STUDENT ID No.

3143541

PART I

1. A

2. F

3. A

4. B

5. E

6. D

7. C

8. E

9. B

1. The proposal of the Senator seeks to repeal Section 144 (a) (1) which is one of the safe

harbor provisions that allows a director to engage in conflicted transactions for as long as there is

disclosure of the material facts to the board and the approval of “majority of the disinterested

directors.” This will change the law in that the only way that an interested director may secure

authorization for a conflicted transaction is through the disclosure to and approval of the majority

of the shareholders. Under the current law, the disclosure and approval to the board gives rise to

the standard of review that the court will use when the transaction is challenged, i.e., business

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judgment rule, a presumption that the board acted in the best interest of the corporation. The

statute does not mention of the standards.

If there is no approval of the shareholders as currently required by 144 (a)(2), the conflicted

director has to resort to 144 (a)(3) to ratify his transaction that is, if the transaction is challenged

in court, he has the burden of proving that the transaction is entirely fair. The entire fairness rule

applies.

2. I will No. The Bill should be rejected.

To take out the ratificatory powers of the board, betrays a basic governing principle of the

Delaware corporations, specifically that the Board is supreme. A corporation has centralized

management through its board of directors, who in their exercise of power as a board, acts as

agents of the shareholders, who are the principals. This is the reality of the separation of

ownership and control in the corporate setting.

Another consequence of the separation of ownership and control is that the board is in the better

position than the shareholders to know if the approval of the conflicted transaction is to the best

interest of the corporation.

Also, the board only has authority to manage the corporation when it acts as a board and not

individually. The Board is a collegial body. On an efficiency argument, the Board functions

better if they work well together and there is transparency and voluntary disclosures. Allowing

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the board to approve the transaction incentivizes the interested director to disclose the conflict

before entering the transaction. This promotes collegiality.

At a practical level, the rule that relaxes the duty of loyalty through the safe harbor provision of

Section 144 (a) (1), makes it easier for outside directors to join corporations and assume the risk

of fiduciary duties attached to being directors. In some cases, the compensation as a director

might not be enough to cover all the risk involved.

Also, as earlier noted, the approval of an interested transaction by a fully informed board has the

effect of only authorizing the transaction and not of foreclosing judicial review. Compliance with

Section 144 (a)(1) only means that the business judgment rule applies, or if not compliant with

Section 144 (a) (1) or Section 144 (a) (2) on shareholders’ approval, then the entire fairness

evaluation applies. A concerned stockholder should not be worried that the approval of the board

under 144 (a) (1) shields the transaction from judicial review.

1. Yes, the court will excuse the demand requirement.

As this case is brought before a district court, plaintiff is bound to comply with the demand

requirement under Federal Rule 23. 1. The rule requires that before a plaintiff can commence a

derivative action, plaintiff must make a demand, in writing, that the corporation take the desired

action. The requirement for the demand is excused if plaintiff argues that the demand would be

futile, such as when the board is so controlled and dominated by a majority and controlling

shareholder that the board is not “independent.”

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In Zapata, the court explained that in order for a complaint not to be dismissed for lack of

demand, the shareholder-plaintiff in a derivative suit must plead particularized facts that show:

(1) A majority of directors are interested or lacked independence; thus, incapable of exercising

judgment over whether to bring the suit, or (2) There is a reasonable doubt that the transaction

was not the product of reasoned business judgment.

Defendant Zuckerberg is the fiduciary subject of the case. There is no away that Facebook has an

independent board given the Zuckerberg is not only the founder, chairman and Chief Executive

Officer, he us more importantly, the controlling stockholder with ownership of stock and proxies

representing more than 60% of Facebook’s voting power. He also owns 61% of Facebook’s total

equity value. He clearly has influence and domination over the board that there is no reason to

expect independence, objectivity and impartiality from the board.

2. Yes, Mark Zuckerberg breached his fiduciary duties.

Zuckerberg is not excused from the Business Judgment Rule.

This is clear failure of Zuckerberg as a fiduciary to exercise the duty of care, specifically

his oversight duty, of which “unconsidered inaction” has cause loss to the Company.

As a general rule, Zuckerberg as a director is excused from his action or inaction as a

director because he is afforded the business judgment rule. Specifically, Aronson v. Lewis (Del.

1984) provides that business judgment rule is a “presumption that in making a business decision

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the directors of a corporation acted on an informed basis, in good faith and in the honest belief

that the action taken was in the best interests of the company.”

However, business judgment rule does not apply when there is (a) gross negligence; (b)

lack of good faith; and (c) conflicted transaction/Interested. This is a clear a breach of the duty

of care and a case of gross negligence and lack of good faith.

Zuckerberg violated his duty of care.

This is a case of a corporation suffering a loss for failure to monitor the corporation’s

security and privacy system that allowed access to private data of users that caused and continue

to cause losses to the corporation. This is clearly a duty of care case, specifically the failure to

exercise oversight.

The complaint alleges that the corporation suffered or is suffering losses from

Zuckerberg’s failure to monitor the Company, through its employees, grossly negligent conduct

of allowing Cambridge Analytica to access and retain information of 50 Million Facebook users

“without permission and informed consent”. This violation of private and data security has

“severely damages the Company’s reputation and imposed significant costs on it, including

regulations investigations.” In the first two days, following public revelation of the data breach,

Facebook lost $50 billion in market value. Facebook is also the target of an inquiry by the

Federal Trade Commission for failure to comply with regulation that requires Facebook to get

express permission from and notify users before sharing their data with third parties. Vladeck, an

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FTC Official was quoted to say that this may cause “many millions of dollars of penalties,

multiple investigations and potentially a whole lot of liability here.”

The Supreme Court in Stone v. Ritter clarified that in Caremark, the necessary conditions

that predicate director oversight liability: (a) the directors utterly failed to implement any

reporting or information system or controls; or (b) having implemented such a system or

controls, consciously failed to monitor or oversee its operations thus disabling themselves from

being informed of risks or problems requiring their attention.

Chancellor Allen in Caremark elucidates that the corporation must satisfy its obligation

to reasonably informed by assuring “themselves that information and reporting system exists in

the organization that are reasonably designed to provide to senior management and the board

itself timely, accurate information” sufficient to allow the board to make informed judgments.

However, only a sustained or systemic failure of the board to exercise oversight-such as an utter

failure to assure a reasonable information and reporting system exist-will establish the lack of

good faith that is a necessary condition to liability.

In this case, while arguably a system was in place, there was a failure to monitor or

oversee the operations. There was also a clear lack of good faith, which is necessary in an

oversight case.

There is a lack of good faith

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 Disney is the leading case for the contours of the duty of care and the meaning of good

faith. Justice Jacobs in Disney defined good faith as follows:

“A failure to act in good faith may be shown, for instance, where the
fiduciary intentionally acts with a purpose other than that of advancing the best
interests of the corporation, where the fiduciary acts with the intent to violate
applicable positive law, or where the fiduciary intentionally fails to act in the face
of a known duty to act, demonstrating a conscious disregard for his duties.”

In the present case, there is a lack of good faith because of the corporation’s failure to act

in the face obvious red flags. In 2015, Company officials learned that Kogan had violated

Facebook platform policies but did not inform the millions of affected users or make reasonable

or meaningful efforts to recover or secure the private information of the individual users.

Facebook knew that there was an applicable positive law, i.e., the Federal Trade Commission

requiring “express permission from and notify users before sharing their data with third parties”.

Zuckerberg, being the Chairman and CEO of Facebook, being responsible for Facebook’s day-

to-day operations, know about this and chose to violate or disregard the law.

There is lack of good faith when the fiduciary intentionally fails to act in the face of a

known duty to act, demonstrating a conscious disregard for his duties. This was apparent in

this case.

To make matters worse, it was only “after more than two years after it was reported to

Facebook officials – that Facebook announced that it was finally suspending Cambridge

Analytica and Kogan from the platform pending further information over misuse of date.” In an

email to university colleagues, Kogan said that in 2014, after he founded GSR, he transferred the

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app to the company and used an official Facebook Inc. platform for developers to change the

terms and conditions of his app from “research” to “commercial use” and that at no point that did

the media company object.

Arguments against the breach of duty of

care are unavailing.
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It is true that there is a system in place to check the breaches in security and privacy of

the users and the law does not require the “best practices”. Thus, it is correct that it does not

matter that Stamos, the Chief Information Security Officer, believed that “Facebook need to act

more like a defense contractor in dealing with security”.

It may be argued that there was a good faith effort for the systems to be in place and

Kogan had in fact given the assurance to Facebook that the “users were granting us the right to

use the date in broad scope, including the selling and licensing the data.” If this was true and

absent the other looming evidence to the contrary, Zuckerberg may be excused because there is a

good faith effort to monitor the systems. Facebook’s use of apps in their platform and the terms

thereof is a business judgment of a board and presumably for the interest of the board. Caremark

oversight duty does not cover monitory of a business risk because that is part of a business

judgment rule.

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 Ritter is clear that there has to be a conscious effort to monitor or oversee its operations.

A reasonable person, in the face of the red flags, i.e., discovery of the breach, should have acted

on it. The delayed action of Zuckerberg in the face of a known duty to act is clearly in bad faith.

Zuckerberg cannot invoke DGLC Section 145 and

Section 102(b)(7) to excuse his breach of the duty of
care.
Waives personal liability

The Articles of Incorporation of Facebook provides that the “Corporation shall indemnify

to the fullest extent permitted by law any person made or threated to be made a party to an action

or proceeding”.

This means that the directors can look for relief under the DGLC Section 145, which

allows a corporation to indemnify a director, officer or employee or agent for amounts paid in

settlement “if he is reasonably believed to be acting in good faith in or not opposed to the best

interest of the corporation”. This provision does not protect gross negligence.

However, under DLGC Section 102(b)(7), Delaware permits Delaware corporations to

include a provision in their certificate of incorporation that immunized directors for even grossly

negligent decisions except “for acts or omissions not in good faith or which involve intentional

misconduct or a knowing violation of law.”

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 To avail himself of indemnification or waiver of liability under both provisions, good

faith must be established. There is no good faith on the part of Zuckerberg.

The lack of good is arguably a violation of the duty of loyalty.

According to Stone v. Ritter, "[a] director cannot act loyally towards the corporation

unless she acts in the good faith belief that her actions are in the corporation's best interest." The

lack of good faith of Zuckerberg in this case, is also a violation of the duty of loyalty.

3. Since this is a derivative case, a case brought by a shareholder on behalf of the

corporation, the benefit from the case should inure to the corporation. If the derivative suit

prospects and Mark Zuckerberg is held to have violated his fiduciary duty of care and loyalty,

the veil of corporation may be pierced to make him personally liable for the damages that the

corporation has suffered because of his acts or inaction. This can include the fines arising from

Federal Trade Commission rules violation and other regulations investigations. Also, it is alleged

that Facebook lost $50 billion in market value, which means that the shareholder’s shares

likewise suffered a diminution in value. However, since the shareholders are not personally

entitled to damages, the corporation can recover the lost in market value.

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