Court Opinion

ID: 4580482
Source: CourtListenerOpinion
Date Created: 2020-10-26 15:02:51.75776+00
Date Added: 2024-06-11T09:28:16.522072
License: Public Domain

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

UNITED FOOD AND COMMERCIAL                    )
WORKERS UNION AND                             )
PARTICIPATING FOOD INDUSTRY                   )
EMPLOYERS TRI-STATE PENSION                   )
FUND,                                         )
                                              )
              Plaintiff,                      )
                                              )
       v.                                     )   C.A. No. 2018-0671-JTL
                                              )
MARK ZUCKERBERG, MARC                         )
ANDREESSEN, PETER THIEL, REED                 )
HASTINGS, ERSKINE B. BOWLES, and              )
SUSAN D. DESMOND-HELLMANN,                    )
                                              )
              Defendants,                     )
                                              )
      and                                     )
                                              )
FACEBOOK, INC.,                               )
                                              )
             Nominal Defendant.               )

                                     OPINION

                             Date Submitted: July 29, 2020
                            Date Decided: October 26, 2020

P. Bradford deLeeuw, DELEEUW LAW LLC, Wilmington, Delaware; Robert C.
Schubert, SCHUBERT JONCKHEER & KOLBE LLP, San Francisco, California; James
E. Miller, SHEPHERD FINKELMAN MILLER & SHAH, LLP, Chester, Connecticut;
Attorneys for Plaintiff.

Kevin R. Shannon, Berton W. Ashman, Jr., Tyler J. Leavengood, POTTER ANDERSON
& CORROON LLP, Wilmington, Delaware; William Savitt, Ryan A. McLeod, Anitha
Reddy, Cecilia A. Glass, WACHTELL, LIPTON, ROSEN & KATZ, New York, New
York; Attorneys for Defendants Marc L. Andreessen, Erskine B. Bowles, Susan D.
Desmond-Hellmann, Reed Hastings, and Peter A. Thiel.
Raymond J. DiCamillo, Kevin M. Gallagher, Megan E. O’Connor, RICHARDS,
LAYTON & FINGER, P.A, Wilmington, Delaware; George M. Garvey, Laura Lin,
MUNGER, TOLLES & OLSON LLP, Los Angeles, California; Attorneys for Defendant
Mark Zuckerberg.

David E. Ross, Garrett B. Moritz, R. Garrett Rice, ROSS ARONSTAM & MORITZ LLP,
Wilmington, Delaware; George M. Garvey, Laura Lin, MUNGER, TOLLES & OLSON
LLP, Los Angeles, California; Attorneys for Nominal Defendant Facebook, Inc.

LASTER, V.C.
       Defendant Mark Zuckerberg is the founder, CEO, chairman of the board, and

controlling stockholder of nominal defendant Facebook, Inc. At Zuckerberg’s request, the

Facebook board of directors (the “Board”) pursued a reclassification of Facebook’s shares.

The transaction involved authorizing a new class of non-voting stock, then issuing two

shares of non-voting stock to each existing stockholder. The effect of the reclassification

would be to shift two-thirds of Facebook’s economic value into the non-voting stock. The

chief beneficiary was Zuckerberg, who would be able to transfer the bulk of his economic

ownership in Facebook without giving up voting control.

       Various stockholder plaintiffs filed lawsuits and sought a permanent injunction

blocking the reclassification. Facebook agreed not to implement the reclassification until

after a ruling on its merits. Just before trial, at Zuckerberg’s request, the Board withdrew

the reclassification. That decision gave the plaintiffs everything they sought to achieve,

rendering that litigation moot.

       The plaintiff in this litigation filed a derivative action against Zuckerberg and certain

members of the Board who approved the reclassification. The plaintiff maintains that the

pursuit of the reclassification constituted a breach of duty and that Facebook was harmed

as a result. As damages, the plaintiff seeks to recover $21.8 million that Facebook expended

pursuing the reclassification and defending the transaction until the eve of trial, plus $68.7

million that Facebook paid the prior plaintiffs as a fee award. The plaintiff alleges that

Facebook has suffered other damages, including reputational harm, in an amount to be

proven at trial.
       The defendants moved to dismiss this derivative action under Rule 23.1 on the

grounds that the plaintiff failed to demand that the Board pursue the litigation and did not

establish that demand was futile. This decision grants the defendants’ motion.

                          I.      FACTUAL BACKGROUND

       The facts are drawn from the amended complaint and the documents that it

incorporates by reference. At this stage of the proceeding, the complaint’s allegations are

assumed to be true, and the plaintiff receives the benefit of all reasonable inferences.

A.     Facebook

       Facebook is a publicly traded Delaware corporation with its principal place of

business in Menlo Park, California. Facebook is a social networking platform that allows

users to create profiles, upload photos and videos, send messages, and communicate with

friends, family, and colleagues. Based on global reach and total active users, Facebook is

the largest social media and networking service. As of December 31, 2018, Facebook had

2.32 billion monthly users.

       Facebook is one of the ten largest companies in the world by market capitalization.

Shares of Facebook’s Class A common stock trade on the Nasdaq under the symbol “FB.”

Facebook is a “controlled company” under applicable Nasdaq rules. Compl. ¶ 11.

Zuckerberg controls Facebook, having founded the company in 2004 and served as its CEO

and as a director since then. Since 2012, Zuckerberg has served as chair of the Board.

       When the events giving rise to this litigation began, Zuckerberg beneficially owned

shares that carried 53.8% of Facebook’s outstanding voting power, but which reflected

economic ownership of only 14.8%. Zuckerberg exercised disproportionate voting power

                                              2
because of Facebook’s dual-class capital structure. Facebook’s certificate of incorporation

authorized two classes of common stock: (i) Class A common stock, which carried one

vote per share, and (ii) Class B common stock, which carried ten votes per share.

Zuckerberg owned around 4 million Class A shares and 419 million Class B shares. His

Class B shares carried as much voting power as 4.19 billion Class A shares.

B.     Zuckerberg Takes The Giving Pledge.

       In December 2010, Zuckerberg took the Giving Pledge. Championed by Bill Gates

and Warren Buffett, the Giving Pledge calls on wealthy business leaders to donate a

majority of their wealth to philanthropic causes. Zuckerberg announced that he would

begin his philanthropy early in life.

       In March 2015, Zuckerberg developed a plan to complete the Giving Pledge by

making annual donations of shares of Facebook stock worth $2–3 billion, eventually giving

away 99% of his wealth. At some point, donations of this magnitude would cause

Zuckerberg to lose control over Facebook.

       Zuckerberg asked Facebook’s general counsel to examine how soon the donations

would undermine his voting control. The answer was quite soon. Zuckerberg only could

donate shares worth approximately $3–4 billion before losing voting control.

       To avoid this result, Facebook’s general counsel recommended that Zuckerberg

follow the “Google playbook.” Facebook would authorize new shares of Class C common

stock that would not have any voting rights, then distribute shares of Class C common

stock to all its existing stockholders, including Zuckerberg. By doing so, Facebook would

reallocate a portion of its economic value to the new non-voting shares. No existing

                                            3
stockholders would be harmed because each stockholder would receive a proportionate

number of Class C shares. For Zuckerberg, however, the reallocation of a portion of his

economic ownership to the non-voting Class C shares would allow him to transfer that

portion without undermining his voting control.

       Facebook’s general counsel advised Zuckerberg that the reclassification required (i)

an amendment to Facebook’s certificate of incorporation, followed by (ii) a dividend of

Class C shares. Both required Board approval, and the amendment required stockholder

approval. Given the voting power of his holdings, Zuckerberg could approve the

amendment at the stockholder level, so the only hurdle was Board approval. Facebook’s

general counsel recommended that the Board form a special committee to evaluate the

transaction. Facebook’s general counsel also advised that Google’s reclassification led to

stockholder litigation, which ended with a settlement valued at $522 million.

       Zuckerberg liked the idea of a reclassification. He told Facebook’s legal team to

“start figuring out how to make this happen.” Id. ¶ 22.

C.     Zuckerberg Proposes The Reclassification.

       In June 2015, Zuckerberg told the Board about the Giving Pledge and his plan to

donate his Facebook shares. He explained that he wanted to consider the implications of

reducing his stock ownership and how best to position Facebook moving forward.

       Zuckerberg retained Simpson Thacher & Bartlett LLP and Goldman, Sachs & Co.

to advise him on the reclassification. On August 20, 2015, Zuckerberg formally proposed

to the Board that Facebook engage in a reclassification.

                                             4
        On August 22, 2015, the Board established a special committee to review, analyze,

and negotiate the reclassification (the “Committee”). The Board also tasked the Committee

with evaluating potential alternatives to a reclassification and making a formal

recommendation to the Board. The members of the Committee were defendants Marc

Andreessen, Erskine Bowles, and Susan Desmond-Hellmann.

        The Board authorized the Committee to retain its own legal and financial advisors.

At the recommendation of Facebook management, the Committee selected Wachtell,

Lipton, Rosen & Katz LLP as its legal advisor. The Committee did not meet with Wachtell

before hiring the firm. The Committee was supposed to prepare a formal charter delineating

its duties and responsibilities, but it never did.

D.      The Committee Negotiates With Zuckerberg.

        Before meeting with the Committee, Wachtell contacted Simpson Thacher to

discuss the terms of a reclassification. Simpson Thacher rejected as “non-starters” certain

corporate governance concessions from the “Google playbook,” including (i) a “stapling”

provision that would have required Zuckerberg to sell a share of high-vote Class B stock

each time he sold a share of non-voting Class C stock and (ii) a “true-up” payment to the

Class A stockholders to compensate them for the dilution of their voting power. See id.

¶ 33.

        On September 23, 2015, Wachtell met with the Committee for the first time. From

the outset, the Committee anticipated that a reclassification would take place. Its

deliberations focused less on whether to pursue a reclassification or propose an alternative

and more on the details of the reclassification that Zuckerberg wanted.

                                                5
      On October 12, 2015, the Committee retained Evercore Partners as its financial

advisor. As with Wachtell, the Committee did not meet with Evercore before retaining the

firm. The lead banker from Evercore noted that they were hired “in the second inning,”

after the transaction was well underway. Id. ¶ 34 (internal quotation marks omitted).

      At some point, Facebook retained Morgan Stanley & Co. LLC as its financial

advisor. Simpson Thacher had previously spoken with Morgan Stanley about serving as

Zuckerberg’s personal financial advisor, and Morgan Stanley briefly acted in that role

before Zuckerberg retained Goldman Sachs. As a result, Morgan Stanley knew about

Zuckerberg’s expectations for the reclassification, and Morgan Stanley used Simpson

Thacher’s work product when preparing its analyses of the reclassification.

      On October 23, 2015, at the Committee’s request, Wachtell spoke with Simpson

Thacher about eight “Possible Concessions” from Zuckerberg:

     sunset provisions,

     an equal treatment provision,

     a non-competition covenant,

     acquisition protections,

     an independent nominating committee,

     conditioning the reclassification on the approval of Facebook’s Class A
      stockholders,

     “stapling” provisions or other transfer restrictions, and

     a “true-up” payment to the Class A stockholders.

                                             6
Wachtell already knew from its earlier communications with Simpson Thacher that

Zuckerberg would not agree to the last two proposals. Zuckerberg now rejected the idea of

a Class A vote. Zuckerberg agreed to consider the first five concessions.

      On November 9, 2015, the Committee discussed the five concessions that

Zuckerberg had agreed to consider. The Committee did not ask about the concessions that

Zuckerberg had rejected; it simply accepted Zuckerberg’s position. Evercore advised the

Committee that Facebook’s Class A stockholders were unlikely to approve the

reclassification. Evercore did not provide any explanation, and the Committee did not ask

why or otherwise explore the comment.

      Although negotiations ostensibly had just begun, Zuckerberg was confident that the

Board would approve a reclassification. He told Facebook’s COO, Sheryl Sandberg, that

there were “lots of details to work through, but at this point we’re much more in the mode

of making decisions and locking things down rather than broad consideration.” Id. ¶ 39

(internal quotation marks omitted). On November 9, 2015, Zuckerberg publicly reaffirmed

his Giving Pledge, noting that his “giving [was] just starting” and that he and his spouse

planned to “expand” their giving. Id. ¶ 40 (internal quotation marks omitted).

      The next day, Zuckerberg circulated a draft announcement that described his “new

model of philanthropy” and involved donating 99% of his wealth during his lifetime. Id.

He solicited comments from various Facebook personnel, including Desmond-Hellmann,

one of the three members of the Committee. Zuckerberg told the other two members of

Committee—Andreessen and Bowles—about his plan before he announced it. Both

Andreessen and Bowles reacted enthusiastically. Andreessen told Zuckerberg that he was

                                            7
“very proud” of him, and Bowles told Zuckerberg that he was “proud to be a small part of

your life.” Id. Zuckerberg also told Warren Buffett and Bill and Melinda Gates about his

plan. Melinda Gates forwarded her email conversation with Zuckerberg to Desmond-

Hellmann, along with a smiley emoji. Zuckerberg later told the Board that he planned to

announce that he and his spouse had committed “to give 99% of [their] FB shares during

[their] lives with a focus on improving the world for the next generation.” Id.

       On November 11, 2015, Wachtell relayed the Committee’s demands to Simpson

Thacher. The demands largely hewed to the five concessions that Zuckerberg had agreed

to consider. The Committee did not attempt to extract a cash payment or a greater number

of Class C shares for the Class A stockholders. The Committee did not propose that the

reclassification be conditioned on Class A stockholder approval. The Committee also did

not ask for any type of restriction on Zuckerberg’s ability to sell stock.

       On December 1, 2015, Zuckerberg announced his Giving Pledge through a

Facebook post. He simultaneously affirmed that he would “remain[] Facebook’s CEO for

many, many years to come.” Id. ¶ 41 (internal quotation marks omitted). To do both,

Zuckerberg needed the reclassification to become a reality. The announcement did not

mention the reclassification, the Committee, or the need for the Committee and the Board

to approve the reclassification. Zuckerberg did not seek Board approval before posting his

announcement.

       Over the next week, Zuckerberg’s pledge received negative press. On December 6,

2015, Zuckerberg emailed Andreessen, writing, “This has been a crazy week. I want to

                                              8
thank you for all your support, and all you’re doing to defend and spread what we’re

actually doing.” Id. ¶ 43.

       By January 27, 2016, the Committee largely had agreed to move forward with a

reclassification. Over the next three months, the Committee and Zuckerberg negotiated

various corporate governance provisions, focusing primarily on sunset provisions. The

final slate of governance provisions permitted Zuckerberg to retain voting control of

Facebook, even if he took years off to work for the government or redirected his focus to

managing the charity that he and his wife had created.

E.     Andreessen Back-Channels Information To Zuckerberg.

       Throughout the negotiations over the reclassification, Andreessen regularly

engaged in back-channel communications with Zuckerberg about what the Committee was

doing. Andreessen and Zuckerberg exchanged text messages in which Andreessen

described at least twelve different meetings during which the Committee deliberated over

its negotiating positions. Andreessen shared with Zuckerberg details about what the

Committee focused on, what questions the members would ask, and how each member felt

about different governance issues. Id. ¶ 47.

       For example, on February 11, 2016, the Board met to receive an update on the

Committee’s progress. An hour before the meeting, Andreessen sent a series of text

messages to Zuckerberg. He told Zuckerberg, “Between us – re special board session. 1

new share class will happen. 2 everyone loves [your plan].” Id. ¶ 48 (internal quotation

marks omitted). He added that the Committee “love[d] the intent.” Id. He texted that the

Committee was merely working “around the edges of the big things you want.” Id. He told

                                               9
Zuckerberg that the Committee was working to “protect the company and you personally.”
Id. Later that day, Andreessen reassured Zuckerberg that “[a]ll [of the Committee’s]

feedback is to protect you and the company.” Id. At other points, Andreessen

acknowledged to Zuckerberg that several Facebook “senior staff think[] this is a big

mistake” and that they “wish you would stop but don’t want to challenge you.” Id.

       In addition to back-channeling information, Andreessen coached Zuckerberg

before, during, and after calls with the Committee. For example, during a teleconference

with the Committee on March 5, 2016, when Zuckerberg was pushing for the right to take

an eight-year leave of absence, Andreessen coached Zuckerberg through the negotiations

via text message. Throughout the meeting, Andreessen shared live updates with

Zuckerberg. He told Zuckerberg when his arguments were falling flat: “This line of

argument is not helping .” Id. ¶ 49 (internal quotation marks omitted). He told

Zuckerberg when to back off: “The committee wants to do this. You don’t need to question

that.” Id. And he encouraged Zuckerberg when his arguments were working: “NOW

WE’RE COOKING WITH GAS.” Id.

       In another example, Zuckerberg was scheduled to talk to Desmond-Hellmann on

March 11, 2016. The day before, Zuckerberg asked Andreessen, “Do you have any context

before I talk to Sue tomorrow.” Id. ¶ 47 (internal quotation marks omitted). Andreessen

provided a detailed preview of the call.

       These communications are only examples. Andreessen engaged in similar

communications with Zuckerberg throughout the negotiations.

                                           10
F.     Facebook Moves Forward With The Reclassification.

       On April 5, 2016, the Committee met to discuss the reclassification. Zuckerberg and

an outside director, defendant Peter Thiel, attended. On April 13, 2016, the Committee

voted to recommend the reclassification to the full Board.

       Under the terms of the reclassification, Facebook would amend its charter to

authorize the new Class C stock and to add certain corporate governance provisions.

Facebook then would declare a dividend of two Class C shares of Facebook stock for each

existing share of Class A and Class B stock. And Zuckerberg would enter into a “Founder

Agreement” with Facebook conditioned on the reclassification becoming effective. See id.

¶ 56 (the “Reclassification”).

       Under the Founder Agreement, Zuckerberg agreed that if he ever owned less than

50.1% of the outstanding Class B shares, then he would retire Facebook’s multi-class

structure. Zuckerberg’s also agreed that his high-vote shares would lose their additional

voting rights if he left Facebook. But Zuckerberg could satisfy the condition that he remain

at Facebook by serving as an “Approved Executive Officer,” which only required that he

serve as a vice president in charge of a principal business unit, division, or function. With

the approval of the independent directors, that position could be part-time. The Founder

Agreement permitted Zuckerberg to take a leave of absence to pursue government service

and continue to maintain his voting control, as long as he retained at least 30% of the shares

that he held on the effective date of the Reclassification.

       Bowles was concerned about the government-service provision. In one of his back-

channel text messages, Andreessen told Zuckerberg that Bowles regarded the provision as

                                             11
“an unforced error,” which he “may grudgingly support [] at the end.” Id. ¶ 58 (internal

quotation marks omitted). Andreessen also told Zuckerberg that Bowles was “worried” that

the government-service provision would be “the straw that breaks the camel’s back on the

optics of good governance” and “the thing people will point to on announcement and say

‘what the f*ck are you guys doing agreeing to this.’” Id.

       On April 14, 2016, the Board approved the Reclassification. Zuckerberg, Sandberg,

and then-director Jan Koum abstained from the vote. Id.

G.     Facebook Stockholders Challenge The Reclassification.

       Facebook did not immediately announce the Reclassification. Facebook delayed the

announcement until April 27, 2016, when Facebook publicly announced both the

Reclassification and its best-ever quarterly earnings. An Evercore banker told Desmond-

Hellmann, “Anytime FB announces earnings like that, no one will care about an equity

recapitalization.” Id. ¶ 59 (internal quotation marks omitted).

       On April 29, 2016, Facebook stockholders filed a lawsuit in this court challenging

the Reclassification. In subsequent days, another twelve cases were filed. The thirteen cases

were consolidated. See In re Facebook, Inc. Class C Reclassification Litig., C.A. No.

12286-VCL (the “Reclassification Action”).

       On June 20, 2016, Facebook held its annual stockholders meeting. Shares carrying

5.1 billion votes were voted in favor of the Reclassification, while shares carrying 1.5

billion votes were voted against. The shares voted in favor included Zuckerberg’s holdings

of 4 million Class A shares and 419 million Class B shares, which together constituted 4.7

billion votes. Excluding Zuckerberg’s votes, the tally would have been around 453 million

                                             12
shares in favor and 1.5 billion shares against. Put differently, holders of more than 70% of

the disinterested shares opposed the Reclassification.

       The plaintiffs in the Reclassification Action sought injunctive relief blocking the

consummation of the transaction. On June 24, 2016, the parties to the Reclassification

Action agreed that Facebook would not implement the Reclassification while litigation was

ongoing. On April 17, 2017, this court certified a class of stockholders comprising the

holders of Facebook common stock other than Zuckerberg. Trial was scheduled to begin

on September 26, 2017.

H.     Facebook Abandons The Reclassification.

       On September 21, 2017, five days before trial was set to begin, Zuckerberg asked

the Board to abandon the Reclassification. The Board agreed, and the next day, Facebook

issued a Form 8-K announcing the Board’s decision. Facebook also announced that

Zuckerberg still planned to fulfill the Giving Pledge by selling or donating between 35 and

75 million shares over the next eighteen months. Zuckerberg posted on Facebook about the

abandoned Reclassification, explaining that he “knew it was going to be complicated and

it wasn’t a perfect solution.” Compl. ¶ 62 (internal quotation marks omitted). He stated that

he had come up with a “better” plan that would allow him to “fully fund” his philanthropy

and “retain voting control of Facebook for 20 years or more.” Id. Zuckerberg made clear

that although Facebook had abandoned the Reclassification, he and his spouse still planned

“to give away 99% of [their] Facebook shares during [their] lives.” Id. He claimed that they

“now plan[ned] to accelerate [their] work and sell more of those shares sooner.” Id. Over

                                             13
the next sixteen months, Zuckerberg sold about 30.4 million shares for around $5.6 billion

without losing control of Facebook. See id.

       Because the plaintiffs in the Reclassification Action sought to block its

implementation, the Board’s withdrawal of the Reclassification gave them everything they

wanted and rendered the Reclassification Action moot. By the time that the Board made its

decision, Facebook had incurred approximately $21.8 million to pursue the

Reclassification and defend the Reclassification Action. Then, as compensation for the

benefits conferred by the Reclassification Action, Facebook agreed to pay a fee award of

$68.7 million to plaintiffs’ counsel.

I.     This Litigation

       On September 12, 2018, the plaintiff filed this derivative action. The complaint

asserts a single count for breach of fiduciary duty. According to the complaint, the

defendants “violated their fiduciary duties of care and loyalty” by pursuing and approving

the Reclassification. Id. ¶ 110. The plaintiff further contends that the defendants “breached

their fiduciary duties by failing to adequately evaluate Andreessen and Desmond-

Hellmann’s suitability to serve on the [Committee] . . . and then appointing these

individuals to the [Committee].” Id. According to the complaint, Facebook is entitled to

recover damages from the defendants for the “massive expenditures on financial advisors,

experts, and attorneys retained by [Facebook] in connection with the Reclassification . . . ,

exposure to the Reclassification [Action] and the related litigation costs, and damage to

Facebook’s reputation and goodwill.” Id. ¶ 111.

                                              14
                               II.      LEGAL ANALYSIS

       When a corporation suffers harm, the board of directors is the institutional actor

legally empowered under Delaware law to determine what, if any, remedial action the

corporation should take, including pursuing litigation against the individuals involved. See

8 Del. C. § 141(a). “A cardinal precept of the General Corporation Law of the State of

Delaware is that directors, rather than shareholders, manage the business and affairs of the

corporation.” Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984).1 “Directors of Delaware

corporations derive their managerial decision making power, which encompasses decisions

whether to initiate, or refrain from entering, litigation, from 8 Del. C. § 141(a).” Zapata

Corp. v. Maldonado, 430 A.2d 779, 782 (Del. 1981) (footnote omitted). Section 141(a)

vests statutory authority in the board of directors to determine what action the corporation

will take with its litigation assets, just as with other corporate assets. See id.

       1
         In Brehm v. Eisner, 746 A.2d 244, 253–54 (Del. 2000), the Delaware Supreme
Court overruled seven precedents, including Aronson, to the extent that they reviewed a
Rule 23.1 decision by the Court of Chancery under an abuse of discretion standard or
otherwise suggested deferential appellate review. Id. at 253 n.13 (overruling in part on this
issue Scattered Corp. v. Chi. Stock Exch., 701 A.2d 70, 72–73 (Del. 1997); Grimes v.
Donald, 673 A.2d 1207, 1217 n.15 (Del. 1996); Heineman v. Datapoint Corp., 611 A.2d
950, 952 (Del. 1992); Levine v. Smith, 591 A.2d 194, 207 (Del. 1991); Grobow v. Perot,
539 A.2d 180, 186 (Del. 1988); Pogostin v. Rice, 480 A.2d 619, 624–25 (Del. 1984); and
Aronson, 473 A.2d at 814). The Brehm Court held that going forward, appellate review of
a Rule 23.1 determination would be de novo and plenary. Brehm, 746 A.2d at 254. The
seven partially overruled precedents otherwise remain good law. This decision does not
rely on any of them for the standard of appellate review. Having described Brehm’s
relationship to these cases, this decision omits their cumbersome subsequent history.

                                               15
       In a derivative suit, a stockholder seeks to displace the board’s authority over a

litigation asset and assert the corporation’s claim. Aronson, 473 A.2d at 811. Unless the

board of directors permits the stockholder to proceed, a stockholder only can pursue a cause

of action belonging to the corporation if (i) the stockholder demanded that the directors

pursue the corporate claim and they wrongfully refused to do so or (ii) demand is excused

because the directors are incapable of making an impartial decision regarding the litigation.

Ainscow v. Sanitary Co. of Am., 180 A. 614, 615 (Del. Ch. 1935) (Wolcott, C.) (citing

Sohland v. Baker, 141 A. 277 (Del. 1927)).

       The doctrines of demand refusal and demand excusal are substantive requirements

of Delaware law. As a matter of procedure, Rule 23.1 imposes a pleading requirement on

a plaintiff that seeks to assert a derivative claim so that the doctrines can be applied at the

pleading stage. Rule 23.1 did not create the demand requirement; it is merely the

“procedural embodiment of this substantive principle.” Rales v. Blasband, 634 A.2d 927,

932 (Del. 1993); accord Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 96–97 (1991)

(holding that the demand requirement underlying Rule 23.1 is substantive, and the Rule

23.1 pleading requirement is procedural).

       Rule 23.1 requires that when a stockholder seeks to assert a derivative claim, the

complaint must “allege with particularity the efforts, if any, made by the plaintiff to obtain

the action the plaintiff desires from the directors or comparable authority and the reasons

for the plaintiff’s failure to obtain the action or for not making the effort.” Ct. Ch. R.

23.1(a). For a pleading to satisfy Rule 23.1, the plaintiff “must comply with stringent

requirements of factual particularity that differ substantially from . . . permissive notice

                                              16
pleadings . . . .” Brehm, 746 A.2d at 254. Under the heightened pleading requirements of

Rule 23.1, “conclusionary [sic] allegations of fact or law not supported by the allegations

of specific fact may not be taken as true.” Grobow, 539 A.2d at 187.

       The requirement of factual particularity does not entitle a court to discredit or weigh

the persuasiveness of well-pled allegations. “The well-pleaded factual allegations of the

derivative complaint are accepted as true on such a motion.” Rales, 634 A.2d at 931.

“Plaintiffs are entitled to all reasonable factual inferences that logically flow from the

particularized facts alleged . . . .” Brehm, 746 A.2d at 255. Rule 23.1 requires that a plaintiff

allege specific facts, but “he need not plead evidence.” Aronson, 473 A.2d at 816; accord

Brehm, 746 A.2d at 254 (“[T]he pleader is not required to plead evidence . . . .”).

       The plaintiff in this case chose not to make a pre-suit demand. The operative

question is therefore whether “demand is excused because the directors are incapable of

making an impartial decision regarding whether to institute such litigation.” Stone v. Ritter,

911 A.2d 362, 367 (Del. 2006). Subject to exceptions not applicable here, the demand

futility analysis asks whether the board of directors as constituted when the lawsuit was

filed could exercise disinterested and independent judgment regarding a demand. See In re

infoUSA, Inc. S’holders Litig., 953 A.2d 963, 985 (Del. Ch. 2007). When determining

whether the particularized allegations of the complaint support a reasonable inference that

a director could not meet this standard, the court must consider the plaintiff’s allegations

“in their totality and not in isolation from each other.” Del. Cty. Emps. Ret. Fund v.

Sanchez, 124 A.3d 1017, 1019 (Del. 2015). The question is whether the constellation of

allegations, viewed holistically, creates a reasonable doubt about the director’s ability to

                                               17
consider a demand objectively. See In re Oracle Corp. Deriv. Litg., 2018 WL 1381331, at

*18 (Del. Ch. Mar. 19, 2018).

        To determine whether a board of directors could properly consider a demand, a court

counts heads. See In re EZCORP Inc. Consulting Agreement Deriv. Litig., 2016 WL
301245, at *34 (Del. Ch. Jan. 25, 2016). If the board lacks a majority of directors who

could exercise independent and disinterested judgment regarding a demand, then demand

is futile.2

A.      The Standards For Evaluating Whether Directors Can Consider A Demand

        The Delaware Supreme Court has established two tests for determining whether

directors can exercise independent and disinterested judgment regarding a demand. See

Wood v. Baum, 953 A.2d 136, 140 (Del. 2008). The Aronson decision announced the first

test. The Rales decision announced the second test. Both tests remain authoritative, but the

Aronson test has proved to be comparatively narrow and inflexible in its application, and

its formulation has not fared well in the face of subsequent judicial developments. The

        2
         Aronson, 473 A.2d at 812 (noting that if a board decision is “not approved by a
majority consisting of the disinterested directors, then the business judgment rule has no
application”); see Beam v. Stewart, 845 A.2d 1040, 1046 n.8 (Del. 2004) (noting that for
demand futility purposes, a disinterested and independent majority is required, such that a
board evenly divided between interested and disinterested directors could not exercise
business judgment on a demand); Beneville v. York, 769 A.2d 80, 85–87 (Del. Ch. 2000)
(holding that demand is futile if the board is split); Gentile v. Rossette, 2010 WL 2171613,
at *7 n.36 (Del. Ch. May 28, 2010) (“A board that is evenly divided between conflicted
and non-conflicted members is not considered independent and disinterested.”).

                                            18
Rales test, by contrast, has proved to be broad and flexible, and it encompasses the Aronson

test as a special case.

       1.      Aronson

       In 1984, after many decades during which Rule 23.1 did not play a major role in

stockholder derivative litigation, the Delaware Supreme Court issued its landmark decision

in Aronson. A stockholder plaintiff alleged that a board of directors could not evaluate a

demand to bring litigation to challenge an earlier board decision made by the very same

directors. See Aronson, 473 A.2d at 814. Relying on established precedent, the plaintiff

argued that the directors self-evidently could not consider a demand because they had

approved the challenged transaction and been named as defendants. See id. at 814, 817.

After acknowledging that earlier Delaware cases had taken that approach,3 the Delaware

Supreme Court rejected it, explaining, “Were that so, the demand requirements of our law

would be meaningless, leaving the clear mandate of Chancery Rule 23.1 devoid of its

purpose and substance.” Id. at 814.

       3
          See id. at 814 (citing McKee v. Rogers, 156 A. 191, 193 (Del. Ch. 1931) (Wolcott,
C.) (“It is manifest then that there can be no expectation that the corporation would sue [the
defendant, who controlled the board], and if it did, it can hardly be said that the prosecution
of the suit would be entrusted to proper hands.”); Miller v. Loft, Inc., 153 A. 861, 862 (Del.
Ch. 1931) (Wolcott, C.) (“[I]f by reason of hostile interest or guilty participation in the
wrongs complained of, the directors cannot be expected to institute suit, . . . no demand
upon them to institute suit is [required].”); Fleer v. Frank H. Fleer Corp., 125 A. 411, 414
(Del. Ch. 1924) (Wolcott, C.) (“Where the demand if made would be directed to the
particular individuals who themselves are the alleged wrongdoers and who therefore would
be invited to sue themselves, the rule is settled that a demand and refusal is not requisite.”)).
Other pre-Aronson precedents consistent with McKee, Fleer, and Miller could be cited.

                                               19
       The high court instead held that the question of demand futility was “inextricably

bound to issues of business judgment . . . .” Id. at 812. For the Aronson court, this

observation meant that the analysis of demand futility turned on whether the business

judgment rule protected the decision being challenged. Id. The Delaware Supreme Court

framed the resulting test as follows:

       Our view is that in determining demand futility the Court of Chancery . . .
       must decide whether, under the particularized facts alleged, a reasonable
       doubt is created that: (1) the directors are disinterested and independent and
       (2) the challenged transaction was otherwise the product of a valid exercise
       of business judgment. Hence, the Court of Chancery must make two
       inquiries, one into the independence and disinterestedness of the directors
       and the other into the substantive nature of the challenged transaction and the
       board’s approval thereof.

       As to the latter inquiry the court does not assume that the transaction is a
       wrong to the corporation requiring corrective steps by the board. Rather, the
       alleged wrong is substantively reviewed against the factual background
       alleged in the complaint. As to the former inquiry, directorial independence
       and disinterestedness, the court reviews the factual allegations to decide
       whether they raise a reasonable doubt, as a threshold matter, that the
       protections of the business judgment rule are available to the board.
       Certainly, if this is an “interested” director transaction, such that the business
       judgment rule is inapplicable to the board majority approving the transaction,
       then the inquiry ceases. In that event futility of demand has been established
       by any objective or subjective standard.

Id. at 814–15 (formatting added). “In sum,” the Delaware Supreme Court concluded, “the

entire review is factual in nature.” Id. at 815. The trial court “must be satisfied that a

plaintiff has alleged facts with particularity which, taken as true, support a reasonable doubt

that the challenged transaction was the product of a valid exercise of business judgment.

Only in that context is demand excused.” Id. at 815.

                                              20
       The Aronson decision thus called for two separate inquiries, each of which assessed

the standard of review that would govern the claim for breach of fiduciary duty challenging

the underlying decision. The first Aronson inquiry asked whether a disinterested and

independent majority of directors had made that decision, which is a prerequisite to the

application of the business judgment rule. Id. at 814. If the particularized allegations of the

complaint established that the board lacked a disinterested and independent majority, then

the protections of the business judgment rule would not be available to the directors when

defending their prior decision, and demand was futile. Id.

       The second Aronson inquiry asked whether the challenged decision “was otherwise

the product of a valid exercise of business judgment.” Id. The Aronson court envisioned

that if the business judgment rule did not apply for some reason other than the absence of

a majority of disinterested and independent directors (the subject of the first Aronson

inquiry), then demand also would be excused. In Aronson, that possibility was front and

center because the plaintiffs alleged that the challenged transaction constituted waste. See

id. at 817.4 The Delaware Supreme Court was engaged contemporaneously in

       4
         Historically, waste derived from the ultra vires doctrine and stood outside the
business judgment rule. See generally Harwell Wells, The Life (and Death?) of Corporate
Waste, 74 Wash. & Lee L. Rev. 1239, 1243–48 (2017). At the time of Aronson, a viable
waste claim thus would not be subject to the business judgment rule because, by definition,
the decision was so extreme as to be beyond the directors’ authority. See Alcott v. Hyman,
208 A.2d 501, 507 (Del. 1965); Gottlieb v. Heyden Chem. Corp., 91 A.2d 57, 58 (Del.
1952). Evidencing the different legal framework, non-unanimous stockholder ratification
could not validate an action that constituted waste. See Michelson v. Duncan, 407 A.2d
211, 219 (Del. 1979). Contemporary Delaware decisions have brought waste within the

                                              21
strengthening the duty of care,5 and the Aronson decision stated that “to invoke the rule’s

protection directors have a duty to inform themselves, prior to making a business decision,

of all material information reasonably available to them. Having become so informed, they

must then act with requisite care in the discharge of their duties.” 473 A.2d at 812. With

the benefit of hindsight, it seems possible that the Aronson court also anticipated that entire

fairness might apply based on a pled breach of the duty of care, as the Delaware Supreme

Court subsequently held.6

fiduciary framework of the business judgment rule by re-conceiving of waste as a means
of pleading that the directors acted in bad faith. See, e.g., White v. Panic, 783 A.2d 543,
554 n.36 (Del. 2001) (“To prevail on a waste claim or a bad faith claim, the plaintiff must
overcome the general presumption of good faith by showing that the board’s decision was
so egregious or irrational that it could not have been based on a valid assessment of the
corporation’s best interests.”); CanCan Dev., LLC v. Manno, 2015 WL 3400789, at *20
(Del. Ch. May 27, 2015) (explaining that waste is “best understood as one means of
establishing a breach of the duty of loyalty’s subsidiary element of good faith”); Se. Penn.
Transp. Auth. v. AbbVie Inc., 2015 WL 1753033, at *14 n.144 (Del. Ch. Apr. 15, 2015)
(“This Court has found that, doctrinally, waste is a subset of good faith under the umbrella
of the duty of loyalty.”), aff’d, 132 A.3d 1 (Del. 2016).
       5
          The duty of care was a subject of much discussion and debate at the time. See
Henry Ridgely Horsey, The Duty of Care Component of the Business Judgment Rule, 19
Del. J. Corp. L. 971, 996–97 (1994) (describing debates over duty of care that preceded
Aronson). As part of its discussion of the duty of care, the Aronson court addressed an issue
of first impression, stating that “under the business judgment rule director liability is
predicated upon concepts of gross negligence.” 473 A.2d at 812. Eight months later, the
Delaware Supreme Court issued Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985), its
landmark decision on the duty of care.
       6
        See Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 366–71 (Del. 1993). Justice
Moore, the author of Aronson, also served on the panel that decided Technicolor.

                                              22
       Addressing a situation in which the same directors who would consider a demand

had made the challenged decision, the Aronson court viewed the standard of review that

would apply to the challenged decision as outcome determinative for purposes of demand

futility. If the business judgment rule governed the challenged decision, then the directors

did not face a substantial risk of liability from the lawsuit, and the lawsuit could not disable

the directors from exercising business judgment regarding the demand. But if the entire

fairness test governed—either because the board lacked a disinterested and independent

majority when making the challenged decision or for some other reason—then the Aronson

court regarded that fact as sufficient to render demand excused.7

       In using the standard of review for the challenged transaction as a proxy for the risk

of director liability and hence the test for demand futility, Aronson was a creature of its

time. Subsequent jurisprudential developments severed the linkage between these

concepts. Under current law, the application of a standard of review that is more onerous

       7
         See id. at 815 (“Certainly, if this is an ‘interested’ director transaction, such that
the business judgment rule is inapplicable to the board majority approving the transaction,
then the inquiry ceases. In that event futility of demand has been established by any
objective or subjective standard.”); id. at 818 (“Unless facts are alleged with particularity
to overcome the presumptions of independence and a proper exercise of business judgment,
in which case the directors could not be expected to sue themselves, a bare claim of this
sort raises no legally cognizable issue under Delaware corporate law.”); id. (“In sum, we
conclude that the plaintiff has failed to allege facts with particularity indicating that the
Meyers directors were tainted by interest, lacked independence, or took action contrary to
Meyers’ best interests in order to create a reasonable doubt as to the applicability of the
business judgment rule. Only in the presence of such a reasonable doubt may a demand be
deemed futile.”).

                                              23
than the business judgment rule does not render demand futile. Similarly, the availability

of exculpation means that a standard of review that is more onerous than the business

judgment rule may not result in a substantial likelihood of liability.

       The most obvious place to look for any continuing link between the application of

a standard of review more onerous than the business judgment rule and a consequence of

rendering demand futile is in cases involving interested transactions with a controlling

stockholder. Authored in 1984, Aronson predated by more than a decade two watershed

decisions from the Delaware Supreme Court which held that the entire fairness test applies

inherently and from the outset (“ab initio”) to an interested transaction involving a

controlling stockholder. See Kahn v. Tremont Corp., 694 A.2d 422, 428–29 (Del. 1997);

Kahn v. Lynch Commc’n Sys. Inc., 638 A.2d 1110, 1115 (Del. 1994). The Aronson court

thus could not have taken into account the implications of automatic-entire-fairness review

on the demand futility analysis, even though the decisions at issue in Aronson involved

interested transactions with a 47% stockholder. See Aronson, 473 A.2d at 808. After

Tremont and Lynch, a natural reading of Aronson’s second prong would suggest that

demand becomes futile when entire fairness applies ab initio. Former Chief Justice Strine

once said as much while serving as a member of this court. See Parfi Hldg. AB v. Mirror

Image Internet, Inc., 794 A.2d 1211, 1231 n.47 (Del. Ch. 2001) (“The complaint pleads

particularized facts that suggest that the entire fairness standard of review—rather than the

business judgement [sic] rule—would apply to the Transactions and that the Transactions

might not have been fair. As a result, the complaint satisfies the second prong of

Aronson.”). Case law, however, developed in a different direction, with this court holding

                                             24
that demand is not rendered futile under the second prong of Aronson simply because entire

fairness applies ab initio to a transaction with a controlling stockholder.8

       The Aronson decision also pre-dated the Delaware Supreme Court’s open

recognition of enhanced scrutiny as a third and intermediate standard of review.9 Because

the sibling strains of enhanced scrutiny create additional scenarios where the business

judgment rule does not apply, a natural reading of Aronson’s second prong would suggest

       8
         See In re BGC P’rs, Inc., 2019 WL 4745121, at *7–8 (Del. Ch. Sept. 30, 2019);
Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera, 2015 WL 4192107, at *16 (Del.
Ch. July 13, 2015). Both decisions relied on the indisputable fact that Aronson did not
regard a transaction with a controlling stockholder as triggering entire fairness ab initio
and hence rendering demand futile. As noted, that omission was likely an artifact of the
timing of that subsequent doctrinal innovation. Both decisions also relied on Beam, in
which a stockholder plaintiff sought to establish that demand was futile under Aronson.
The corporation in Beam had a controlling stockholder, but as the Baiera decision
recognized, the claim in Beam did not challenge a self-interested transaction with the
controlling stockholder. It was therefore not a situation in which entire fairness would
apply ab initio. See Baiera, 2015 WL 4192107, at *16. The Delaware Supreme Court’s
decision in Beam thus does not provide insight into how the second prong of Aronson
would operate after Tremont and Lynch. As discussed below, the question is no longer
meaningful because of the manner in which Section 102(b)(7) now operates at the pleading
stage, even when entire fairness applies ab initio.
       9
        The development of enhanced scrutiny can be traced to Zapata, a decision issued
in 1981, three years before Aronson. See, e.g., Obeid v. Hogan, 2016 WL 3356851, at *13
(Del. Ch. June 10, 2016). By 1984, it was not yet clear that enhanced scrutiny would
emerge as a new standard of review. And rather than embracing and building on Zapata’s
innovative approach, the Aronson court appears to have sought to calm the tempestuous
response to Zapata by reassuring the business and legal community that the business
judgment rule was alive and well. See EZCORP, 2016 WL 301245, at *26–27 (describing
scope of practitioner and academic response to Zapata and the aspects of Aronson that
appear intended to respond to criticism of the earlier decision).

                                             25
that demand becomes futile when enhanced scrutiny applies. Here too, former Chief Justice

Strine once said as much while serving as a member of this court, writing that if an

enhanced scrutiny claim were assumed to be derivative, that characterization would not

have any effect on a stockholder plaintiff’s ability to sue because “[s]o long as the plaintiff

states a claim implicating the heightened scrutiny required by Unocal, demand has been

excused under the [Aronson] demand excusal test.”10 Once again, subsequent case law

developed in a different direction, and authority now holds that demand is not futile simply

because enhanced scrutiny applies. See Ryan v. Armstrong, 2017 WL 2062902, at *13–14

(Del. Ch. May 15, 2017).

       10
          In re Gaylord Container Corp. S’holders Litig., 747 A.2d 71, 81 (Del. Ch. 1999).
As support, then-Vice Chancellor Strine cited the following precedents: Moran v.
Household Int’l, Inc., 490 A.2d 1059, 1071 (Del. Ch. 1985) (“In my view, the plaintiffs’
complaints, which set forth particularized facts alleging that the Rights Plan deters all
hostile takeover attempts through its limitation on alienability of shares and the exercise of
proxy rights, sufficiently pleads a primary purpose to retain control, and thus casts a
reasonable doubt as to the disinterestedness and independence of the board at this stage of
the proceedings.”), aff’d, 500 A.2d 1346 (Del. 1985); Carmody v. Toll Bros., Inc., 723 A.2d
1180, 1189 (Del. Ch. 1998) (“Even if the claims were regarded as derivative, the
complaint’s entrenchment allegations are sufficient to excuse compliance with the demand
requirement.”); Wells Fargo & Co. v. First Interstate Bancorp, 1996 WL 32169, at *8 (Del.
Ch. Jan. 18, 1996) (Allen, C.) (“With respect to the entrenchment claim, it seems clear that
factual allegations which, if true, are sufficient to shift the burden to defendants to meet
the ‘enhanced business judgment’ test of Unocal are similarly sufficient to raise a
reasonable doubt concerning the board’s ability to make a binding business judgment,
whether one focuses on a judgment to resist the Wells Fargo offer or on the hypothetical
judgment that this board would make if asked to institute this law suit.”); In re Chrysler
Corp. S’holders Litig., 1992 WL 181024, at *4–5 (Del. Ch. July 27, 1992) (holding that
directors’ decision to lower rights plan trigger created sufficient inference of entrenchment
to excuse demand).

                                              26
       Perhaps most significantly, Aronson predated by two years the enactment of Section

102(b)(7) of the Delaware General Corporation Law, which authorizes the certificate of

incorporation of a Delaware corporation to contain a provision

       eliminating or limiting the personal liability of a director to the corporation
       or its stockholders for monetary damages for breach of fiduciary duty as a
       director, provided that such provision shall not eliminate or limit the liability
       of a director: (i) For any breach of the director’s duty of loyalty to the
       corporation or its stockholders; (ii) for acts or omissions not in good faith or
       which involve intentional misconduct or a knowing violation of law;
       (iii) under § 174 of this title; or (iv) for any transaction from which the
       director derived an improper personal benefit.

8 Del. C. § 102(b)(7). Exculpatory provisions shield directors from personal liability for

monetary damages, except as to the four identified categories. “The totality of these

limitations or exceptions . . . is to . . . eliminate . . . director liability only for ‘duty of care’

violations. With respect to other culpable directorial actions, the conventional liability of

directors for wrongful conduct remains intact.” 1 David A. Drexler et al., Delaware

Corporation Law and Practice, § 6.02[7], at 6-18 (2019).

       The presence of an exculpatory provision has significant implications for the risk of

liability faced by outside directors, even in a lawsuit challenging a self-dealing transaction

involving a controlling stockholder for which entire fairness is the operative standard of

review. When a corporation has an exculpatory provision and a self-dealing transaction has

been determined to be unfair, “only the self-dealing director [is] subject to damages

liability for the gap between a fair price and the deal price without an inquiry into his

subjective state of mind.” Venhill Ltd. P’ship v. Hillman, 2008 WL 2270488, at *22 (Del.

Ch. June 3, 2008). For other directors,

                                                 27
       even the ones who might be deemed non-independent by status, the presence
       of the exculpatory charter provision . . . require[s] an examination of their
       state of mind, in order to determine whether they breached their duty of
       loyalty by approving the transaction in bad faith . . . , rather than in a good
       faith effort to benefit the corporation.

Id. at *23. “In other words, their status [as non-independent directors] is only a fact relevant

to the ultimate determination whether they complied with their fiduciary duties, it is not a

status crime making them a guarantor of the fairness of the transaction.” Id. Instead, “[t]he

liability of the directors must be determined on an individual basis because the nature of

their breach of duty (if any), and whether they are exculpated from liability for that breach,

can vary for each director.” In Emerging Commc’ns, Inc. S’holders Litig., 2004 WL

1305745, at *38 (Del. Ch. May 3, 2004).

       After the turning of the millennium, this court began to confront arguments that

Section 102(b)(7) affected the analysis of the second prong of Aronson.11 A line of

       11
          The first case to address this argument appears to have been this court’s second
pleading-stage decision in the Disney litigation, rendered after the Delaware Supreme
Court affirmed the original dismissal but granted the plaintiffs leave to re-plead. See In re
Walt Disney Co. Deriv. Litig. (Disney III), 825 A.2d 275 (Del. Ch. 2003). The Disney III
opinion described “[t]he primary issue before the Court [as] whether plaintiffs’ new
complaint survives the Rule 23.1 motion to dismiss under the second prong of Aronson v.
Lewis.” Id. at 285–86. The court observed that the defendants had argued that the complaint
alleged, at most, a breach of the duty of care, and that even if it stated a claim, “Disney’s
charter provision, based on 8 Del. C. § 102(b)(7), would apply and the individual directors
would be protected from personal damages liability for any breach of their duty of care.”
Id. at 286. The court held that the complaint stated a claim for bad faith, but framed its
holding as if Section 102(b)(7) operated to qualify the second prong of Aronson:

       A fair reading of the new complaint, in my opinion, gives rise to a reason to
       doubt whether the board’s actions were taken honestly and in good faith, as

                                              28
decisions asserted that when a corporation had a Section 102(b)(7) provision, the second

prong of Aronson would result in demand being futile only if the underlying transaction

both was not protected by the business judgment rule and the plaintiff had pled

particularized facts supporting a non-exculpated claim.12 When these decisions grounded

their analysis in Aronson, they relied on the Delaware Supreme Court’s statement that

       the mere threat of personal liability for approving a questioned transaction,
       standing alone, is insufficient to challenge either the independence or
       disinterestedness of directors, although in rare cases a transaction may be so
       egregious on its face that board approval cannot meet the test of business
       judgment, and a substantial likelihood of director liability therefore exists.

Aronson, 473 A.2d 815. A natural reading of this language does not suggest that it required

a substantial likelihood of liability in addition to a standard of review more onerous than

       required under the second prong of Aronson. Since acts or omissions not
       undertaken honestly and in good faith, or which involve intentional
       misconduct, do not fall within the protective ambit of § 102(b)(7), I cannot
       dismiss the complaint based on the exculpatory Disney charter provision.

Id. Subsequent cases have identified Disney III as the earliest case to introduce Section
102(b)(7) to the second prong of Aronson. See, e.g., Lenois v. Lawal, 2017 WL 5289611,
at *14 (Del. Ch. Nov. 7, 2017); In re Goldman Sachs Gp., Inc. S’holder Litig., 2011 WL
4826104, at *12 (Del. Ch. Oct. 12, 2011).
       12
         See Goldman Sachs, 2011 WL 4826104, at *12 (applying Section 102(b)(7) as an
overlay to the second prong of Aronson; holding that as a result, the plaintiffs had to plead
facts “amounting to bad faith” to satisfy the second prong); Guttman v. Huang, 823 A.2d
492, 501–02, 507 (Del. Ch. 2003) (same); In re Lear Corp. S’holder Litig., 967 A.2d 640,
652 (Del. Ch. 2008) (holding that for purposes of the second prong of Aronson, the
presence of an exculpatory provision “requires the plaintiffs to plead particularized facts
supporting an inference that the directors committed a breach of the fiduciary duty of
loyalty”).

                                             29
the business judgment rule. The passage rather equated a substantial likelihood of liability

with the application of a standard more onerous than the business judgment rule. Hence,

the quoted passage stated that there may be settings in which the business judgment rule

does not apply “and a substantial likelihood of director liability therefore exists.” Id.

(emphasis added). The decisions that incorporated Section 102(b)(7) into the second prong

of Aronson transmuted this language into a requirement that the business judgment rule not

apply and a substantial likelihood of director liability also exist. As the emerging approach

took hold, other decisions hewed to a more natural reading of Aronson’s second prong that

did not require a substantial likelihood of liability in addition to a standard more onerous

than the business judgment rule.13

       13
          See, e.g., McPadden v. Sidhu, 964 A.2d 1262, 1272–73 (Del. Ch. 2008) (holding
that demand was futile under second prong of Aronson because the directors were grossly
negligent, even though the directors were entitled to exculpation and dismissed from the
case on that basis); Khanna v. McMinn, 2006 WL 1388744, at *25 n.201 (Del. Ch. May 9,
2006) (explaining the “tension” between a strict reading of Aronson’s second prong, which
would render demand futile if the business judgment rule did not apply, and the effect of
an exculpatory provision in limiting whether a director faced a substantial threat of liability;
following then-current law, under which a court could not rely on an exculpatory provision
at the pleading stage unless it was clear that the claim resulted exclusively from a breach
of the duty of care); In re J.P. Morgan Chase & Co. S’holder Litig., 906 A.2d 808, 824
(Del. Ch. 2005) (stating that plaintiffs could establish demand excusal under the second
prong of Aronson by pleading “particularized facts sufficient to raise (1) a reason to doubt
that the action was taken honestly and in good faith or (2) a reason to doubt that the board
was adequately informed in making the decision” (internal quotation marks omitted)); see
also Emerald P’rs v. Berlin, 1993 WL 545409, at *7–8 (Del. Ch. Dec. 23, 1993) (rejecting
argument that Section 102(b)(7) should overlay the Aronson test).

                                              30
       During the years when Section 102(b)(7) was emerging as a consideration under the

second prong of Aronson, there was uncertainty about the extent to which defendants could

invoke Section 102(b)(7) at the pleading stage to obtain dismissal when entire fairness

provided the standard of review. Delaware Supreme Court precedent at the time indicated

that a court’s ability to assess the availability of exculpation at the pleading stage depended

on the standard of review, and that a court could not dismiss a defendant based on

exculpation at the pleading stage if entire fairness applied.14 Under this framework,

exculpation operated as an affirmative defense, and director defendants could “avoid

       14
          Compare Emerald P’rs v. Berlin, 726 A.2d 1215, 1223 (Del. 1999) (holding that
in a challenge to a transaction with majority stockholder to which entire fairness applied,
the court could not apply Section 102(b)(7) on motion for summary judgment because
transaction implicated loyalty issues, and factual conflicts required a trial to determine
nature of the duty breached), with Malpiede v. Townson, 780 A.2d 1075, 1094–96 (Del.
2001) (holding that in a challenge to third-party, arm’s-length merger that was approved
by fully informed stockholder vote, court could apply Section 102(b)(7) at pleading stage
unless plaintiff pled facts sufficient to show that a majority of the board was not
disinterested or independent), with Emerald P’rs v. Berlin, 787 A.2d 85, 93–94 (Del. 2001)
(holding that in challenge to transaction with majority stockholder to which entire fairness
applied, court could not apply Section 102(b)(7) without first analyzing transaction under
entire fairness standard to determine nature of the fiduciary breach). See generally Drexler,
supra, § 6.02[7], at 6-21. This approach recognized that by shifting the burden of proof,
the entire fairness test operated as the functional equivalent of a rebuttable presumption of
unfairness. See D.R.E. 301(a) (“In a civil case, unless a statute or these Rules provide
otherwise, the party against whom a presumption is directed has the burden of proving that
the nonexistence of the presumed fact is more probable than the existence of the presumed
fact.”). Put differently, by pleading facts sufficient to show at the pleading stage that the
entire fairness test applied, the plaintiff established a rebuttable presumption of breach and
threw the burden on to the defendant to establish either that there was no breach because
the transaction was entirely fair or that any breach resulted exclusively from a breach of
the duty of care. With inferences drawn in favor of the plaintiff, the defendants could not
carry those burdens at the pleading stage.

                                              31
personal liability for paying monetary damages only if they ha[d] established that their

failure to withstand an entire fairness analysis is exclusively attributable to a violation of

the duty of care.” Emerald P’rs, 787 A.2d at 98; accord id. at 91, 93. For purposes of the

second prong of Aronson, that meant that if the pleadings indicated that entire fairness

provided the standard of review, then there was reason to doubt that the directors would be

entitled to exculpation. Moreover, the Delaware Supreme Court had held that when entire

fairness applied, the nature of a director’s breach could not be determined until after trial,

and hence, the directors would have their actions scrutinized and potentially called into

question. Emerald P’rs, 787 A.2d at 94. The prospect of public scrutiny, potential

reputational harm, and possible liability combined to mean that when entire fairness

applied, there was reason to doubt that a director could exercise disinterested and

independent judgment regarding a demand.

       In 2015, the Delaware Supreme Court clarified how Section 102(b)(7) operates at

the pleading stage. Rejecting any distinction based on the standard of review, the high court

explained that when a corporation’s charter contains an exculpatory provision,

       [a] plaintiff seeking only monetary damages must plead non-exculpated
       claims against a director who is protected by an exculpatory charter provision
       to survive a motion to dismiss, regardless of the underlying standard of
       review for the board’s conduct—be it Revlon, Unocal, the entire fairness
       standard, or the business judgment rule.

In re Cornerstone Therapeutics Inc. S’holder Litig., 115 A.3d 1173, 1175–76 (Del. 2015)

(footnotes omitted). “So applied, the existence of an exculpatory provision operates more

in the nature of an immunity, comparable to the extent to which sovereign immunity

typically protects government employees from suit, rather than as an affirmative defense.”

                                             32
In re EZCORP Inc. Consulting Agreement Deriv. Litig., 130 A.3d 934, 940 (Del. 2016).

       The Cornerstone decision sapped any continuing vitality from Aronson’s use of the

standard of review for the challenged decision as a proxy for whether directors face a

substantial likelihood of liability sufficient to render demand futile. After Cornerstone, no

matter what standard of review applies, a plaintiff can only state a claim against an

individual director under the more lenient pleading standard used for Rule 12(b)(6) by

“pleading facts supporting a rational inference that the director harbored self-interest

adverse to the stockholders’ interests, acted to advance the self-interest of an interested

party from whom they could not be presumed to act independently, or acted in bad faith.”

115 A.3d at 1179–80. Reframed using the heightened pleading standard required for Rule

23.1, a plaintiff seeking to show that a director faces a substantial likelihood of liability for

having approved a transaction, no matter what standard of review applies, must plead

particularized facts providing a reason to believe that the individual director was self-

interested, beholden to an interested party, or acted in bad faith.

       Since Cornerstone, Delaware decisions have consistently interpreted the second

prong of Aronson as requiring both that a standard more onerous than the business

judgment applies and that a majority of the directors face a substantial likelihood of

liability on a non-exculpated claim.15 The application of a standard of review more onerous

       15
          See Ellis v. Gonzalez, 2018 WL 3360816, at *6 (Del. Ch. July 10, 2018) (post-
Cornerstone decision explaining that Section 102(b)(7) clause will affect analysis under
“either Aronson or Rales” when determining whether the complaint adequately alleges that

                                               33
than the business judgment rule no longer implies the existence of a substantial likelihood

of liability, as Aronson assumed. After Cornerstone, the first prong of Aronson remains

viable, but only because the requirements for satisfying the first prong of Aronson also

create a pleading-stage inference that exculpation will be unavailable to directors

comprising a majority of the Board.16 The second prong of Aronson remains viable only in

the unlikely event that a corporation lacks a Section 102(b)(7) provision, or to the extent

that the particularized factual allegations portray a transaction that is so extreme as to

a director “faces a substantial likelihood of liability”); Steinberg v. Bearden, 2018 WL
2434558, at *7 n.54 (Del. Ch. May 30, 2018) (post-Cornerstone decision holding that
because corporation had an exculpatory charter provision, it was “inconsequential which
test applies [i.e., Rales or Aronson], because under both Rales and Aronson, the relevant
inquiry is whether Steinberg has pled sufficiently a non-exculpated claim for bad faith
against a majority of the Board”); Lenois, 2017 WL 5289611, at *14 (post-Cornerstone
decision holding that “where an exculpatory charter provision exists, demand is excused
as futile under the second prong of Aronson with a showing that a majority of the board
faces a substantial likelihood of liability for non-exculpated claims”); see also Stritzinger
v. Barba, 2018 WL 4189535, at *5 (Del. Ch. Aug. 31, 2018) (post-Cornerstone decision
observing that “[t]here appears to be some confusion in our law whether the ‘substantial
likelihood of liability’ theory used to challenge the impartiality of a director for demand
futility purposes fits within the analysis contemplated by the first or second prong of
Aronson,” but applying test that required a showing of disloyalty or bad faith, i.e., a test
that considered whether directors faced a substantial risk of liability and whether
exculpation would be available).
       16
          Isolated decisions have made this linkage more visible by considering whether
directors faced a substantial risk of liability from a claim when evaluating whether they
were disinterested and independent for purposes of the first prong of Aronson. See
Friedman v. Khosrowshahi, 2014 WL 3519188, at *10–11 (Del. Ch. July 16, 2014), aff’d,
2015 WL 1001009 (Del. Mar. 6, 2015) (ORDER); Higher Educ. Mgmt. Gp., Inc. v.
Mathews, 2014 WL 5573325, at *6 (Del. Ch. Nov. 3, 2014); MCG Capital Corp. v.
Maginn, 2010 WL 1782271, at *18 (Del. Ch. May 5, 2010); see also DiRienzo v.
Lichtenstein, 2013 WL 5503034, at *23 (Del. Ch. Sept. 30, 2013).

                                             34
suggest bad faith. See infoUSA, 953 A.2d at 972 (explaining that to render demand futile

under the second prong of Aronson, a plaintiff “faces a task closely akin to proving that the

underlying transaction could not have been a good faith exercise of business judgment”).

That option remains viable under Section 102(b)(7) because pleading bad faith is one

means of pleading that exculpation is not available. For both prongs, exculpation dominates

the analysis. The standard of review is secondary.

       As this analysis shows, Delaware’s evolving jurisprudence, and particularly the

pleading-stage application of Section 102(b)(7) under Cornerstone, have dismantled the

logic of Aronson. Viewed on its own terms, Aronson is no longer a functional test.

Delaware decisions have managed to continue applying it only by emphasizing the

overarching question of a substantial likelihood of liability, incorporating the implications

of exculpation, and de-emphasizing the role of the standard of review. The foundational

premise of the decision, which relied on the standard of review for the challenged decision

as a proxy for whether directors face a substantial likelihood of liability, no longer endures.

Fortunately, a viable alternative exists.

       2.     Rales

       The narrow factual setting that produced the Aronson decision—in which the same

directors who made the challenged decision also would consider the demand—and the

close tailoring of the Aronson test to that factual setting meant that the two prongs of

Aronson did not translate easily to other scenarios. In Rales, the Delaware Supreme Court

confronted a board whose members had not participated in the challenged decision, and

therefore “the test enunciated in Aronson . . . [was] not implicated.” 634 A.2d at 930. In

                                              35
response, the high court framed a second, more straightforward, and more comprehensive

demand futility standard that asks “whether or not the particularized factual allegations of

a derivative stockholder complaint create a reasonable doubt that, as of the time the

complaint is filed, the board of directors could have properly exercised its independent and

disinterested business judgment in responding to a demand.” Id. at 934.

       The significant advance made by Rales was to refocus the inquiry on the decision

regarding the litigation demand, rather than the decision being challenged. In Rales, this

step was necessary because the demand board had not made the decision being challenged.

See id. at 933. The Rales decision thus asked directly “whether the board that would be

addressing the demand can impartially consider its merits without being influenced by

improper considerations.” Id. at 934. Although necessity birthed this shift, the solution has

the virtue of posing the pertinent question directly, rather than backing into an answer

indirectly.

       Under Rales, a director is disqualified from exercising judgment regarding a

litigation demand if the director was interested in the alleged wrongdoing, such as when

the director received a personal benefit from the wrongdoing that was not equally shared

from the stockholders. Id. at 936. A director also is disqualified from exercising judgment

regarding a litigation demand if another person was interested in the alleged wrongdoing,

and the director lacks independence from that person. Id. Although these aspects of the

Rales inquiry look to the relationship between the alleged wrongdoing and the directors

considering the litigation demand, they do so for purposes of analyzing the directors’

                                             36
ability to evaluate the litigation demand, not to determine the standard of review that would

apply to the alleged wrongdoing.

       The Rales decision further explained that

       [d]irectorial interest also exists where a corporate decision will have a
       materially detrimental impact on a director, but not on the corporation and
       the stockholders. In such circumstances, a director cannot be expected to
       exercise his or her independent business judgment without being influenced
       by the adverse personal consequences resulting from the decision.

Id. The Rales court held that a director is compromised for purposes of considering a

demand if the director faces a risk from litigation that goes beyond a “mere threat” and

reaches the level of a “substantial likelihood” of liability. Id. (internal quotation marks

omitted). The Rales court rejected the argument that a plaintiff must demonstrate “a

reasonable probability of success” on the claim, describing that requirement as “unduly

onerous.” Id. at 934–35. Although framed as a “substantial likelihood” of liability, the

standard thus only requires that plaintiffs “make a threshold showing, through the

allegation of particularized facts, that their claims have some merit.” Id. at 934.

       In a case in which one or more of the directors who are considering the litigation

demand participated in the alleged wrongdoing that the derivative action would challenge,

a court must conduct the same inquiry called for by contemporary interpretations of

Aronson to determine whether those directors face a substantial likelihood of liability. As

in Aronson, if the underlying claim is for breach of fiduciary duty, then the court must

determine what standard of review would apply to that claim and take that standard into

account when assessing whether a substantial likelihood of liability exists. The Rales

approach also seamlessly accommodates derivative claims in which the plaintiff seeks to

                                             37
assert a corporate cause of action does not involve a claim for breach of fiduciary duty

against the directors.17 The Aronson framework has no tools to address any legal theory

other a claim for breach of fiduciary duty against the same directors who would consider

the demand.

       Delaware decisions have consistently recognized that for purposes of analyzing

whether a director faces a substantial likelihood of liability under Rales, a court must take

into account the availability of exculpation under Section 102(b)(7).18 Expressing

       17
         See 3 Stephen A. Radin, The Business Judgment Rule 3612 (6th ed. 2009) (“‘Any
claim belonging to the corporation may, in appropriate circumstances, be asserted in a
derivative action,’ including claims that do—and claims that do not—involve corporate
mismanagement or breach of fiduciary duty.”) (quoting Midland Food Servs., LLC v.
Castle Hill Hldgs. V, LLC, 792 A.2d 920, 931 (Del. Ch. 1999)); see, e.g., First Hartford
Corp. Pension Plan & Trust v. United States, 194 F.3d 1279, 1293 (Fed. Cir. 1999)
(permitting “contract actions brought derivatively by shareholders on behalf of the
contracting corporation”); Slattery v. United States, 35 Fed. Cl. 180, 183 (1996) (same);
Suess v. United States, 33 Fed. Cl. 89, 93 (Fed. Cl. 1995) (denying motion to dismiss a
derivative claim for breach of contract against the United States); see also Ross v.
Bernhard, 396 U.S. 531, 542-43 (1970) (holding right to jury trial existed for breach of
contract claim asserted by stockholder derivatively because “[t]he corporation, had it sued
on its own behalf, would have been entitled to a jury’s determination”).
       18
          See, e.g., Oracle, 2018 WL 1381331, at *14–15, *20; Baiera, 119 A.3d at 62–63;
Zucker, 2012 WL 2366448, at *10–11; Goldman Sachs, 2011 WL 4826104, at *12, *18;
Guttman, 823 A.2d at 501–02; In re Baxter Int’l, Inc. S’holders Litig., 654 A.2d 1268, 1270
(Del. Ch. 1995); see also Wood, 953 A.2d 136, 142 (Del. 2008) (evaluating demand futility
under Rales in context of limited liability company; holding that if “directors are
contractually or otherwise exculpated from liability for certain conduct, then a serious
threat of liability may only be found to exist if the plaintiff pleads a non-exculpated claim
against the directors based on particularized facts” (emphasis in original) (internal
quotation marks omitted)); DiRienzo, 2013 WL 5503034, at *28 (applying contractual
exculpation provisions in partnership agreement when evaluating whether general partner
faced a substantial likelihood of liability sufficient to render demand futile). Many of these

                                             38
sentiments equally applicable to the second prong of Aronson, this court has explained that

after Cornerstone, the fact that entire fairness may govern the underlying claim does not

give rise to substantial likelihood of liability for purposes of considering a demand unless

the complaint pleads facts sufficient to raise a reasonable doubt that the director would not

be entitled to exculpation.19

       When announcing the Rales test, the Delaware Supreme Court envisioned that

Aronson would remain the predominant approach and that the Rales test would be used

       in three principal scenarios: (1) where a business decision was made by the
       board of a company, but a majority of the directors making the decision have
       been replaced; (2) where the subject of the derivative suit is not a business
       decision of the board; and (3) where . . . the decision being challenged was
       made by the board of a different corporation.

decisions address Caremark claims. Ironically, in that setting, exculpatory provisions are
superfluous because the Delaware Supreme Court has held that pleading a Caremark claim
requires the complaint to support a reasonable inference bad faith. See Stone, 911 A.2d at
370 (holding that “a showing of bad faith conduct . . . is essential to establish director
oversight liability” and therefore “the fiduciary duty violated by that conduct is the duty of
loyalty”). Consequently, even in a corporation without an exculpatory provision, a
complaint asserting a Caremark claim must plead bad faith to survive pleading-stage
analysis. Likewise, a validly pled Caremark claim is unaffected by the presence of a
Section 102(b)(7) because the a viable Caremark claim supports an inference of bad faith
that defeats exculpation. Section 102(b)(7) therefore logically cannot affect the analysis of
a Caremark claim.
       19
         Sandys v. Pincus (Sandys I), 2016 WL 769999, at *13–14 (Del. Ch. Feb. 29,
2016), rev’d on other grounds, 152 A.3d 124 (Del. 2016); see Oracle, 2018 WL 1381331,
at *10–15, *22 & n.287 (analyzing whether directors faced substantial risk of liability for
purposes of Rule 23.1 based on whether complaint’s allegations supported a non-
exculpated claim; noting that entire fairness standard applied to purchase of company
belonging to controlling stockholder).

                                             39
Rales, 634 A.2d at 934. (footnotes omitted). In practice, however, the Aronson scenario is

the exception. Changes in board composition are common, and the majority-of-directors

principle that ostensibly creates a binary dividing line between Aronson and Rales leaves

courts to wonder what standard should apply to the new directors who have joined the

board. Those directors could have relationships that would compromise their

independence, which a strict application of Aronson would not take into account. As a

practical matter, therefore, the broader Rales test must be used to evaluate any new

directors who join the board, leading to a hybrid of Aronson and Rales.

       For these and other reasons, leading commentators have argued that “the current

state of this area of the law is conceptually inverted; i.e., that it would be both simpler and

more direct to regard the original Aronson analysis as a subpart of the more generally

applicable and consistently relevant test set forth in Rales.” Donald J. Wolfe, Jr. & Michael

A. Pittenger, Corporate and Commercial Practice in the Delaware Court of Chancery

§ 11.03[c][4][ii], at 11-113 (2019). Consistent with this view, decisions from the Court of

Chancery have explained on multiple occasions that Rales encompasses Aronson and

should be used as the general test.20 As this decision has shown, Aronson is broken in its

       20
           See Hughes v. Hu, 2020 WL 1987029, at *12 (Del. Ch. Apr. 27, 2020)
(“Conceptually, . . . the Rales test supersedes and encompasses the Aronson test, making
the Aronson test a special application of Rales.”); In re Wal-Mart Stores, Inc. Del. Deriv.
Litig., 2016 WL 2908344, at *11 (Del. Ch. May 13, 2016) (“[T]he Rales test encompasses
all relevant aspects of the Aronson test.”); Baiera, 119 A.3d at 67 n.131 (“[O]ur
jurisprudence would benefit . . . from the adoption of a singular test to address the question
of demand futility.”); David B. Shaev Profit Sharing Account v. Armstrong, 2006 WL

                                              40
own right because subsequent jurisprudential developments have rendered non-viable the

core premise on which Aronson depends—the notion that an elevated standard of review

standing alone results in a substantial likelihood of liability sufficient to excuse demand.

The Delaware Supreme Court already has overruled Aronson in part. See Brehm, 746 A.2d

at 253–54. Perhaps the time has come to move on from Aronson entirely.

       3.     The Test In This Case

       The composition of the Board in this case exemplifies the difficulties that the

Aronson test struggles to overcome. The Board has nine members, six of whom served on

the Board when it approved the Reclassification. Under a strict reading of Rales, because

the Board does not have a new majority of directors, Aronson provides the governing test.

But one of those six directors abstained from the vote on the Reclassification, meaning that

the Aronson analysis only has traction for five of the nine. Aronson does not provide

guidance about what to do with either the director who abstained or the two directors who

391931, at *4 (Del. Ch. Feb. 13, 2006) (“[T]he Rales test, in reality, folds the two-pronged
Aronson test into one broader examination”), aff’d, 911 A.2d 802 (Del. 2006) (ORDER);
Huang, 823 A.2d at 501 (“At first blush, the Rales test looks somewhat different from
Aronson, in that [it] involves a singular inquiry . . . . Upon closer examination, however,
that singular inquiry makes germane all of the concerns relevant to both the first and second
prongs of Aronson.”); see also Buckley Family Trust v. McCleary, 2020 WL 1522549, at
*9 (Del. Ch. Mar. 31, 2020) (“This court has commented on many occasions that the
Aronson and Rales tests look different but they essentially cover the same ground.”); Park
Emps.’ & Ret. Bd. Emps.’ Annuity & Benefit Fund of Chicago v. Smith, 2017 WL 1382597,
at *5 (Del. Ch. Apr. 18, 2017) (“The analyses in both Rales and Aronson drive at the same
point; they seek to assess whether the individual directors of the board are capable of
exercising their business judgment on behalf of the corporation.”).

                                             41
joined the Board later. The director who abstained from voting on the Reclassification

suffers from other conflicts that renders her incapable of considering a demand, yet a strict

reading of Aronson only focuses on the challenged decision and therefore would not

account for those conflicts. Similarly, the plaintiff alleges that one of the directors who

subsequently joined the Board has conflicts that render him incapable of considering a

demand, but a strict reading of Aronson would not account for that either. Precedent thus

calls for applying Aronson, but its analytical framework is not up to the task. The Rales

test, by contrast, can accommodate all of these considerations.

       This decision therefore applies Rales as the general demand futility test. In doing

so, this decision draws upon Aronson-like principles when evaluating whether particular

directors face a substantial likelihood of liability as a result of having participated in the

decision to approve the Reclassification. Rather than trifurcating the analysis into a first

prong of Aronson, a second prong of Aronson, and Rales, this decision proceeds on a

director-by-director basis, asking for each director (i) whether the director received a

material personal benefit from the alleged misconduct that is the subject of the litigation

demand, (ii) whether the director would face a substantial likelihood of liability on any of

the claims that are the subject of the litigation demand, and (iii) whether the director lacks

independence from someone who received a material personal benefit from the alleged

misconduct that is the subject of the litigation demand or who would face a substantial

likelihood of liability on any of the claims that are the subject of the litigation demand.

       In determining whether the director would face a substantial likelihood of, this

decision considers both the operative standard of review, as called for by the original

                                             42
Aronson decision, and the potential availability of exculpation, as subsequent re-

interpretations of Aronson recognize is necessary. Under Cornerstone, whether a director

faces a substantial likelihood of liability turns primarily on whether the allegations of the

complaint are sufficient to overcome the pleading-stage operation of Section 102(b)(7). As

part of that analysis, this decision considers whether the complaint pleads particularized

facts that support a reasonable inference that the director’s decision could be attributed to

bad faith. This inquiry both recognizes the only situation in which the second prong of

Aronson has continuing vitality and identifies a scenario in which the pled facts render

exculpation unavailable.21

B.        The Transaction For Purposes Of Analyzing Demand Futility

          Before turning to the director-by-director analysis, it is necessary to examine “the

nature of the decision confronting” the Board. Rales, 634 A.2d at 935. Demand futility is

assessed based on the particular corporate claim that a stockholder plaintiff wishes to

assert. Baiera, 119 A.3d at 58 n.71. Framing the corporate claim properly is an important

step in the demand futility analysis, because a director might be able to exercise

disinterested and independent judgment for purposes one claim, but not for purposes of

another.

          21
               See Sandys I, 2016 WL 769999, at *13–14; Goldman Sachs, 2011 WL 4826104,
at *12.

                                               43
       In this case, the plaintiff seeks to recover damages that Facebook suffered as a result

of the individual defendants having breached their fiduciary duties by approving the

Reclassification. In the Reclassification Action, other stockholder plaintiffs challenged the

Reclassification itself, and they sought permanent injunctive relief to block Facebook from

completing it. Just before trial, Zuckerberg asked the Board to withdraw the

Reclassification, and the Board complied. By doing so, the Board gave the plaintiffs in the

Reclassification Action all of the relief they sought, rendering that action moot.

       When a challenged transaction goes away, “the absence of transactional damages

arising out of the abandoned deal does not necessarily render the underlying claims moot.”

OTK Assocs., LLC v. Friedman, 85 A.3d 696, 716 (Del. Ch. 2014) (emphasis in original).

If a plaintiff proves that defendant directors breached their fiduciary duties by pursuing the

abandoned transaction, then “[e]quity may require that the directors of a Delaware

corporation reimburse the company for sums spent pursuing such faithless ends.” infoUSA,

953 A.2d at 996. Equity also may require disgorgement of any benefit received by the

defendant fiduciaries. See Oberly v. Kirby, 592 A.2d 445, 463 (Del. 1991) (“[T]he absence

of specific damage to a beneficiary is not the sole test for determining disloyalty by one

occupying a fiduciary position.”). See generally Thorpe v. CERBCO, Inc., 676 A.2d 436,

437, 445 (Del. 1996) (holding that despite the absence of transactional damages from an

abandoned transaction, the controlling stockholders were “liable for damages incidental to

their breach of duty,” which included “any expenses, including legal and due diligence

costs, that the corporation incurred to accommodate the [controlling stockholders’] pursuit

of their own interests prior to the deal being abandoned”).

                                             44
       The plaintiff relies on these principles in this case. The plaintiff contends that the

individual defendants breached their fiduciary duties when approving the Reclassification,

which led to Facebook incurring what might be thought of as reliance damages, i.e.,

expenses for professionals who worked on pursuing the Reclassification and defending the

resulting litigation, as well as lost employee time that otherwise could have been spent on

Facebook’s business. They also maintain that Facebook suffered reputational harm and a

loss of goodwill.

       These types of damages arguably flow from the decision to approve the

Reclassification. Viewed in this light, the proper inquiry for purposes of demand futility is

whether the director could exercise disinterested and independent judgment with respect to

a decision to embark on litigation over the Reclassification. If a director received a material

personal benefit from the Reclassification, would face a substantial likelihood of liability

in connection with a lawsuit challenging the Reclassification, or was not independent of

someone who did or would, then that director cannot exercise disinterested and

independent judgment regarding a demand.

       The defendants disagree with this reasoning. They argue that this court must

Balkanize its analysis by examining separately the decisions to retain each financial advisor

and law firm. By slicing and dicing the decisions, the defendants can argue more

persuasively that the members of the Board could exercise disinterested and independent

judgment regarding a demand. For example, assuming that Zuckerberg was interested in

the Reclassification, could he really be deemed interested in the Committee’s decision to

retain a financial advisor? Or the defendants’ decision to retain litigation counsel?

                                              45
       The defendants also ask the court to analyze separately plaintiff’s effort to recover

the award of attorneys’ fees and expenses that Facebook paid to the plaintiffs’ counsel in

the Reclassification Action. It is unclear under extant precedent whether the decision to

withdraw the Reclassification would constitute a separate decision for purposes of demand

futility, or whether it would be sufficiently connected to the Reclassification such that the

Reclassification itself would remain the focus for demand-futility purposes. The

defendants argue that the decision to withdraw the Reclassification was a separate decision,

distinct from the initial decision to approve the Reclassification. And they maintain that

the decision to pay a fee to plaintiffs’ counsel in the Reclassification Action was another

separate decision. They conclude that even if certain directors might not be able to exercise

disinterested and independent judgment regarding a litigation demand challenging the

Reclassification itself, there is no reason for any potential taint to extend to the decisions

to withdraw the Reclassification and to pay a fee to plaintiffs’ counsel.

       Fortunately, this decision need not express a view on these questions. The plaintiff

plainly believes that that its best case for establishing demand futility is to focus on the

Reclassification. For the reasons described below, this decision adopts that framework and

nevertheless finds that demand is not excused. It is therefore unnecessary to address

whether the defendants could also prevail on a Rule 23.1 motion by grinding the analysis

more finely.

C.     The Director-By-Director Analysis

       When the complaint was filed, the members of the Board were:

      defendant Zuckerberg, the primary beneficiary of the Reclassification;

                                             46
      defendants Andreessen, Desmond-Hellmann, Bowles, who were the members of the
       Committee that approved the Reclassification;

      defendant Peter Thiel, who has served as a director of Facebook since April 2005
       and who voted to approve the Reclassification;

      defendant Reed Hastings, who has served as a director of Facebook since June 2011
       and who voted to approve the Reclassification;

      nonparty Sandberg, who has served as the COO of Facebook since March 2008 and
       a director of Facebook since January 2012;

      nonparty Kenneth Chenault, who became a director after the Board approved the
       Reclassification; and

      nonparty Jeffrey Zients, who became a director after the Board approved the
       Reclassification.

This decision refers to these directors as the “Demand Board.”

       The fundamental question presented by the defendants’ motion is whether the

Demand Board validly could consider a litigation demand. The answer to that question

depends on whether a majority of the members of the Demand Board would be

disinterested and independent with respect to the litigation demand. Because the Demand

Board has nine members, demand is excused if five directors could not exercise

disinterested and independent judgment regarding a litigation demand. Conversely,

demand is futile if the complaint’s allegations establish a reason to doubt whether five

directors could exercise disinterested and independent judgment regarding a demand.

       For purposes of analyzing demand futility, this decision makes the following pro-

plaintiff assumptions:

      The Reclassification would be subject to review under the entire fairness test for the
       reasons explained in IRA Trust FBO Bobbie Ahmed v. Crane, 2017 WL 7053964
       (Del. Ch. Dec. 11, 2017). Unlike the transaction at issue in Crane, the

                                             47
       Reclassification did not follow the template set out in Kahn v. M & F Worldwide,
       Corp., 88 A.3d 635 (Del. 2014), so entire fairness would remain the operative
       standard of review.

      At a minimum, Andreesen’s back-channel communications with Zuckerberg
       prevented the Committee from functioning effectively. As a result, the burden of
       proof would not shift to the plaintiff to prove unfairness, but rather would remain
       with the defendants to establish that the Reclassification was entirely fair.

      There is a substantial likelihood that the court would conclude after trial that the
       Reclassification was not entirely fair to Facebook’s non-controlling stockholders.

      Zuckerberg could not exercise disinterested and independent judgment regarding a
       demand. As the controlling stockholder of Facebook, he received a material
       personal benefit from the Reclassification, and he would face a substantial risk of
       liability on a claim challenging it. Zuckerberg would not be entitled to exculpation
       because (i) he stood on both sides of the transaction and (ii) the plain language of
       Section 102(b)(7) does not extend to controlling stockholders.

      Andreesen could not exercise disinterested and independent judgment regarding a
       demand. Based on his back-channel communications during the Committee process
       and self-professed fealty to Zuckerberg, he is not independent of Zuckerberg and he
       would face a substantial risk of liability on a claim challenging the Reclassification.
       He would not be entitled to exculpation because he acted disloyally and in bad faith.

      Sandberg could not exercise disinterested and independent judgment regarding a
       demand. As Facebook’s longstanding COO, she is not independent of Zuckerberg.

These assumptions leave six directors for consideration: Zients, Chenault, Hastings, Thiel,

Bowles, and Desmond-Hellmann. If five of these six directors could exercise independent

and disinterested judgment regarding a demand, then demand is not futile, and the

complaint must be dismissed.

       1.     Zients

       The complaint fails to plead facts supporting a reason to doubt that Zients could

exercise disinterested and independent judgment regarding a demand. Zients joined the

Board in May 2018, after the Board had approved the Reclassification. He is an outside

                                             48
director. There is no suggestion that he received any benefit from the Reclassification, and

the plaintiff does not advance any argument about why he is not independent. Zients is

deemed capable of exercising disinterested and independent judgment regarding a demand.

       2.     Chenault

       The complaint fails to plead facts supporting a reason to doubt that Chenault could

exercise disinterested and independent judgment regarding a demand. Chenault joined the

Board in February 2018, after the Board had approved the Reclassification. There is no

suggestion that he received any benefit from the Reclassification.

       The complaint’s only basis for questioning Chenault’s ability to consider a demand

is to assert that he is beholden to Zuckerberg, but the complaint does not plead any facts

that undermine Chenault’s independence. The complaint points to a Facebook post in

which Zuckerberg announced that Chenault had joined the Board and said that he had been

“trying to recruit [Chenault] for years.” Compl. ¶ 107. Continuing, Zuckerberg stated,

       Adding someone to our board is one of the most important decisions our
       board makes. It’s a long process that I take very seriously since this is the
       group that ultimately governs Facebook. [Chenault] and I have had dinners
       discussing our mission and strategy for years, and he has already helped me
       think through some of the bigger issues I’m hoping we take on this year.

Id.

       The plaintiff asserts that this post suggests a close personal friendship that could

compromise Chenault’s independence, but that is a logical leap and not a reasonable

inference. It is both expected and customary for a chair and CEO to comment favorably on

a new director who is joining the board. Nothing about the post suggests a relationship of

a bias-producing nature. See Beam, 845 A.2d at 1045, 1050–51 (rejecting as insufficient

                                            49
allegations that a director was “old friend” of the controller and was “recruited for the

board” by the controller).

       The complaint also alleges that in 2018, Chenault became the chair and a Managing

Director of General Catalyst Partners, an early stage venture capital firm. The complaint

alleges that Chenault “will rely on Zuckerberg for ‘deal flow,’” making him beholden to

Zuckerberg. Compl. ¶ 107. The complaint does not allege any specific facts to support this

conclusory allegation, which seems based on nothing more than Chenault’s affiliation with

a venture capital firm and Zuckerberg’s status as a Silicon Valley superstar and mega-

billionaire. “It is not enough, however, for a plaintiff simply to argue in the abstract that a

particular director has a conflict of interest because she is affiliated with a particular type

of institution.” Chen v. Howard-Anderson, 87 A.3d 648, 671 (Del. Ch. 2014). There must

be specific allegations that would support a reason to doubt that the director could exercise

independent judgment on the issue presented. See Beam, 845 A.2d at 1048 (explaining that

the court cannot infer that a director lacks independence “[w]ithout details about the nature

of the contact”).

       The plaintiff has not called into question Chenault’s independence. Whether viewed

individually or together, the allegations against Chenault are insufficient to suggest that he

could not exercise disinterested and independent judgment regarding a demand.

       3.     Hastings

       The complaint fails to plead facts supporting a reason to doubt that Hastings could

exercise disinterested and independent judgment regarding a demand. The plaintiff argues

                                              50
that Hastings is not independent of Zuckerberg. The plaintiff also argues that Hastings

faces a substantial likelihood of liability because he approved the Reclassification.

       The complaint fails to allege facts supporting a reasonable inference that Hastings

is beholden to Zuckerberg. Hastings is a cofounder of Netflix, serves as its CEO, and chairs

its board of directors. The complaint alleges that “Netflix purchased advertisements from

Facebook at relevant times.” Compl. ¶ 99. Netflix also allegedly maintains “ongoing and

potential future business relationships with” Facebook. Id. ¶ 100. The only specific facts

that support this assertion allege that in March 2013, Netflix launched a “Friends and

Community” initiative, which allows Facebook users to share data about their Netflix

viewing habits with their Facebook friends. Id. The complaint also alleges that according

to an article published by The New York Times, Facebook gave to Netflix and several other

technology companies “more intrusive access to users’ personal data than it ha[d]

disclosed, effectively exempting those business partners from its usual privacy rules.” Id.

The exemption allowed Netflix and other favored companies to “read, write and delete

users’ private messages, and to see all participants on a thread.” Id.

       The complaint contends that “Hastings would not jeopardize this valuable

relationship with Facebook and Zuckerberg by investigating or initiating the claims”

because that “could prompt termination of the ‘Friends and Community’ data sharing or

other current and future ventures.” Id. The complaint’s allegations support the existence of

an ongoing, collaborative relationship between the two companies. They do not support an

inference that the relationship is so important to Netflix as to compromise Hastings’

independence. The complaint does not allege any specific facts about the extent to which

                                             51
Netflix relies on the Facebook relationship as part of its business model or how valuable

this relationship is to Netflix. The complaint does not identify any facts about the “Friends

and Community” feature, such as how many Facebook users take advantage of this feature,

or whether Netflix has realized any concrete advantages through this feature. The

complaint’s allegations thus do not support an inference that the relationship is sufficiently

material to Netflix that it would compromise Hastings’ ability to consider a demand.

       The complaint also contends that “Hastings (as a Netflix founder) is biased in favor

of founders maintaining control of their companies.” Id. ¶ 99. This allegation does not

identify an interest of a bias-producing nature. A director could believe in good faith that

it is generally optimal for companies to be controlled by their founders and that this

governance structure is value-maximizing for the corporation and its stockholders over the

long-term. Others might differ. As long as an otherwise independent and disinterested

director has a rational basis for her belief, that director is entitled (indeed obligated) to

make decisions in good faith based on what she subjectively believes will maximize the

long-term value of the corporation for the ultimate benefit of its residual claimants. See

generally The Frederick Hsu Living Trust v. ODN Hldg. Corp., 2017 WL 1437308, *16–

22 (Del. Ch. Apr. 14, 2017). If a director believes that it will be better for the corporation

to have the founder remain in control, then the director may make decisions to achieve that

goal. As long as a director acts in good faith, exercises due care, and does not otherwise

have any compromising interests, a director will not face liability for making a decision

that she believes will maximize the long-term value of the corporation for the ultimate

benefit of its residual claimants, even if a court later determines that the transaction was

                                             52
not entirely fair. Even if Hastings believed that maintaining Zuckerberg’s control over

Facebook was desirable, that belief would not produce a conflict of interest that would

render him incapable of considering a demand.

       The complaint also alleges that Hastings, like Zuckerberg, has a track record of

supporting philanthropic causes and has publicly endorsed founders of large companies

making substantial donations during their lifetimes. Compl. ¶ 99. Hastings and Zuckerberg

each have made large contributions to the Silicon Valley Community Foundation, which

solicits donations from company founders and manages donor funds for both Hastings and

Zuckerberg. Id. There is no logical reason to think that a shared interest in philanthropy

would undercut Hastings’ independence. Nor is it apparent how donating to the same

charitable fund would result in Hastings feeling obligated to serve Zuckerberg’s interests.

       The plaintiff additionally argues that Hastings faces a substantial likelihood of

liability because he voted in favor of the Reclassification. This court has assumed that the

Reclassification would be reviewed for entire fairness and that there is a substantial

likelihood that the court would conclude after trial that it was not entirely fair to Facebook’s

non-controlling stockholders. But it does not follow from those assumptions that Hastings

faces a substantial likelihood of liability.

       Facebook’s certificate of incorporation contains a provision that exculpates

directors to the fullest extent permitted by Delaware law. Consequently, to establish that

Hastings faces a substantial likelihood of liability in connection with the Reclassification,

the complaint must plead facts supporting a reasonable inference that Hastings either

harbored self-interest adverse to the stockholders’ interest, acted to advance the self-

                                               53
interest of an interested party from whom they could not be presumed to act independently,

or acted in bad faith. Cornerstone, 115 A.3d at 1179–80.

       The complaint does not plead any facts that would support a pleading-stage

inference that Hastings committed a non-exculpated breach of fiduciary duty and thus

could face personal liability as a result of voting to approve the Reclassification. Referring

to all six director defendants collectively, the complaint states, “They each face a

substantial likelihood of liability for their individual misconduct.” Compl. ¶ 73. It then

states that each director defendant “owed [Facebook] fiduciary duties of good faith, due

diligence, and reasonable inquiry” and “knew of their own unlawful acts, participated in

the actions of their colleagues, and failed to prevent these breaches of loyalty and due care.”

Id. ¶ 74. Nowhere does the complaint describe any “individual conduct” on Hastings’ part.

The complaint does not contain any suggestion that Hastings was aware of the improper

back-channel communications between Andreessen and Zuckerberg. The allegations

against Hastings are conclusory and do not support a reasonable inference that he faces a

substantial risk of liability.

       In briefing and at argument, the plaintiff maintained that the Reclassification was so

obviously unsound that the Board never should have considered it, much less approved it

and defended it until the eve of trial. Doubtless there are proposals that are so extreme or

bizarre that independent directors should reject them summarily. Generally speaking,

however, directors have an obligation to respond to potential corporate actions on an

informed basis and after due deliberation. See, e.g., Technicolor, 634 A.2d at 367

(“[D]irectors ‘have a duty to inform themselves, prior to making a business decision, of all

                                              54
material information reasonably available to them. Having become so informed, they must

then act with requisite care in the discharge of their duties.’” (emphasis in original) (quoting

Aronson, 473 A.2d at 812)). The Reclassification was not so outlandish as to warrant

rejecting it out of hand. To the contrary, Google recently had implemented a similar

transaction after a settlement that this court approved.

       The plaintiff further argues that the process leading to the Board’s approval of the

Reclassification Plan was a sham marked by glaring problems and resulted in a transaction

that did not extract any material concessions from Zuckerberg. The plaintiff disagrees with

how the Committee proceeded, but those disagreements are not sufficient to support an

inference of bad faith. “[T]here is a vast difference between an inadequate or flawed effort

to carry out fiduciary duties and a conscious disregard for those duties.” McElrath v.

Kalanick, 2019 WL 1430210, at *10 (Del. Ch. Apr. 1, 2019) (internal quotation marks

omitted).

       Finally, the plaintiff tries to bolster its argument by pointing to the Board’s decision

to withdraw the Reclassification. It is not inherently suspect to decide to moot a case,

whether due to changed business circumstances or to enable the company to avoid the

burden of a public trial.

       When evaluating Hastings’ decision to approve the Reclassification, it is important

to consider those allegations collectively and not in isolation. Even viewed collectively, it

is not reasonable to infer that the Reclassification was so extreme as to support an inference

that Hastings approved it in bad faith. Nor is it reasonable to think that Hastings would be

held liable after trial.

                                              55
       The complaint’s allegations do not support a reasonable inference that Hastings is

beholden to Zuckerberg. They do not support a reasonable inference that Hastings faces a

substantial likelihood of liability on the claims that are the subject of the demand. Demand

is not excused as to Hastings.

       4.     Thiel

       The complaint fails to plead facts supporting a reason to doubt that Thiel could

exercise disinterested and independent judgment regarding a demand. Like Hastings, Thiel

voted in favor of the Reclassification. As with Hastings, the plaintiff maintains that Thiel

faces a substantial threat of liability on the claims that would be the subject of a demand.

As with Hastings, the plaintiff alleges that Thiel is not independent of Zuckerberg.

       The complaint’s allegations that Thiel faces a substantial likelihood of liability

based on his decision to approve the Reclassification fall short for the same reasons as the

allegations against Hastings. The complaint does not advance any incremental allegations

against Thiel, so this decision will not repeat that analysis.

       The complaint also fails to allege facts that provide reason to doubt whether Thiel

is independent of Zuckerberg. The complaint alleges that Thiel was one of the early

investors in Facebook and has served on the Board for longer than any of the other

directors, with the exception of Zuckerberg. According to the complaint, Thiel has been

“instrumental to Facebook’s business strategy and direction over the years.” Compl. ¶ 93.

The complaint does not explain how Thiel’s longstanding affiliation with Facebook or his

instrumental contributions to Facebook translate into Thiel being beholden to Zuckerberg.

                                              56
       The complaint attempts to bolster its allegations with a variant of the argument about

founder bias that the plaintiff leveled against Hastings. Thiel is a cofounder of PayPal, Inc.,

and he has been a partner at a venture capital firm called “Founders Fund” since 2005. The

complaint alleges that the Founders Fund “strives to keep founders in long-term control of

the companies they have created” and “touts Facebook as a primary example of that maxim,

stating that ‘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.’” Id. As with Hastings, assuming that Thiel honestly believes that founder

ownership benefits corporations and their stockholders over the long term, that belief is not

a disqualifying interest. To support a contention that Thiel acted disloyally or in bad faith,

the complaint would have to allege that Thiel believed that preserving founder ownership

was harmful to Facebook, and that he nevertheless supported the Reclassification out of

personal loyalty to Zuckerberg. As long as Thiel acted based on a sincerely and rationally

held belief that his actions would benefit Facebook, his bias in favor of founders

maintaining control is not disqualifying. The belief that founder control benefits

corporations and their stockholders over the long run is debatable, but it is not irrational.

       Harkening back to the allegations against Chenault, the complaint alleges that Thiel

is beholden to Zuckerberg because the “Founders Fund gets ‘good deal flow’ from [its]

high-profile association” with Facebook. Id. ¶ 94. As with Chenault, the complaint does

not provide any specifics. It does not identify a single deal that has flowed to the Founders

Fund as a result of Thiel’s relationship with Facebook, still less that any such deal was

material to Thiel or the Founders Fund.

                                              57
       The complaint similarly alleges that Thiel lacks independence because he has a

“personal and financial interest in remaining on Facebook’s Board.” Id. ¶ 95. The

complaint states that Facebook shares owned by the Founders Fund “will be released from

escrow in connection with the Oculus VR acquisition” and that “Thiel stands to gain

substantially from the vesting of stock in connection therewith.” Id. The complaint fails to

quantify those gains or explain why Thiel must retain his position on the Board to realize

those gains.

       Finally, the complaint attempts to suggest that Thiel must be indebted to Zuckerberg

for allowing Thiel to continue serving on the Board despite a barrage of public criticism

that Thiel has suffered. The complaint notes that Thiel played a major role in the Cambridge

Analytica scandal and secretly financed lawsuits aimed at bankrupting a news website. Id.

¶¶ 96–97. The complaint also alleges that there were “widespread calls for Zuckerberg to

remove Thiel from Facebook’s Board . . . .” Id. ¶ 97. The complaint implies that Zuckerberg

stood by Thiel, so it is reasonable to infer that Thiel feels a sense of obligation to

Zuckerberg.

       These allegations could support a reasonable inference that Thiel is beholden to

Zuckerberg only if serving on the Board was material to Thiel. The complaint describes

Thiel as a co-founder of PayPal and partner in a venture capital fund. These allegations

support a reasonable inference that Thiel inhabits the rarified realms of the uber-rich and

belongs to the Silicon Valley aristocracy. The complaint does not support an inference that

Thiel’s service on the Board is financially material to him. Nor does the complaint

                                            58
sufficiently allege that serving as a Facebook director confers such cachet that Thiel’s

independence is compromised.

       When evaluating the Thiel’s relationship with Zuckerberg, it is important to

consider these allegations holistically. Even viewed in that light, it is not possible to infer

that the Thiel is beholden to Zuckerberg.

       5.     Bowles

       The complaint fails to plead facts supporting a reason to doubt that Bowles could

exercise disinterested and independent judgment regarding a demand. The complaint does

not adequately allege that Bowles received a material personal benefit from the

Reclassification or lacked independence from someone who did. The complaint also does

not provide a basis to infer that Bowles faces a substantial likelihood of liability based on

his involvement in the decision to approve the Reclassification.

       The complaint attempts to establish that Bowles received a material personal benefit

from the Reclassification by linking him to the financial advisors who worked for Facebook

and the Committee. The complaint alleges “Morgan Stanley—a company for which

[Bowles] also served as a longstanding board member at the time (2005-2017)—directly

benefitted by receiving over $2 million in fees for its work on behalf of [Facebook] in

connection with the Reclassification . . . .” Compl. ¶ 92. The complaint similarly alleges

that Bowles had a “direct personal interest in the [R]eclassification” because he “ensured

that Evercore and his close friend Altman financially benefitted from the [Committee’s]

engagement without requisite vetting or consideration . . . .” Id. These allegations do not

support a reasonable inference that Bowles received any material personal benefit,

                                              59
financial or otherwise, either from Facebook’s retention of Morgan Stanley or the

Committee’s retention of Evercore.

       The complaint next attempts to establish that Bowles was beholden to Zuckerberg.

The complaint’s allegations do not support that inference. The complaint alleges that

Zuckerberg spoke with Bowles about taking the Giving Pledge and accelerating his

charitable giving. It also alleges that after Zuckerberg made the announcement, Bowles

told Zuckerberg that he was “proud to be a small part of [Zuckerberg’s] life.” Id. ¶ 40.

These allegations suggest that Zuckerberg and Bowles had a collegial relationship, which

is not sufficient to compromise Bowles’ independence.

       The complaint adds that “Bowles is beholden to the entire Board for granting a

waiver of the mandatory retirement age for directors . . . so that [he] could stand for

reelection despite having reached” that age. Id. ¶ 91. The complaint notes that under

Facebook’s Corporate Governance Guidelines, “the Board may only permit waivers in

‘exceptional circumstances.’” Id. ¶ 92. So be it, but this conclusory assertion does not

explain why or in what way Bowles would be beholden to the Board or what that would

entail. The complaint does not suggest that the waiver was conditioned on Bowles

supporting any particular initiative or person. Nor does it allege that Bowles’ directorship

is sufficiently important to him that continuing to serve on the Board could be viewed as a

material inducement that would render Bowles beholden to his fellow directors.

       The complaint also attempts to portray Bowles as facing a substantial likelihood of

liability for having approved the Reclassification. The complaint relies on Bowles’ service

on the Committee in addition to the allegations advanced against Hastings and Thiel. This

                                            60
decision already has rejected the argument that the decision to approve the Reclassification

was so extreme as to support a substantial likelihood of liability. The question is whether

Bowles’ service on the Committee changes that conclusion.

       The complaint asserts the Committee “was not fully informed, did not negotiate at

arm’s-length, and never demanded anything meaningful from Zuckerberg.” Id. ¶ 77. The

complaint also asserts that the “Committee squandered the significant negotiating leverage

Zuckerberg gave it” by publicly announcing his accelerated Giving Pledge before the

Committee had recommended the Reclassification to the Board. Id. These allegations, at

most, allege a breach of the duty of care. Bowles does not face any threat of liability for

breaches of the duty of care because Facebook has an exculpatory provision in its charter,

and these allegations do not support an inference of bad faith.

       In an effort to build up to an inference of bad faith, the complaint criticizes the

Committee’s negotiations with Zuckerberg. The complaint does not plead particularized

facts to suggest that the Committee extracted so little value from Zuckerberg that its

members could be found to have acted in bad faith. The complaint notes that at one point,

Andreessen told Zuckerberg that Bowles was worried about the provision in the Founder

Agreement that authorized Zuckerberg to take a leave of absence for government service,

but that allegation cuts in the opposite direction. The fact that Bowles voiced concerns

suggests that he acted independently, not the opposite.

       This decision has assumed that Andreesen’s back-channel communications with

Zuckerberg fatally undermined the Committee’s deliberations, resulting in a transaction

that was not negotiated at arm’s-length. Those problems, however, cannot be attributed to

                                            61
Bowles, and there is no basis to conclude that Bowles knew about what Andreessen and

Zuckerberg were doing. To the contrary, the complaint alleges that “Zuckerberg and

Andreessen’s shenanigans won over Bowles.” Id. ¶ 49. Based on this allegation, the

complaint seemingly agrees that Bowles was oblivious. Under Cornerstone, Bowles would

be entitled to a pleading-stage dismissal because the plaintiff has not pled facts supporting

an inference that Bowles acted with scienter. For the same reason, the complaint does not

support a reasonable inference that Bowles would face a substantial threat of liability.

       As with the allegations against Hastings and Thiel, it is essential to consider the

allegations against Bowles in their totality. Even viewed in that light, it is not reasonable

to infer that the Bowles could be held liable in connection with the Reclassification or that

he is not independent.

       6.     Desmond-Hellmann

       The last director is Desmond-Hellman. She did not receive a material personal

benefit from the Reclassification. She also does not face a substantial likelihood of liability

based on her service on the Committee because, as with Bowles, the complaint does not

plead facts sufficient to overcome the protections of Section 102(b)(7). That said, whether

Desmond-Hellman is independent of Zuckerberg presents a comparatively close call.

Because this decision already has found that five of the Board’s nine directors can consider

a demand, it does not evaluate Desmond-Hellman’s independence.

                                              62
                              III.    CONCLUSION

      A majority of the Demand Board is disinterested, independent, and capable of

considering a demand. Demand thus is not excused, and the defendants’ motion to dismiss

under Rule 23.1 is granted.

                                          63