Court Opinion

ID: 5116173
Source: CourtListenerOpinion
Date Created: 2021-10-05 22:02:50.069902+00
Date Added: 2024-06-11T08:21:54.895029
License: Public Domain

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

IN RE: FACEBOOK, INC. DERIVATIVE                   )   CONSOLIDATED
LITIGATION                                         )   CA. No. 2018-0307

           ORDER ESTABLISHING LEADERSHIP STRUCTURE

      WHEREAS:

   A. Two competing teams of stockholder plaintiffs and counsel seek to be

appointed to leadership roles in this consolidated derivative action that is proposed

to be brought on behalf of nominal defendant, Facebook, Inc. (or the “Company”).

   B. Under one proposal, California State Teachers’ Retirement System

(“CalSTRS”), City of Birmingham Retirement and Relief System (“Birmingham”)

and Construction and General Building Laborers’ Local Union No. 79 General Fund

(“Local 79”) would serve as co-lead plaintiffs. Kaplan Fox & Kilsheimer LLP,

Prickett, Jones & Elliott, P.A., and Scott+Scott Attorneys at Law would serve as co-

lead counsel. This team of litigants and counsel shall be referred to collectively as

the “CalSTRS Group.”

   C. Under the other proposal, Employees’ Retirement System of Rhode Island

and City of Warwick Retirement System would serve as co-lead plaintiffs. Block &

Leviton LLP would serve as lead counsel, and Heyman, Enerio, Gattuso & Hirzel

LLP would serve as additional Delaware counsel. This team of litigants and counsel

shall be referred to collectively as the “RI Group.”

                                          1
      D. When faced with a leadership dispute, the court’s task is to “establish a

leadership structure that will provide effective representation.”1 To that end, the

court weighs the so-called “Hirt factors,” so named after Hirt v. U.S. Timberlands

Service Company, LLC. 2 The six factors can be paraphrased as follows:

         i. the quality of the pleading that appears best able to represent the interests
            of the shareholder class and derivative plaintiffs;

         ii. the relative economic stakes of the competing litigants in the outcome of
             the lawsuit;

         iii. the willingness and ability of all the contestants to litigate vigorously on
              behalf of an entire class of shareholders;

         iv. the absence of any conflict between larger, often institutional,
             stockholders, and smaller stockholders;

         v. the enthusiasm or vigor with which the various contestants have prosecuted
            the lawsuit; and

         vi. the competence of counsel and their access to the resources necessary to
             prosecute the claims at issue.3

      E. The Hirt factors provide guidance, but they are not a “scorecard.”4

“A plaintiff’s firm does not ‘win’ the lead counsel spot by accumulating the most

1
 In re Del Monte Foods Co. S’holders Litig., 2010 WL 5550677, at *6 (Del. Ch. Dec. 31,
2010).
2
    2002 WL 1558342 (Del. Ch. July 3, 2002).
3
    See id. at *2.
4
    In re Delphi Fin. Gp. S’holder Litig., 2012 WL 424886, at *1 (Del. Ch. Feb. 7, 2012).

                                              2
‘points,’ as it might by demonstrating that its client owns the most shares or that it

has litigated the most [Caremark] cases. Instead, each factor is given weight only

to the extent that it bears on the ultimate question of what is in the best interests of

the plaintiff class.” 5

      F. For purposes of analysis, Delaware courts often group the Hirt factors into

categories based on whether they focus more closely on the proposed lead plaintiff

or the proposed lead counsel. 6

          1. Factors (ii) and (iv) address attributes of the proposed lead plaintiff. Factor
             (ii) considers whether the economic stake of the proposed plaintiff is
             relatively significant, likely leading to meaningful monitoring and reduced
             agency costs. Factor (iv) asks whether there are any particular attributes
             of the proposed plaintiff, such as unique defenses or potentially divergent
             interests, that could diminish the plaintiff’s effectiveness.

          2. Factors (i), (v), and (vi) address aspects of the proposed lead counsel’s
             ability to provide effective representation. Factors (i) and (v) look at two
             objective indicia of counsel’s ability based on their actions in the specific
             case—the pleading on which the law firm proposes to litigate and how
             counsel has acted in the case to date. Factor (vi) calls on the court to
             consider more generally which law firm is best qualified to handle the
             matter.

          3. Factor (iii) blends the consideration of the law firm and the proposed lead
             plaintiff by requiring the court to consider how the litigation is likely to
             unfold and whether the proposed leadership team will operate effectively.

5
    Id.
6
 E.g., Del Monte Foods, 2010 WL 5550677, at *6 (noting that the factors are divided to
“examine both the proposed lead counsel and the proposed named plaintiff”).

                                               3
          Upon applying the Hirt factors to the competing applications for leadership in

this case, it appears to the Court that:

          1.    The CalSTRS Group and the RI Group are closely matched. Both

groups are highly qualified and capable of litigating the case.

          2.    The lead plaintiff factors (ii) and (iv) do not materially favor either

group.

                a.     Factor (ii) asks the Court to consider the relative economic stakes

of the competing litigants in the lawsuit’s outcome. This court only accords “great

weight” to “substantial relative difference[s]” in the movants’ economic stakes; it

does not “simply add up the number of shares and select the law firm with the largest

absolute representation.”7 While “Hirt stands for the proposition that relative

economic stakes are given great weight, not simply economic stakes,”8 Delaware

courts have also recognized that the “potential upside” of a large stockholder will

typically “align its incentives with the rest of the class.” 9

7
    See Wiehl v. Eon Labs, 2005 WL 696764, at *3 (Del. Ch. Mar. 22, 2005).
8
    Id.
9
    Ryan v. Mindbody, Inc., 2019 WL 4805820, at *3 (Del. Ch. Oct. 1, 2019).

                                             4
                b.     Here, the CalSTRS Group collectively owns about 4.5 million

shares of Facebook common stock. 10 The RI Group owns about 160,000 shares.11

Although the CalSTRS Group owns more than 28 times the RI Group’s shares, both

plaintiffs own diversified portfolios that are not disproportionately weighted towards

Facebook. And, of course, neither of the putative lead plaintiffs owns a significant

percentage of Facebook’s outstanding stock relative to the public float, a fact not at

all surprising given that Facebook is one of the largest companies in the world. The

RI Group owns about 0.005%, and the CalSTRS Group owns less than 0.2%.12

Thus, even though the CalSTRS Group holds substantially more shares than the RI

Group, the relative economic stake of each group—as a percentage of their

portfolios and of Facebook’s outstanding shares—is not materially different.

Moreover, both parties own “a sufficient stake to provide an economic incentive to

monitor counsel and play a meaningful role in conducting the case.”13

10
  Appl. for Appointment of Lead Pls. and Co-Lead Counsel by Pls. CalSTRS, Local 79,
and Birmingham (D.I. 196) (C.A. 2018-0307) at 4.
11
  Verified S’holder Deriv. Compl. (“R.I. Compl.”) (D.I. 1) (C.A. 2021-0617-JRS) ¶¶ 19–
20.
12
  R.I. Gp.’s Opp’n to Appl. for Appointment of Lead Pls. and Co-Lead Counsel by Pls.
CalSTRS, Local 79, and Birmingham (“R.I. Opp’n”) (D.I. 211) at 3.

13
     In re Revlon, Inc. S’holders Litig., 990 A.2d 940, 955 (Del. Ch. 2010).

                                               5
                 c.      Factor (iv) asks if there is any conflict between larger and smaller

stockholders. Neither party has alleged a stockholder conflict as between “large and

small” Facebook stockholders, or that either contestant has any interest that would

diverge from the class.

           3. The lead counsel factors favor the CalSTRS Group.

                 a.      Factor (i) evaluates the quality of the pleading that appears best

able to represent the interests of the shareholder class and derivative plaintiffs. Both

groups filed large and extremely thorough complaints that would support meaningful

litigation. As is often the case in these difficult decisions, “[b]oth complaints reflect

investigative effort and craftsmanship expected of competent plaintiff’s counsel

engaged in representative litigation of this Court.”14

                 b.      In analyzing this factor, this court has often favored the movant

who has utilized Section 220 documents more effectively or provided more factual

fodder to support its claims. 15 Here, however, both contestants have properly

utilized Section 220 documents and have revealed their extensive investigative

efforts in thoroughly pled complaints, although the Court notes that both parties rely

more heavily on the CalSTRS Group’s Section 220 documents.

14
  In re Investors Bancorp, Inc. S’holder Litig., 2016 WL 4257503, at *4 (Del. Ch. Aug. 12,
2016).
15
     See, e.g., id. at *4–5 (citing cases).

                                                6
                c.     Both complaints span hundreds of pages. While the pleadings

share a similar girth, they do not reflect shared strategic decisions as evidenced by

the claims asserted. The CalSTRS Group pleads many claims, including a Caremark

claim against the entire Board and a Brophy insider trading claim that, if proven,

would recover tens of billions of dollars on behalf of the Company. 16 In contrast,

the RI Group alleges a strong entire fairness claim, sets forth strong lack-of-

independence allegations, and asserts a claim against Palantir Technologies, Inc. that

is not asserted by the CalSTRS Group.17 The entire fairness claim is tailored to focus

on the $5 billion FTC settlement agreed to by Facebook, which the RI Group alleges

was a transaction entered into by Facebook at an unfair price, following an unfair

process, for the purpose of benefitting certain Facebook insiders. 18 In other words,

while the CalSTRS Group pleads wide-reaching claims against many defendants,

the RI Group primarily focuses on the event they believe best typifies fiduciary

misconduct that can be challenged under a plaintiff-friendly standard of review.

16
     Brophy v. Cities Serv. Co., 70 A.2d 5 (Del. Ch. 1949).
17
  Palantir Technologies, Inc. is a software company co-founded by defendant Peter Thiel.
R.I. Compl. ¶ 14. The RI Group’s complaint brings a derivative claim against Palantir for
violation of California’s unfair competition law. R.I. Compl. ¶¶ 439–45. It alleges that
Palantir deceptively and unlawfully obtained and retained data from Facebook users
without their knowledge and consent. R.I. Compl. ¶ 441.
18
     R.I. Compl. ¶¶ 417, 423–25, 429–31, 435–37.

                                               7
               d.     The RI Group is to be commended for its thoughtful and tailored

complaint. But, in my view, the CalSTRS Group’s complaint is simply more

comprehensive.        Although “[t]he bigger complaint is not always the better

complaint,”19 the CalSTRS Group’s complaint contains broader allegations against

Facebook’s executives and Board of Directors (the “Board”). Moreover, it pleads

several ways to overcome the formidable standard for demand futility. While the

RI Group’s complaint makes a strong case that the Board lacks independence from

defendant Zuckerberg, should its theory fail, there is no alternative path to demand

futility that would allow Facebook stockholders to overcome a pleading stage

challenge under Chancery Rule 23.1. In contrast, the CalSTRS Group’s complaint

provides for several avenues to overcome demand futility, including the entire

fairness/lack of independence theory proffered by the RI Group. 20

               e.     At oral argument, the RI Group claimed its complaint is superior

because it focuses on the correct Board members in arguing that the Board could not

give disinterested and independent consideration to a demand (the “Demand

Board”). Yet the CalSTRS Group makes allegations against all the Board members

identified by the RI Group and then some. In other words, the RI Group argues it

19
     In re Investors Bancorp, 2016 WL 4257503, at 4.
20
   R.I. Gp.’s Leadership Appl. (“R.I. Appl.”) (D.I. 195) (C.A. 2018-0307) at 8
(acknowledging that the CalSTRS Group has pled an entire fairness claim).

                                             8
has identified and targeted claims against the correct Demand Board, whereas the

CalSTRS Group brings allegations against all the potentially relevant Demand Board

members under various theories. To be sure, the RI Group might make more detailed

allegations against certain Board members, but the CalSTRS Group casts a wider

net to impugn the disinterestedness or independence of a greater number of Board

members in recognition that the composition of the Demand Board may be disputed.

Trade-offs such as these are the inevitable product of competing complaints; they do

not reveal that the RI Group’s complaint is superior.

             f.     Because the CalSTRS Group’s complaint is more comprehensive

and contains more pathways to recovery, I am satisfied it provides Plaintiffs the best

opportunity to succeed. Factor (i) weighs in the CalSTRS Group’s favor.

             g.     Factor (v) asks the Court to evaluate the enthusiasm or vigor with

which the various contestants have prosecuted the lawsuit. Both sets of counsel have

pursued this litigation diligently. Both have utilized Section 220 litigation to

improve their claims. Although the CalSTRS Group entered this litigation earlier,

“[t]o avoid rushes to the courthouse, this Court accords no special weight or status

to the first-filing plaintiff.”21 This factor does not favor either party.

21
  In re Kraft Heinz Co. Deriv. Litig., 2020 WL 1248471, at *2 (Del. Ch. Mar. 13, 2020)
(ORDER).

                                            9
                h.        Factor (vi) asks the Court to assess the competence of counsel

and their access to the resources necessary to prosecute the claims at issue.

All counsel involved in this dispute are highly competent, well-funded and very well

regarded by the Court.

                i.        The RI Group argues that counsel for the CalSTRS plaintiffs is

fatally conflicted by virtue of having pursued direct claims against Facebook and,

therefore, cannot competently represent the CalSTRS Group. After careful review

of the supposedly conflicted cases, I am satisfied there is no conflict that would

prevent counsel from properly representing the CalSTRS Group.

                          i.    The RI Group specifically identifies several ongoing cases

where Kaplan Fox and Scott+Scott represent plaintiffs suing Facebook directly.22

Given this dynamic, they argue that the CalSTRS Group’s counsel cannot represent

Facebook derivatively. As this court has recognized, there is a potential for conflict

when a law firm seeks to represent both a derivative plaintiff on behalf of a

corporation and a class plaintiff in direct litigation against the same corporation, but

that is not always the case.23 Indeed, Vice Chancellor Noble confronted a similar

22
     R.I. Opp’n at 1–2.
23
   E.g., In re Ebix, Inc. S’holder Litig., 2014 WL 3696655, at *18 (Del. Ch. July 24, 2014)
(stating that bringing both direct and derivative claims did not amount to a “disabling
conflict”); In re Tesla Motors, Inc. S’holder Litig., 2018 WL 1560293, at *2 (Del. Ch.
Mar. 28, 2018) (allowing plaintiffs and their counsel to bring both direct and derivative
claims in the same action). But see In re Duke Energy Corp. Deriv. Litig., 7705-CS
(Del. Ch. Dec. 21, 2012) (TRANSCRIPT), at 27 (“[W]hen it comes to . . . third-party suits
                                               10
issue in In re Ebix and determined that there was no potential for a “disabling conflict

because the claims [were] not internally inconsistent.”24 After reviewing the direct

claims asserted by the CalSTRS Group’s counsel against Facebook, I am persuaded

that counsel is not asserting claims in those cases that are internally inconsistent with

the claims being asserted in this derivative action, or vice versa.

                      ii.   The RI Group’s citation to In re Towers Watson & Co.

Shareholder Litigation does not alter the outcome. 25 There, then-Vice Chancellor

Montgomery-Reeves chose not to pick the contestant who was the lead plaintiff and

lead counsel in securities litigation and an appraisal action against the derivative

nominal defendant, where the direct claims were closely related to the putative

derivative claims, because of the “potential for conflicts.” 26 Towers Watson is

distinguishable on two grounds. First, serving as lead counsel and lead plaintiff in

both securities litigation and an appraisal action regarding the same subjects that are

the gravamen of the derivative claims presents a far greater risk of conflict than is

presented here. Second, the court in Towers Watson believed there were “no real

against your company . . . you cannot simultaneously be a derivative plaintiff and then be
rooting for the third party to win.”).
24
     In re Ebix, 2014 WL 3696655, at *18.
25
     2018-0132-TMR (Del. Ch. June 5, 2018) (TRANSCRIPT) (cited in R.I. Appl. Ex. L).
26
     Id. at 63.

                                            11
determinative differences between the contestants” under the Hirt factors, and the

court used the potential for conflicts essentially as a tiebreaker.27 In this regard, the

court observed, “[w]hile the potential conflicts raised here may well not amount to

disabling conflicts, with two such equally matched choices, I’m going to pick the

counsel and the plaintiff that minimizes the potential for distracting motion practice

in the future.”28 Here, the Hirt factors favor the CalSTRS Group and I am not

persuaded that the very remote potential for conflicts overrides the CalSTRS

Group’s superior application such that the Company and its stockholders should be

deprived of the strengths of the CalSTRS Group’s complaint.

                     iii.    I trust that the CalSTRS Group will prosecute this case

fairly and vigorously. I note, however, that even after lead counsel has been selected,

the Court must continue to monitor the adequacy of counsel’s representation.29

Should any potential conflicts arise, the Court can make necessary adjustments at

that time, if needed.

27
     Id.
28
     Id.
29
   2 Donald J. Wolfe, Jr. & Michael A. Pittenger, Corporate and Commercial Practice in
the Delaware Court of Chancery, § 13.02, 13-9 (2d. ed. 2020); cf. In re Revlon, 990 A.2d
at 955 (“A trial court has a continuing duty in a class action case to scrutinize the class
attorney to see that he or she is adequately protecting the interests of the class, and if at any
time the trial court realizes that class counsel should be disqualified, the court is required
to take appropriate action.”) (internal quotation marks omitted).

                                               12
      4.       Factor (iii) asks the Court to examine the willingness and ability of the

contestants to litigate vigorously on behalf of the class of stockholders they seek to

represent.     Both contestants here (plaintiffs and counsel) have exhibited a

willingness to litigate this case fully and effectively. This factor is a wash.

      5.       Although the competing applications for leadership present a close call,

because the CalSTRS Group’s complaint is superior, it has presented the better

application.

      6.       CalSTRS, Birmingham, and Local 79 are hereby designated as Co-

Lead Plaintiffs.

      7.       The law firms of Kaplan Fox & Kilsheimer LLP, Prickett, Jones &

Elliott, P.A., and Scott+Scott Attorneys at Law are hereby designated as Co-Lead

Counsel.

      8.       Hach Rose Schirripa & Cheverie LLP and Dilworth Paxson LLP are

hereby designated as Co-Chairs of an Executive Committee of shareholders. The

additional members of the Executive Committee are Robbins LLP, Gainey

McKenna & Egleston, Berman Tabacco and Cotchett Pitre & McCarthy LLP.

      9.       Co-Lead Counsel shall set policy for the prosecution of this litigation,

delegate and monitor the work performed to ensure there is no duplication of effort

or unnecessary expense, and initiate and coordinate the activities of counsel.

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      10.    Co-Lead Counsel shall have the power and responsibility, with input

from the Executive Committee, to: coordinate and direct the preparation of

pleadings; coordinate and direct the briefing and argument of motions; coordinate

and direct the conduct of discovery and other pretrial proceedings; conduct any and

all settlement negotiations with counsel for the Defendants; coordinate and direct

the preparation for trial of this matter, and delegate work responsibilities to selected

counsel as may be required; and coordinate and direct any other matters concerning

the prosecution or resolution of the consolidation action.

      11.    Co-Lead Plaintiffs shall file a consolidated complaint within thirty days

of this Order, which shall serve as the operative complaint.

      IT IS SO ORDERED.

Dated: October 5, 2021

                                                       /s/ Joseph R. Slights III
                                                             Vice Chancellor

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