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EFiled: May 06 2016 12:02PM EDT

Transaction ID 58965095
Case No. 12303-

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE


KENNETH ELAN, Individually and on
Behalf of all Others Similarly Situated,
Plaintiff,
C.A. No. __________

v.
MARK ZUCKERBERG, MARC
ANDREESSEN, PETER THIEL,
REED HASTINGS, SUSAN
DESMOND-HELLMANN, ERSKINE
BOWLES, SHERYL SANDBERG,
JAN KOUM and FACEBOOK, INC.,
Defendants.

PLAINTIFFS MOTION FOR EXPEDITED PROCEEDINGS


Plaintiff Kenneth Elan (Plaintiff), a holder of Class A stock of Facebook,
Inc. (Facebook or the Company), hereby moves for an Order expediting the
proceedings. In this action, Plaintiff seeks to enjoin the proposed issuance by
Facebook of two shares of non-voting Class C stock for each outstanding share of
Class A and Class B stock (the Share Issuance). Plaintiff is not seeking to enjoin
the stockholder vote scheduled for June 20, 2016, given that the outcome of the
vote is foreordained. Nor is Plaintiff seeking to enjoin proposed amendments to
Facebooks certificate of incorporation necessary to create the Class C stock. By
this motion, Plaintiff seeks (i) expedited discovery in aid of a planned motion to
preliminarily enjoin the Share Issuance, and (ii) the scheduling of an expedited trial

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at which Plaintiff will seek a final injunction of the Share Issuance. The grounds
for the motion are as follows:
BACKGROUND 1
1.

This action challenges a giveaway of unprecedented dimension

future control over Facebook, the fifth most valuable public corporation in the
world. By approving and declaring advisable charter amendments that will
facilitate the issuance of a massive number of non-voting shares to current
stockholders (i.e., the Share Issuance), Facebooks board of directors has agreed
to give future control over Facebook to its founder and current controlling
stockholder, Mark Zuckerberg.
2.

Zuckerberg owns 14.8% of the total outstanding shares of Facebook.

Zuckerberg controls Facebook by virtue of his ownership of 76.1% of Facebooks


Class B shares, which have ten votes per share (unlike Facebooks Class A shares,
which have one vote per share). Through an irrevocable proxy from a co-founder,
Zuckerberg controls the vote of another 8.9% of the Class B shares. Overall,
Zuckerberg controls 60.1% of the total voting power of Facebook shares.

These facts are taken from the Summary of the Action section of Plaintiffs
Verified Class Action Complaint, which is filed concurrently herewith and
incorporated herein by reference.

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3.

If he wished, Zuckerberg could control Facebook indefinitely by

holding the great bulk of his shares and not issuing additional shares. But holding
the great bulk of his shares is not Zuckerbergs ambition. In December 2010,
Zuckerberg announced that he had signed up for the Giving Pledge, an initiative
set up by Bill Gates that asks signatories to commit to donating the majority of
their wealth. At the time, Zuckerberg publicly announced that he wanted to donate
great wealth sooner rather than later in life:
People wait until late in their career to give back. But why wait when
there is so much to be done? With a generation of younger folks who
have thrived on the success of their companies, there is a big
opportunity for many of us to give back earlier in our lifetime and see
the impact of our philanthropic efforts.
4.

Zuckerbergs interest in donating a significant proportion of his

personal wealth created a tremendous opportunity for public stockholders of


Facebook. As Zuckerberg liquidated his personal holdings over time, control over
Facebook would pass to the public. Investors in Facebooks 2012 initial public
offering could reasonably expect that Zuckerberg would eventually divest his
control of Facebook.
5.

In December 2015, Zuckerberg announced that he and his wife,

Priscilla Chan, would, within their lifetime, donate 99% of their Facebook shares
through a personal philanthropic vehicle, the Chan Zuckerberg Initiative LLC.

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6.

But Zuckerberg did not want to relinquish control over Facebook.

Zuckerberg was confronted with a dilemma.


7.

Zuckerbergs dilemma created its own opportunity for Facebook.

Facebooks Board could insist that Zuckerberg pay for the power to exert control
in the future, or insist that Zuckerberg face the diminution of his control over time.
Just as you cant have your cake and eat it too, you cant retain corporate control
while donating your shares to charity. The Board possessed the power to say no.
8.

Zuckerbergs hand-picked directors had no interest in saying no to

Zuckerberg. They acquiesced to Zuckerbergs desire to retain control over


Facebook indefinitely, even decades after Zuckerberg gives away most of his
wealth to philanthropic and public advocacy initiatives that he and his wife will
oversee, regardless of Facebooks performance over those decades. The massive
issuance of non-voting Class C sharesand Zuckerbergs ability to sell those
shares without also selling voting shareswill allow him to retain a majority of the
voting power over Facebook even if he reduces his personal shareholdings from
14.8% to 5%. Given expected future financings, acquisitions, and equity awards
using newly issued non-voting stock, Zuckerberg can expect to retain control over
Facebook even as his percentage ownership of the Company further decreases.
9.

The Board is creating a radically new control structure for the

Company. Zuckerberg is being granted power to control the Company for decades

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after he divests the bulk of his wealth, even if he is no longer CEO, and after he
has established a massive philanthropic endeavor. Current directors have no
reliable means to predict whether Zuckerbergs unfettered control over the
Company will be beneficial decades hence, when the Company will be operating in
a new environment, Zuckerbergs economic stake in the Company will be far
diminished, and his attention to the Companys affairs may also be far diminished.
10.

There was no arms-length bargaining between Zuckerberg and the

Board of Directors over whether Zuckerberg could retain control and at what price.
The Special Committee was established for the express purpose of arriving at a
transaction structure that would maintain our founder-controlled structure. The
Chairperson of the Special Committee was Susan Desmond-Hellmann, the Chief
Executive Officer of the Bill & Melinda Gates Foundation, who has a massive
professional interest in facilitating the transfer of Zuckerbergs wealth to charitable
ends. Special Committee member Marc Andreessen, a venture capitalist who
relies heavily on his prestigious association with Facebook to capture deal flow,
and markets his firm, Andreessen Horowitz, as enabl[ing] founders to run their
own companies. The members of the Special Committee convinced themselves
that it was a critical benefit[] to Facebook that the Company remain under
Zuckerbergs control even as [he] sells or transfers a significant number of his
shares.

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11.

Having taken that position, the Special Committee did not bother

negotiating for anything of value from Zuckerberg in return. The Special


Committee waxes triumphant that Zuckerberg will now be newly required to
relinquish his high-vote Class B share in the event that he resigns or is terminated
for cause and upon his death. But none of the new provisions create any practical
restraint commensurate with the grant of future control:
a.

Zuckerberg has publicly stated that he plans to remain CEO of


Facebook for many, many years to come. Even so, Zuckerberg has
been granted the contractual freedom to remain in control of Facebook
so long as he is an Approved Executive Officer, a term defined
loosely to include service as Executive Chairman of the Board of
Directors or service in a policy making function. Zuckerberg may
even take a leave of absence to serve in a government position without
triggering conversion of his high-vote shares.

b.

Termination for cause requires a finding of bad faith by 75% of the


independent directors, after which time Zuckerberg is afforded sixty
days to cure the condition, followed by another vote by 75% of the
independent directors (who Zuckerberg may replace in the interim).

c.

Required conversion of the high-vote shares within three years of


Zuckerbergs death has little import, given Zuckerbergs relative

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youth and his intent to donate the bulk of his wealth in the near term.
There was never any likelihood that Zuckerbergs descendants would
exercise what the proxy statement refers to as multi-generational
majority voting control of the company.
12.

Zuckerberg and the other directors chose not to afford the public

stockholders an opportunity to register a veto or a voice over the desirability of


granting him future control over Facebook. Zuckerberg, as the controlling
stockholder, will exercise the voting power to amend the charter at the upcoming
annual meeting, without any need to obtain approval of a majority of the
unaffiliated stockholders. Facebook chose to announce the proposed charter
amendments in conjunction with a report of record quarterly earnings, rendering
the stock price reaction to the charter amendments unknowable.
13.

Zuckerberg timed his bid for untethered future control over Facebook

when he was at the zenith of his influence. His success as founder and CEO of a
company now worth over $337 billion is unparalleled. But past performance is no
guarantee of future results. The Board of Directors abdicated their responsibilities,
unfairly benefited Zuckerberg at the Companys expense, and acted for an
improper purpose when they agreed to grant Zuckerberg free future control over
Facebook, knowing that Zuckerberg will be divesting himself of a commensurate
economic interest in the Company, knowing that he will be undertaking new

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responsibilities apart from Facebook that may end up consuming the bulk of his
attention, and knowing that history is filled with examples of individuals who
could not sustain early success. The Boards grant of future control to Zuckerberg
is as reckless as it is unprecedented and vast.
14.

Delaware fiduciary duty law is predicated on the principle that Boards

of Directors must exercise stewardship over the business and affairs of the
corporation. Facebooks Board of Directors unlawfully acquiesced to the grant of
future control to the Companys controller. Absent an injunction of the issuance of
the Class C non-voting shares, the public stockholders will become subject to a
single individuals unconstrained exercise of control in circumstances never
previously authorized.
ARGUMENT
15.

A motion for expedited proceedings is properly granted if the plaintiff

is able to demonstrate a sufficient possibility of threatened irreparable and a


colorable claim. The burden of demonstrating a colorable claim is minimal: in
deciding whether the plaintiff's claims are colorable, the Court conducts something
of an almost superficial factual assessment in order to determine whether imposing
the burdens resulting from expedition is warranted. Ehlen v. Conceptus, Inc.,
2013 WL 2285577, at *1 (Del. Ch. May 24, 2013) (internal quotations omitted).

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A.

Plaintiffs Claims Are More Than Colorable

16.

The Board of Directors proposed grant of future control over

Facebook to Zuckerberg implicates heightened scrutiny under fundamental


doctrines of Delaware law.
17.

The Share Issuance must be examined under the rigorous standard of

entire fairness, because it entails the conveyance to a controlling stockholder of an


intangible but huge benefit, the guarantee of future corporate control for as long as
Zuckerberg wishes, even after he disposes of the great bulk of his economic stake
in Facebook.
18.

Vice Chancellor Laster recently discussed at length how legal

scholarship and Delaware precedent support the proposition that the same
standard of judicial review should apply to the different types of transactions by
which controllers can extract nonratable benefits, and that entire fairness should
not be limited to squeeze-out mergers or other transformative transactions. In re
EZCorp Inc. Consulting Agmt. Deriv. Litig., 2016 WL 197814, at *21 (Del. Ch.
Jan. 25, 2016). The transfer of future corporate control to Zuckerberg by means of
the Share Issuance is a form of asset tunneling, which is the transfer of major
long-term (tangible and intangible) assets from the [controlled] firm for less
than market value. Id. at *22 (quoting Vladimir Atanasov et al., Law and
Tunneling, 37 J. Corp. L. 1, 5 (2011)).

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19.

In an earlier case, Vice Chancellor Laster ruled that entire fairness

was the standard of review at the pleading stage because the challenged transaction
confers a benefit on a controlling stockholder that was not shared with the rest of
the stockholders. That benefit was liquidity. In re Activision Blizzard, Inc.
Sholder Litig., Cons. C.A. No. 8885-VCL, tr. at 114 (Del. Ch. June 6, 2014). The
fact that the controlling stockholder came to the corporation to facilitate the
controllers ability to liquidate its stake could be used and potentially exploited to
benefit the corporation. And what is alleged is that fiduciaries, instead, worked out
a transaction that worked to the great benefit of certain of them. Id. at 112-13.
20.

Here, similarly, Zuckerberg came to Facebook seeking a means to

facilitate his desire to transfer the great bulk of his economic stake. Rather than
negotiate against Zuckerberg with the objective of guiding the corporation along a
path by which corporate control could transfer to the public over time, or by which
Zuckerberg would pay to retain corporate control, the Special Committee and
Board acquiesced to Zuckerbergs desire to cement his control for as long as he
wished to exercise it, even after he transferred the great bulk of his economic stake.
21.

Zuckerberg gave up nothing nearly commensurate with his newfound

power to exercise lifelong control while retaining only a minimal percentage of


Facebooks equity. The give of future corporate control does not nearly justify
the get of new contractual restrictions that Zuckerberg can easily avoid

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triggering. No apparent effort was made by the Special Committee to bargain with
Zuckerberg over the value of the corporate control that he sought to guarantee for
himself for so long as he chose to exercise it. See In re S. Peru Copper Corp.
S'holder Derivative Litig., 52 A.3d 761, 801 (Del. Ch. 2011) (A reasonable
special committee, evaluating a conflicted transaction with a controlling
shareholder, would have a continuing and relentless focus on the actual giveget involved in real cash terms.). See also In re Dairy Mart Convenience Stores,
Inc., 1999 WL 350473, at *17 (Del. Ch. May 24, 1999) (apply entire fairness to
transaction with controller that was restructured in a manner that gave two
management directors the ability to secure near 41% of the voting power and
effective voting control for the Company at no cost to those insiders).
22.

It is no defense that the Board believed that it was preferable for

Zuckerberg to exercise control for so long as he wished to wield it, regardless of


the passage of decades and the massive diminution of his proportionate equity
stake. The Board decided that it was preferable to vest control with Zuckerberg
rather than protect the prospect of control shifting over time to public stockholders.
That choice is at odds with the teaching of Paramount Communications Inc. v.
QVC Network Inc., 637 A.2d 34 (Del. 1993), that directors must protect and
demand compensation for the lost ability of public stockholders to exercise control.
When a transfer of control is intended, public stockholders are entitled to receive,

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and should receive, a control premium and/or protective devices of significant


value. Id. at 43. Directors may not vest an individual with control based on an
uninformed view that public stockholders with a continuing equity stake will
prosper under the controllers rule. See id. at 50 (directors squandered their
final opportunity to negotiate on the stockholders behalf and remained
paralyzed by their uninformed belief that alternative to transaction with controlled
company was illusory).
23.

Put differently, directors may not act with the primary purpose of

entrenching a top manager in office. See id. at 42 n.11 (collecting cases); Giurich
v. Emtrol Corp., 449 A.2d 232, 239 (Del. 1982) (The Courts of this State will not
allow the wrongful subversion of corporate democracy by manipulation of the
corporate machinery or by machinations under the cloak of Delaware law.).
24.

Defendants will likely try to argue that the Proposed Share Issuance is

subject to business judgment rule review under the majority opinion in Williams v.
Geier, 671 A.2d 1368 (Del. 1996), in which the plaintiffs failed to establish that
the implementation by charter amendment of a tenured voting scheme that
benefited a controlling family group had a sole or primary purpose of
entrenchment. Id. at 1384. In Geier, there was no evidence offered to show that
the Board was dominated or controlled by the Family Group. Id. at 1378. Here, as
discussed at length in the complaint, Zuckerbergs hand-picked directors were

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conflicted by personal ties to and business relationships with Zuckerberg, as well


as their own professional commitments to facilitating the perpetuation of founder
control or facilitating founder philanthropy.
C.

Plaintiff Is At Risk Of Irreparable Harm; The Balance Of


Equities Favors Expedition And Will Favor Injunctive Relief

25.

Once the Share Issuance occurs, public stockholders can begin trading

Class C stock, Zuckerberg can transfer it, and Facebook can begin using it for
acquisitions, equity awards and other corporate purposes. It is practicable to
schedule an expedited trial and, if necessary, schedule a hearing on a motion for
preliminary injunction, before any third-party rights in Class C stock can vest.
Plaintiff would be prepared to try the case within six months. This brief delay
would not unduly prejudice Zuckerberg or Facebook.
CONCLUSION
For all the foregoing reasons, Plaintiff respectfully requests entry of an
Order, substantially in the form of the proposed order submitted herewith,
expediting the proceedings, including:
expedited production of board minutes, banker books, and emails
concerning the Share Issuance;
expedited depositions; and

the scheduling of a hearing on a motion for preliminary injunction and


the scheduling of an expedited trial.

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/s/ Joel Friedlander


Joel Friedlander (Bar No. 3163)
Jeffrey M. Gorris (Bar No. 5012)
Christopher P. Quinn (Bar No. 5823)
FRIEDLANDER & GORRIS, P.A.
1201 N. Market Street, Suite 2200
Wilmington, DE 19801
(302) 573-3500
OF COUNSEL:

Counsel for Plaintiff

Jeffrey H. Squire
Lawrence P. Eagel
David J. Stone
J. Brandon Walker
Todd H. Henderson
BRAGAR EAGEL & SQUIRE, P.C.
885 Third Avenue, Suite 3040
New York, NY 10022
(212) 308-5858
DATED: May 6, 2016

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