EFiled: May 06 2016 04:01PM EDT

Transaction ID 58958691
Case No. 12309-

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

SOUTHEASTERN PENNSYLVANIA
TRANSPORTATION AUTHORITY
individually, and on behalf of all those
similarly situated,
Plaintiff,
v.
MARK ZUCKERBERG, SHERYL
SANDBERG, MARC ANDREESSEN,
ERSKINE B. BOWLES, SUSAN
DESMOND-HELLMANN,
REED
HASTINGS, JAN KOUM, PETER A.
THIEL and FACEBOOK, INC.,
Defendants.

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C.A. No. ___________

PLAINTIFFS MOTION FOR EXPEDITED PROCEEDINGS

Plaintiff Southeastern Pennsylvania Transportation Authority, by and
through its undersigned counsel, respectfully moves this Court for an Order, in the
form attached hereto, expediting the proceedings in this matter, including
discovery and a trial on the merits of the claims asserted herein. The grounds for
the motion are as follows.
I.

FACTUAL BACKGROUND
1.

Plaintiff is a stockholder of Facebook, Inc. (Facebook or the

Company) and is the Plaintiff in the captioned action challenging the conduct of

the named defendants for breaches of fiduciary duty arising from an effort to
reclassify

the

Companys

shares

as

announced

on

April

27,

2016

(Reclassification).
2.

The action challenges the approval process of the Reclassification and

the terms of the Reclassification.

3.

As detailed in the Complaint,1 this action asserts claims: (1) for

breaches of fiduciary duty of loyalty and care against the directors of Facebook; (2)
for breaches of fiduciary duty of loyalty and care against Defendant Sandberg as an
officer and director of Facebook; and (3) for breaches of fiduciary duty of loyalty
and care against Defendant Zuckerberg as an officer and director and as controlling
stockholder of Facebook.2
4.

The Action alleges that Facebook and its Board of Directors

(Board)3 openly acknowledge that the Reclassification effort is an attempt to

entrench the Companys founder, Chairman and Chief Executive Officer (CEO),
Mark Zuckerberg (Zuckerberg), as controlling stockholder of Facebook by

The Verified Class Action Complaint (Complaint) is being filed herewith.

References to the Complaint will be cited as __.
2

7, 69-79.

The Facebook Board of Directors consists of Defendants Mark Zuckerberg,

Sheryl Sandberg, Marc Andreessen, Erskine B. Bowles, Susan DesmondHellmann, Reed Hastings, Jan Koum, and Peter A. Thiel, collectively referred to as
Individual Defendants.
2

creating a non-voting class of Facebook stock (Class C) in order to preserve his

voting power into perpetuity.4 Facebook currently has two classes of stock: Class
A common stock and Class B common stock. Class A shares entitle stockholders
to one vote per share, and Class B shares carry ten (10) votes each. Zuckerberg
owns nearly 4 million Class A shares and 468 million Class B shares, giving him
overall voting power of 60.1%.5
5.

Under the terms of the Reclassification, the Board will declare and

pay a dividend of two shares of non-voting Class C stock for each outstanding
share of Class A common stock and Class B common stock.6 The Company stated
that it expects the market price for the shares of Class A common stock to reflect
the effect of a three-for-one stock split.7 The Class C shares will trade separately
on the NASDAQ, which will likely trade at a discount to the Class A stock due to
the lack of voting rights.8

This distribution of non-voting stock will allow

Zuckerberg to fulfill his purported mission of donating 99% of his Facebook stock
to charitable causes over the course of his lifetime and will also allow Facebook to

4, 34, 40.

1, 47.

2, 47.

Id.

2, 47, 53-58.
3

purchase other companies or issue stock to employees without diluting

Zuckerbergs voting power or diminishing his iron-clad grip over Company
management and operations (which includes the ability to appoint the entire Board
of Directors).9
6.

Pursuant to a Preliminary Proxy Statement (PPS),10 filed with the

Securities and Exchange Commission on April 27, 2016, the Reclassification is

being submitted for a stockholder vote and is technically subject to stockholder
approval of a majority of Facebooks outstanding shares.11

However, with

Zuckerbergs 60.1% voting stake and without the benefit of a majority-of-the

minority condition, the Reclassification is a fait accompli.12
7.

Zuckerberg and the Company have openly admitted that the

Reclassification is intended to and will allow Zuckerberg to keep control of the

Company.13

In December 2015, Zuckerberg announced that he and his wife

created a limited liability corporation to which they would donate 99% of their

2, 34, 36, 47.

10

The PPS is attached as Exhibit A hereto.

11

3, 47.

12

3, 47, 67.

13

4, 34, 40.
4

Facebook stock over the course of their lifetimes for charitable purposes.14 In
addition, the Company has said it will use stock to acquire new companies,
employees or technologies and to compensate their employees.15 While these
actions would, under the Companys current capital structure, dilute Zuckerbergs
voting power and threaten his majority control of the business, the Reclassification
would allow him to perpetuate his control over the Company while diluting the
voting power of the public stockholders.16
8.

A Special Committee of Facebook directors approved the deal, but

did not meaningfully bargain with Zuckerberg to obtain value in exchange for the
extraordinary benefit that is being bestowed upon him.17 The Special Committee:
(a)

agreed to allow Zuckerberg to present the Reclassification to a

stockholder vote at the upcoming annual meeting, without any
provision for approval by a majority of the public stockholders,
making the Reclassification a fait accompli, and providing the
public stockholders with no say;

(b)

never sought to have Zuckerberg pay the costs for the Special
Committees financial and legal advisors nor for the Special
Committee fees in connection with the Reclassification;

14

4, 36.

15

4, 34, 57.

16

4.

17

5, 39-45, 49.
5

9.

(c)

never sought or received an opinion from its financial advisor

that the Reclassification was fair to the public Class A
stockholders;

(d)

obtained concessions from Zuckerberg that are essentially

meaningless, thus negating any possible claim that there was
arms-length bargaining;

(e)

allowed director Marc Andreessen (Andreessen) to serve on

the Special Committee as a disinterested member despite the
close business ties between Facebook and Andreessens venture
capital firm, Andreessen Horowitz;

(f)

never had its financial advisor place a value or range of values

on the Reclassification, from Zuckerbergs perspective;

(g)

did not prearrange compensation for the Special Committee,

leaving its eventual compensation to be decided by the
Compensation & Governance Committee, of which Andreessen
is a member;

(h)

did not adopt any independent oversight mechanism to ensure

that future issuances of Class C shares do not unduly benefit
Zuckerberg;

(i)

failed to bargain for the right of public Class A stockholders to

elect even one independent director, so that such stockholders
might have a voice; and

(j)

failed to provide for any compensation for the Class A

stockholders whose investments will be adversely affected by
having their holdings cleaved into voting and non-voting
shares, with their meaningful consent or approval.18

The Action alleges that the Reclassification is not fair to Facebooks

public stockholders and is the product of self-dealing by Zuckerberg. Zuckerberg

18

5, 45.
6

is opportunistically putting himself in an advantageous position to obtain the nonratable benefit of perpetual control over the Company, at the expense of
Facebooks public stockholders and without providing Facebooks stockholders
with a meaningful opportunity to have their voices heard. Given that Zuckerberg
is the founder, Chairman, CEO and controlling stockholder of Facebook,
Facebooks management and Board face divided loyalties and have not acted in the
best interests of the public stockholders. 19 The entire fairness standard also applies
to the Reclassification, as Zuckerberg is Facebooks controlling stockholder and is
extracting the non-ratable benefit of perpetual control of the Company.20
10.

As discussed more particularly below, Plaintiffs claim that Facebook

stockholders face irreparable harm from breaches of fiduciary duty by Defendants

in connection with the dilution of the economic value and voting power of their
Facebook stock that Plaintiffs would suffer pursuant to the Reclassification.
Plaintiff seeks expedition of these proceedings such that a trial on the merits of
Plaintiffs claims will be held before Defendants take any actions to effect the
Reclassification.

As such, the need for immediate judicial intervention is

warranted.

19

6, 32, 33, 37, 38.

20

6, 65-68.
7

II.

ARGUMENT
A.

Standard For Expedited Proceedings

11.

This Court has broad power to order expedited proceedings.21 This

Court has followed the practice of erring on the side of more [expedited] hearings
rather than fewer.22

A partys request to schedule an application for a

preliminary injunction and to expedite the discovery related thereto is normally

routinely granted. Exceptions to that norm are rare.23 Moreover, in the corporate
context, an expedited proceeding is appropriate if the movant articulates a
sufficiently colorable claim and the possibility of a threatened irreparable
injury.24
12.

The standard this Court must apply is whether Plaintiff has articulated

a sufficiently colorable claim and a sufficient possibility of threatened irreparable

injury to justify the costs of expedited proceedings.25

Good cause exists for

21

See Ct. Ch. R. 4, 12, 26, 30, 34 and 173. See, e.g., Box v. Box, 697 A.2d
395, 398-99 (Del. 1997) (Delaware courts are always receptive to expediting any
type of litigation in the interests of affording justice to the parties.).
22

Giammargo v. Snapple Beverage Corp., 1994 Del. Ch. LEXIS 199, at *6

(Nov. 15, 1994) (Exhibit B).
23

In re Intl Jensen Inc. Sholders Litig., 1996 Del. Ch. LEXIS 77, at *1-2
(July 13, 1996) (Exhibit C).
24

TCW Tech. LTD. Pship v. Intermedia Commns., Inc., 2000 Del. Ch. LEXIS
186, at *5 (Oct. 2, 2000) (Exhibit D).
25

Giammargo, 1994 Del. Ch. LEXIS 199, at *6.

8

granting a motion to expedite where, as here, a plaintiff. . . articulate[s] a

sufficiently colorable claim and show[s] a sufficient possibility of a threatened
irreparable injury.26 Plaintiffs application meets this standard.
B.

Plaintiff Has Stated Colorable Claims

13.

In judging whether Plaintiff has pled a sufficiently colorable claim,

this Court accepts the allegations of the complaint as true and does not judge the
legal sufficiency of the pleadings.27

The threshold for finding claims to be

colorable is low, and the Court has found claims to be colorable even when there
are serious doubts that the Plaintiff will ultimately succeed.28 Further, Plaintiff
need not make a showing on all of its claims, and the Court may grant expedited

26

Gomi Investors, LLC v. Schimmell Holdings, Inc., 2006 Del. Ch. LEXIS
138, at *3 (July 27, 2006) (Exhibit E).
27

TCW, 2000 Del. Ch. LEXIS 186, at *5; Morton v. American Marketing
Holdings Inc., 1995 Del. Ch. LEXIS 162, at *9-10 (Oct. 5, 1995) (Exhibit F);
County of York Employees Retirement Plan v. Merrill Lynch & Co., Inc., et al.,
2008 Del. Ch. LEXIS 162, *21 (Oct. 8, 2008) (The burden of demonstrating a
colorable claim is minimal and, in its analysis, the Court conducts something of
an almost superficial factual assessment.) (Exhibit G). See also Renco Gp., Inc. v.
MacAndrews AMG Hldgs. LLC, 2013 Del. Ch. LEXIS 7, at *3 (Jan. 18, 2013)
(noting that the burden on a plaintiff in seeking an expedited proceeding is not
high) (Exhibit H).
28

County of York, 2008 Del. Ch. LEXIS 162, at *34 ([T]he Courts task here
is not to pass on the likelihood of ultimate success of the Plaintiffs claims, but
merely to ascertain whether the Plaintiff have sufficiently articulated colorable
claims.).
9

proceedings if only one claim meets the standard.29

1.

The Complaint States Colorable Claims For Breach of Fiduciary

Duty Against the Individual Defendants Regarding the Process

14.

The Reclassification is a self-dealing, interested transaction,

extracting a non-ratable benefit for Zuckerberg. Thus the entire fairness standard
will apply to the Reclassification.30 Entire fairness remains applicable even when
an independent committee is utilized because the underlying factors which raise
the specter of impropriety can never be completely eradicated and still require
careful judicial scrutiny.31 Further, where, as here, an interested fiduciary stands
on both sides of a Board decision, the Court reviews whether the Board decision
was negotiated and approved by a truly independent decision-maker, free from

29

TCW, 2000 Del. Ch. LEXIS 186, at *5-7 (granting expedited proceedings
where at least Plaintiffs breach of fiduciary duty claim was colorable).
30

See In re EZCorp Inc., 2016 Del. Ch. LEXIS 14, *61 (Jan. 25, 2016) (the
entire fairness framework applie[s] generally to transaction in which a controller
extract[s] non-ratable benefits.) (Exhibit I); Kahn v. Lynch Communication
Systems Inc., 638 A.2d 1110, 1117 (Del. 1994) (the exclusive standard of judicial
review in examining the propriety of an interested cash-out merger transaction by a
controlling or dominating shareholder is entire fairness.); Kahn v. Tremont, Corp.,
694 A.2d 422, 428-29 (Del. 1997). The entire fairness standard requires the Court
to determine whether both the process employed and the price paid in the Proposed
Transactions were fair to the minority shareholders. Lynch, 638 A. 2d 1110 at
1116 (quoting Citron v. E.I. Du Pont de Nemours & Co., 584 A.2d 490, 502 (Del.
Ch. 1990)).
31

EZCorp, 2016 Del. Ch. LEXIS 14, at *61 (quoting Tremont, 694 A.2d at

428).
10

undue influence by the interested fiduciary.32

15.

Plaintiffs Complaint sets forth allegations that the Individual

Defendants acted disloyally by approving the Reclassification, which benefits

Facebooks controlling stockholder, Zuckerberg, at the unfair expense of the
Company and its stockholders.33

Despite the appointment of the Special

Committee, truly independent negotiation was nonexistent. Once Zuckerberg

had determined he wanted a way to sell or gift his Facebook stock to further his
philanthropic endeavors without giving up control over the Company, the Board,
including the Special Committee set to work to effect his plan. The Special
Committee focused on getting Zuckerberg what he desired rather than determining
whether the Reclassification, and the cost associated with exploring the
Reclassification, was the right thing for Facebook and its stockholders.34
16.

Notably, the three-member Special Committee included Defendant

Andreessen, a venture capitalist who had been one of Facebooks original and
largest seed investors and had made millions off of Facebooks acquisition of other
tech startups in which he was invested.35 Additionally, the other two members of

32

See Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1168 (Del. 1994).

33

6, 75-77.

34

35, 37-45.

35

12, 37.
11

the Special Committee were sympathetic to Zuckerbergs desire.

Defendant

Desmond-Hellman is the CEO of the Bill & Melinda Gates Foundation, which
shares the philanthropic aims Zuckerberg has, and Bowles, who upon joining the
Board, expressed his admiration and support for Zuckerberg and his personal
crusade.36
17.

Plaintiff thus has alleged specific facts supporting colorable claims of

breach, self-dealing and unfairness in the process.

C.

Facebooks Stockholders Will Suffer Irreparable Harm If the

Proceedings Are Not Expedited

18.

[D]ilution has been found to constitute irreparable harm because, at

least in part, of the difficulties in restoring the injured party to its proper status
through a grant of final relief. Flight Options International, Inc. v. Simpson, 2005
Del. Ch. LEXIS 149, at *40 (July 7, 2005); Gentile v. Rossette, 906 A.2d 91, 100
(Del.) (recognizing the harm to a stockholders shares when a transaction results in
an expropriation of economic value and voting power from the public
stockholders). Plaintiffs complaint alleges that Zuckerberg, with the Boards aid
and approval, is taking advantage of his control and position in the Company to
opportunistically extract the non-ratable benefit of perpetuated control over the
Company at the expense of Facebooks public stockholders, thereby diluting both

36

13, 14, 38.

12

voting and economic interests of stock held by Facebooks public stockholders.37

Absent expedition, Facebooks public stockholders stock will be wrongfully
diluted as a result of the certificate amendment causing Reclassification, to the
irreparable harm of Facebooks stockholders.
19.

There is a clear connection between the entry of an expedited

discovery schedule and the avoidance of the irreparable injury.

The

Reclassification will be a highly transformative event for the Company and will
scramble the eggs in a way that may result in irreparable harm to Plaintiff.38
Should the Court grant this Motion, the Plaintiff would be able to further evaluate
the process and proceed to a prompt trial on the merits regarding the
Reclassification prior to the Company taking any steps -- including the crucial
filing with the Delaware Secretary of State -- to effect the Reclassification.
Without expedition, Facebook stockholders shares will be diluted and devalued,39
to the benefit of Zuckerberg, who will retain his control as he dissipates his
economic stake.
20.

Moreover, while Plaintiff believes its claims sound in loyalty with

respect to some or all of the Individual Defendants, to the extent that the Board
37

51-52.

38

See In re Transkaryotic Therapies, Inc., 954 A.2d 346, 356-63 (Del. Ch.
2008) (citation omitted).

39

51-55.
13

argues their conduct was merely a breach of the duty of care, there is even more
reason for the Court to expedite these proceedings.40 The presence of an 8 Del. C.
102(b)(7) exculpatory provision in Facebooks certificate of incorporation
protects the members of the Facebook Board from monetary damages for claims of
breaches of the duty of care. Although monetary damages are not available for
breaches of the duty of care, equitable remedies, such as injunctive relief and
rescission are.41 The possibility that Facebooks stockholders will be left without
an opportunity to recover on claims constitutes irreparable harm.42
III.

CONCLUSION
Plaintiff respectfully requests that the Court enter an Order directing

expedited proceedings, including: (1) expedited production of documents from

Defendants, their financial advisors and other key knowledgeable persons which
Plaintiff may identify; (2) depositions of Defendants, their advisors and other key
knowledgeable persons; and (3) a briefing schedule for a trial; and (4) a prompt
40

See In re Del Monte Foods Company Shareholders Litigation, 25 A.3d 813,

838 (Del. Ch. 2011) (Exculpation under Section 102(b)(7) can render empty the
promise of post-closing damages and weigh[s] in favor of prevote relief.).

41

Arnold v. Society for Savings Bancorp., Inc., 678 A.2d 533, 542 (Del. 1996).

42

See Police & Fire Re. Sys. v. Bernal, 2009 Del. Ch. LEXIS 111, *6 (June 26,
2009) (Court granted plaintiffs motion for expedited proceedings as [h]arm
resulting from such deterrence is incalculable, and because it would be
impossible to unscramble the eggs, by attempting to unwind the [action] once it
has been completed.) (Exhibit J).
14

trial date in advance of the filing of any amendments to Facebooks Certificate of

Incorporation with the Delaware Secretary of State. If this motion is granted,
Plaintiff will work with Defendants to achieve a schedule that will allow the parties
to present as complete a record as possible for the Courts consideration at trial.
DATE: May 6, 2016

CHIMICLES & TIKELLIS LLP

/s/ Pamela S. Tikellis
Pamela S. Tikellis (#2172)
Robert J. Kriner, Jr (#2546)
A. Zachary Naylor (#4439)
Tiffany J. Cramer (#4998)
222 Delaware Ave., Suite 1100
P.O. Box 1035
Wilmington, Delaware 19899
(302) 656-2500
Attorneys for Plaintiff

15

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