreessen, a co-founder of Netscape, is also a prominent venture

capitalist who has benefited from his board seat at Facebook. In his own words:

“Deal flow is everything … If you’re in a second-tier firm, you never get a chance

at that great company.” In 2012, Zuckerberg agreed that Facebook would purchase

Instagram—an Andreessen Horowitz portfolio company—in a cash-and-stock

transaction valued at $1 billion at a time when the company had just thirteen

employees and no revenue. As a result of the sale of Instagram, Andreessen

Horowitz made $78 million from a $250,000 seed investment. 12 In 2014,

Zuckerberg announced that Facebook would purchase another Andreessen

Horowitz portfolio company—Oculus Rift, a maker of virtual reality headsets—for

cash-and-stock valued at approximately $2 billion. At the time of the purchase

Oculus had essentially no revenue, nor even a commercial product. The news

website Quartz wrote at the time, “In buying Oculus, Facebook has become

Andreessen Horowitz’s billion-dollar candy machine.”

12 See Andreessen Horowitz, Instagram, (April 22, 2012),https://a16z.com/2012/04/22/instagram/



{FG-W0408049.}

22

52. An October 2015 VANITY FAIR article described how Andreessen

leveraged his Facebook connections into the Oculus investment:

Andreessen, who is also a Facebook board member, had previously been skeptical of funding a virtual-reality company; now he was sohot for the deal that he suggested [Oculus founder Brendan] Iribe talkto Mark Zuckerberg, as a reference.

The first call between Zuckerberg and Iribe lasted 10 minutes.Zuckerberg sang the praises of Andreessen, and then he turned thediscussion to Oculus.

53. Andreessen protects his deal flow by being deferential to Zuckerberg.

As Felix Salmon wrote in an April 26, 2012 piece for Reuters, Andreessen’s “main

job there [on Facebook’s board] is to ensure that Mark [Zuckerberg] can do

whatever he wants, to provide a layer of insulation between Zuckerberg and

shareholders.”

54. Andreessen Horowitz positions itself as deferential to founders,

generally. In a long-form profile of the firm in 2012, Techonomy wrote:

“Andreessen Horowitz is … positioning itself as extremely founder-friendly. Every

partner is himself a founder and an operator.” Andreessen’s partner, Ben Horowitz

echoed this point in a January 2012 post, writing “Marc and I share a simple belief

that became the basis for our new venture capital firm: in general, founding CEOs

perform better than professional CEOs over the long term, and a venture capital

firm that enables founding CEOs to succeed would help build the best companies



{FG-W0408049.}

23

and yield superior investment returns. … [W]e set out to design a venture capital

firm that would enable founders to run their own companies[.]” (emphasis

original). 13 Andreessen could not resist Zuckerberg’s attempts to cement his

control over Facebook without repudiating his firm’s core sales pitch.

55. Over the first two weeks of November 2015—long after negotiations

regarding the Share Issuance began and shortly before Zuckerberg announced the

Chan Zuckerberg Initiative—Andreessen sold more than 73% of his total

ownership stake in Facebook for approximately $160 million.

56. Desmond-Hellmann is the CEO of the Bill & Melinda Gates

Foundation—the mammoth charitable organization to which the Chan Zuckerberg

Initiative is frequently compared. Given that Bill Gates and Zuckerberg are the

two most prominent proponents of tech founder philanthropy, and that Zuckerberg

was an early signatory of the Gates “Giving Pledge,” Desmond-Hellmann is the

last person who would have stood in the way of Zuckerberg’s philanthropic plans.

13 Available at: https://a16z.com/2012/01/30/why-has-andreessen-horowitz-raised-2-7b-in-3-years/



{FG-W0408049.}

24

CLASS ACTION ALLEGATIONS

57. Plaintiff, a stockholder in the Company, brings this action

(a) individually, and (b) as a class action pursuant to Rule 23 of the Rules of the

Court of Chancery of the State of Delaware on behalf of himself and all

stockholders of Facebook (except the Defendants herein, and any person, firm,

trust, corporation or other entity related to or affiliated with any of the Defendants)

to redress the Defendants’ breaches of fiduciary duty.

58.

This action is properly maintainable as a class action.

59. A class action is superior to other available methods of fair and

efficient adjudication of this controversy.

60. The Class is so numerous that joinder of all members is

impracticable. The Company has over 2.3 billion Class A shares outstanding.

Consequently, the number of Class members is believed to be in the hundreds of

thousands and scattered across the world. Moreover, damages suffered by

individual Class members may be small, making it overly expensive and

burdensome for individual Class members to pursue redress on their own.

61. There are questions of law and fact which are common to all Class

members and which predominate over any questions affecting only individuals,

including:



{FG-W0408049.}

25

a. whether the defendants have breached and continue to breach

their fiduciary duties by granting Zuckerberg future control of

the Company without obtaining adequate value in return; and

b. whether the Class is entitled to damages and/or injunctive

relief.

62. Plaintiff’s claims and defenses are typical of the claims and

defenses of other class members and Plaintiff has no interests antagonistic or

adverse to the interests of other class members. Plaintiff will fairly and adequately

protect the interest of the Class.

63. Plaintiff is committed to prosecuting this action and has retained

competent counsel experienced in litigation of this nature.

64. Defendants have acted in a manner that affects Plaintiff and all

members of the Class alike, thereby making appropriate injunctive relief and/or

corresponding declaratory relief with respect to the Class as a whole.

65. The prosecution of separate actions by individual members of the

Class would create a risk of inconsistent or varying adjudications with respect to

individual members of the Class, which would establish incompatible standards of

conduct for Defendants; or adjudications with respect to individual members of the

Class would, as a practical matter, be dispositive of the interest of other members

or substantially impair or impede their ability to protect their interests.



{FG-W0408049.}

27

72. Zuckerberg is the controlling shareholder of Facebook and, as such,

owes Plaintiff and the Class the utmost fiduciary duties of care and loyalty.

73. By reason of the foregoing, Zuckerberg has breached his fiduciary

duties and continue to breach his fiduciary duties. In particular, Zuckerberg has

violated his fiduciary duties by, among other things, causing the Board to agree to

the Share Issuance which will unfairly transfer future control to Zuckerberg.

74. As a result of the foregoing, Plaintiff and the Class have been harmed,

as their influence over Company operations and strategy will be diminished and

they stand to be frozen out of management decisions on an ongoing, long-term

basis, and the value of their investment is at immediate risk.

75. The Plaintiff and the Class have no adequate remedy at law.

COUNT III

Injunctive Relief Against Facebook

76. Plaintiff repeats and realleges each and every allegation above as if set

forth in full herein.

77. By reason of the foregoing, Zuckerberg and the Director Defendants

breached their fiduciary duties and continue to breach their fiduciary duties.

78.

As a result of the foregoing, Plaintiff and the Class will suffer

irreparable harm unless the Share Issuance is enjoined.



{FG-W0408049.}

28

PRAYERS FOR RELIEF

WHEREFORE, Plaintiff demands judgment and preliminary and permanent

relief, including injunctive relief, in his favor, and in favor of the Class, and against

all Defendants as follows:

A. Certifying this case as a class action, certifying the proposed Class,and designating Plaintiff and the undersigned as representatives of theClass;

B. Enjoining Defendants and any and all other employees, agents, orrepresentatives of the Company and persons acting in concert with

any one or more of any of the foregoing, during the pendency of thisaction, from taking any action to consummate the Share Issuance untilsuch time as Defendants have fully complied with their fiduciaryduties;

C. Awarding Plaintiff and the Class appropriate compensatory damages,together with pre- and post-judgment interest;

D. Awarding Plaintiff the costs, expenses, and disbursements of thisaction, including any attorneys’ and experts’ fees and, if applicable,

pre-judgment and post-judgment interest; and

E. Awarding Plaintiff and the Class such other relief as this Court deems just, equitable and proper.



OF COUNSEL:

BRAGAR EAGEL & SQUIRE, P.C.Jeffrey H. SquireLawrence P. EagelDavid J. StoneJ. Brandon WalkerTodd H. Henderson885 Third Avenue, Suite 3040

New York, New York 10022(212) 308-5858

DATED: May 6, 2016

/s/ Joel Friedlander Joel Friedlander (#3163)Jeffrey M. Gorris (#5012)Christopher P. Quinn (#5823)FRIEDLANDER & GORRIS, P.A.1201 N. Market Street, Suite 2200Wilmington, Delaware 19801(302) 573-3500Counsel for Plaintiff

elan v. zuckerberg et al - class action complaint.pdf

Documents