On April 30, 2024, the Delaware Court of Chancery dismissed a stockholder lawsuit against social media giant Meta Platforms, Inc., its board of directors and company founder, Mark Zuckerberg. The decision rejected novel claims that directors’ fiduciary duties extend to the corporation and its stockholders as diversified equity investors. The court found that under the “standard Delaware formulation” of corporate law, directors (and officers) of a corporation owe duties to stockholders as investors in that corporation and do not have a duty to assume that its stockholders are diversified investors and to oversee, consider, or protect the stockholders’ investments in other companies.
Litigation background
Meta, the world’s largest social media network, owns and operates five major social media platforms: Facebook, Instagram, Messenger, WhatsApp and Threads, which are used by 3.24 billion people every day. According to the complaint, Meta’s public stockholders are broadly diversified institutional investors, many of which are legally required to diversify their holdings. For diversified investors, returns primarily track overall market performance rather than the performance of any individual company.
Plaintiff James McRitchie, a Meta stockholder, runs a website focused on corporate governance and stockholder activism. Plaintiff brought suit against Meta and its nine-member board in October 2022, arguing they breached their fiduciary duties by prioritizing company-specific profits over broader societal and economic interests, which conflicts with the interests of diversified investors. Plaintiff argued that under Modern Portfolio Theory, prudent investors diversify, and, therefore, the law must operate on the assumption that a corporation’s stockholder’s are diversified. He asserts that Delaware corporate law currently requires or, alternatively, should require that directors owe fiduciary duties to diversified investors and, therefore, must consider external factors and the effect of their decisions on society and the economy as a whole, as diversified investors benefit when company performance aligns with general economic trends. Plaintiff argued that “if the decisions that maximize the Company’s long-term cash flows also imperil the rule of law or public health, the portfolios of its diversified stockholders are likely to be financially harmed by those decisions.”
Given Meta’s prominence as the largest social media network company in the world, plaintiff’s complaint noted that its “business decisions inevitably create financial impact well beyond its own cash flows and enterprise value and have significant impacts on the global economy.” Plaintiff alleged that the Meta directors focused solely on Meta’s short-term profits, primarily for their own benefit, and failed to consider that stockholders with diversified portfolios may be subject to net losses as a result of Meta’s business model, which focuses on generating and maximizing firm-specific value without regard to society and the economy as a whole and the financial harm it may inflict on their stockholders’ portfolios. Plaintiff argued that externalities, the indirect cost or benefit to uninvolved third parties that arise as an effect of another party’s action, have increased in both relevance and importance over the last several years and that Meta’s directors fail to meet their fiduciary duties when they ignore the negative impacts of externalities on their own diversified stockholders by focusing only on Meta’s bottom line.
Meta moved to dismiss the suit, arguing that plaintiff’s claims contradict long-standing Delaware corporate law. Meta cited the discretionary nature of the business judgment rule, which allows directors to consider broader constituencies but does not mandate it, and argued that while corporate directors have the discretion, they do not have the obligation to consider broader constituencies beyond their stockholder base when making decisions or to protect stockholders’ investments in other companies. According to Meta, plaintiff’s claims “are antithetical to core foundations of Delaware law” and plaintiff is “not pursuing claims under the law as it exists, but rather using this case to broadcast his theories about how he would like the law to change.”
The court affirms a firm-specific model
Vice Chancellor Laster granted Meta’s motion to dismiss. In a 101-page opinion citing court rulings dating back more than 200 years as well as decades of law review articles and legal treatises, Vice Chancellor Laster found that the “deep architecture” of Delaware corporate law reveals that directors owe firm-specific fiduciary duties, which is to say directors owe fiduciary duties to the corporation and its stockholders, which are implicitly the stockholders of the specific corporation that the directors serve – and not stockholders as diversified investors.
The court found plaintiff’s arguments unconvincing, particularly in light of overwhelming Delaware case law precedent to the contrary. The court’s decision cites various cases, including Unocal and Revlon, where a plaintiff brought a breach of fiduciary duties claim and where, in each case, the Delaware Supreme Court referred to the “corporation and its stockholders,” did not refer to stockholders in any other capacities, and gave no indication that Delaware law requires directors to consider the interests of stockholders as diversified investors, employees, customers or participants in the economy. Instead, the case law has always looked only to the stockholders’ economic interests as investors in the corporation and not in any other capacities they may have. While the Delaware Supreme Court has not expressly stated that Delaware follows a single-firm model or uses the words “firm-specific stockholders,” numerous Delaware Supreme Court authorities rest on that implicit proposition. The court noted the “point is so basic that no Delaware decisions have felt the need to say it. Fish don’t talk about water.”
While Delaware case law rests on a foundation of firm-specific fiduciary duties, the court also looked beyond Delaware and examined the historical arc of director duties. The court found that tracing back the development of directors as fiduciaries from its origin in the early nineteenth century through the ensuing declares, the original understanding of fiduciary duties has never changed: “It started out single-firm focused. It remains single-firm focused.”
In addressing plaintiff’s argument that Delaware law should change to require directors to consider external factors and the impact of their decisions on the portfolios of their diversified investors and the economy at large, the court noted that this argument “has no chance in this court, given the existence of binding Delaware Supreme Court opinions that rest on the single-firm model” and that plaintiff “has not made a persuasive case for change,” showing only, at most, that some investor advocacy organizations would prefer a diversified investor model.
A diversified investor model can exist, but is not legally required
Plaintiff asserted that under a firm-specific model “fiduciaries have no duty (or ability) to consider the costs of their decisions on the typical stockholders’ portfolios, even if those costs far outweigh any benefit received as holders of company shares.” The court disagreed with this characterization, noting that directors must seek to maximize long-term value for their firm-specific stockholders and that can involve “a broad spectrum of issues, including how a decision affects stakeholders, the economy, and society.” The court also noted that, while not required under Delaware corporate law, Delaware’s governance model is flexible enough to accommodate corporations that want to follow a diversified-investor approach, as it authorizes private ordering and empowers corporations to tailor director duties through the provisions included in the certificate of incorporation, so a corporation may choose to reorient director duties toward diversified investors. However, the court observed that there are also counterarguments to a diversified investor model and that such an approach would encompass its own externalities.
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