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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,
v.
C. A. No. __________
MARK ZUCKERBERG, MARC
ANDREESSEN, PETER THIEL,
REED HASTINGS, SUSAN
DESMOND-HELLMANN, ERSKINE
BOWLES, SHERYL SANDBERG,
JAN KOUM and FACEBOOK, INC.,
Defendants.
VERIFIED CLASS ACTION COMPLAINT
Plaintiff Kenneth Elan (Plaintiff), asserts claims for breach of fiduciary
duty on behalf of himself, as a class action on behalf of the public stockholders of
Facebook, Inc. (Facebook or the Company), against Facebooks board of
directors (the Director Defendants), including Mark Zuckerberg, Facebooks
founder, Chairman, Chief Executive Officer, and controlling stockholder. 1

Plaintiffs allegations are made upon personal knowledge as to himself and his
own acts, and upon information and belief as to all other matters, based upon the
investigation conducted by and through his attorneys, which included, inter alia, a
review of documents filed by Defendants with the United States Securities and
Exchange Commission (the SEC), news reports, and other publicly available
documents.

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I.

SUMMARY OF THE ACTION


1.

This action challenges a giveaway of unprecedented dimension

future control over Facebook, Inc. (Facebook or the Company), 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 nonvoting shares to current stockholders (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.
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

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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.
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.

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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.
Zuckerberg.

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


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
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

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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. Its most financially sophisticated member was 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.
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
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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
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.
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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
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.
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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.
II.

PARTIES
15.

Plaintiff Kenneth Elan is, and at all relevant times has been, a

stockholder of Facebook.
16.

Defendant Mark Zuckerberg is Facebooks founder, CEO, Chairman,

and controlling stockholder.


17.

Defendant Sheryl Sandberg has been a Facebook director since 2012.

She has served as the Companys Chief Operating Officer since 2008. In 2015, the
Company paid Sandberg over $18 million in cash, stock, and other compensation.
18.

Defendant Jan Koum has been a Facebook director since 2014. He

serves as Chief Executive Officer of WhatsApp Inc. (WhatsApp), a whollyowned subsidiary of Facebook that provides mobile messaging services. When
Koum joined Facebook as an employee in October 2014, he was given 24,853,468

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restricted stock units that will vest and settle over a four-year quarterly vesting
schedule, as long as Mr. Koum remains employed by the Company.
19.

Defendant Peter Thiel has been a Facebook director since 2005. Thiel

is a venture capitalist who has served as a Partner of Founders Fund, a venture


capital firm, since 2005. He was a co-founder of PayPal.
20.

Defendant Marc Andreessen has been a Facebook director since 2008.

Andreessen is the co-founder and general partner of Andreessen Horowitz, a


venture capital firm. He was a co-founder of Netscape.
21.

Defendant Reed Hastings has been a Facebook director since June

2011. He is the founder, CEO and Chairman of Netflix.


22.

Defendant Susan Desmond-Hellmann has been a Facebook director

since 2013. She is the CEO of the Bill & Melinda Gates Foundation.
23.

Defendant Erskine Bowles has been a Facebook director since 2011.

He served as President of the University of North Carolina from 2005 to 2010.


24.

Nominal defendant Facebook, Inc. is a Delaware corporation

headquartered in Menlo Park, California. Facebooks core business is a popular


social media platform that generates substantially all of its revenues through the
sale of advertising. Its current market capitalization exceeds $330 billion.
Facebook is named as a defendant because Plaintiff seeks to enjoin Facebook from
implementing the Share Issuance.
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III.

SUBSTANTIVE ALLEGATIONS
A.

Negotiation Of The Share Issuance


25.

According to the Preliminary Proxy, discussions regarding the Share

Issuance began no later than August 2015 and were sparked by Zuckerbergs
concerns that he might lose control over the Company:
During August 2015, Mr. Zuckerberg discussed with our board of
directors that if he were to donate or otherwise dispose of a significant
number of his shares of our capital stock to further his philanthropic
aims, if we were to make one or more large stock-based acquisitions,
or if we were to issue a significant amount of equity-based
compensation awards to our service providers, we might no longer be
founder-controlled.
26.

On August 20, 2015, the Board of Directors created the Special

Committee to evaluate a potential reclassification and appointed DesmondHellman, Andreessen and Bowles as its members. The Special Committee hired
Evercore Group LLC (Evercore) and Wachtell, Lipton, Rosen & Katz
(Wachtell) as its financial and legal advisors, respectively.
27.

The Preliminary Proxy makes no reference to Evercore issuing a

fairness opinion.
28.

The Preliminary Proxy contains limited information about its

negotiations with Zuckerberg. There is no recounting of offers or counter-offers.


The following three paragraphs are essentially all that is disclosed about the
negotiations:

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Since its formation in August 2015, the Special Committee has met
numerous times and also has had frequent conversations. The Special
Committee has sought advice from its advisors (i) in evaluating the
benefits and disadvantages of the company implementing a
reclassification versus maintaining the status quo and (ii) in assisting
the Special Committee in its deliberations and negotiations with
respect to the terms of a potential reclassification. The Special
Committee has considered, and received advice from its advisors on,
the likely effects of a reclassification on our share price, capital
structure, governance, management, operations, and investor relations.
Furthermore, the Special Committee has reviewed and discussed
several recent reclassifications effected by other founder-controlled
companies with dual-class common stock and has considered the
terms of those reclassifications as well as the effects of those
transactions on the reclassifying companys share price, capital
structure, governance, management, operations, and investor relations.

Throughout the course of the negotiations, the Special Committee


exercised this power and leverage to insist that, in connection with
any Reclassification, (i) we implement the New Certificate, (ii) we
make certain amendments to our corporate governance guidelines
(which amendments are described under Executive Officers,
Directors, and Corporate GovernanceBoard of Directors
Controlled Company Status) and (iii) we enter into the Founder
Agreement with Mr. Zuckerberg and certain of his affiliates that hold
shares of our capital stock (which agreement is described under
Founder Agreement below). The Special Committee believed that
the New Certificate, the amendments to our corporate governance
guidelines and the Founder Agreement help achieve certain benefits to
the company and its stockholders, including by (i) linking Mr.
Zuckerberg's control of our company to Mr. Zuckerbergs continued
service in a leadership role (subject only to certain limited exceptions
for government service or office) and (ii) conferring certain new
protections and benefits not available under the Current Certificate.
See Reasons for the Reclassification below.
Moreover, during the course of these negotiations, the Special
Committee and Mr. Zuckerberg engaged in sustained negotiations
with respect the terms of the Reclassification. Among other matters,
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the Special Committee negotiated to include the four new automatic


sunset triggers described in Proposal 7D, to reduce the length of the
sunset transition period proposed originally by Mr. Zuckerberg for
several of the sunset triggers described in Proposal 7D and to reduce
the scope of certain exceptions to the sunset trigger for voluntary
leaves of absence or a resignation as an Approved Executive Officer
by Mr. Zuckerberg, as a result of which Mr. Zuckerberg can avoid
triggering an automatic sunset only if he takes a voluntary leave of
absence or resigns in connection with government service or office,
subject to certain terms and conditions. The Special Committee made
clear to Mr. Zuckerberg that it would not negotiate further with
respect to these terms and that they were essential to their being able
to recommend the Reclassification. Mr. Zuckerberg agreed to the
Special Committees proposals. At the conclusion of these
negotiations, the Special Committee was satisfied that the proposed
terms of the Reclassification were in the best interests of our company
and our minority stockholders. At the conclusion of these
negotiations, the Special Committee was satisfied that the proposed
terms of the Reclassification were in the best interests of our company
and our minority stockholders. See Reasons for the Reclassification
below.
29.

In short, the Special Committee acquiesced in a give-away of future

control to Zuckerberg, allowing Zuckerberg to achieve his dual objectives of


liquidating and divesting the great bulk of his ownership stake while also
maintaining voting control over Facebook. The Special Committee extracted no
control premium or payment from Zuckerberg and allowed him to obtain voting
control without paying for it or retaining his economic stake in Facebook.
30.

On April 13, 2016, the Special Committee recommended approval of

the Share Issuance. On April 22, 2016, the Board of Directors voted unanimously
to approve the Share Issuance, with the employee directors abstaining.
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B.

The Special Committee Obtained Meaningless Concessions


31.

The Special Committee did not obtain any meaningful limits on

Zuckerbergs future exercise of control. The Special Committee failed to obtain a


majority-of-the-minority vote on the Share Issuance. The concessions that the
Special Committee did obtain were window-dressing.
32.

First, Zuckerberg agreed to a Founders Agreement, which provides

that (i) if Zuckerberg sells down his Class B stock below a majority, he must
convert all Class B stock into Class A stock; (ii) Zuckerberg cannot vote for or
tender into any merger, consolidation, or acquisition that would give differential
treatment to any class of stock; and (iii) Zuckerberg must, from time to time,
discuss succession planning with the Board.
33.

Second, Zuckerberg agreed to amendments to the certificate of

incorporation to provide that all shares of Class B common stock will


automatically convert into Class A common stock within specified periods of time
following (i) the death or qualifying disability of Zuckerberg; (ii) his for-cause
termination as an Approved Executive Officer; or (iii) his voluntary resignation
as an Approved Executive Officer (except in the case of a resignation for
Zuckerberg to serve in government).

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34.

None of these restrictions impose meaningful limits on Zuckerbergs

exercise of control over the Company for as long as he wishes. The benefits to
public stockholders are entirely illusory.
35.

Termination for cause would require 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). Approved Executive Officer, is
defined so loosely as 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. Finally, the required conversion of his shares within three
years of his death is meaningless, given his stated goal of donating 99% of those
shares within his lifetime.
C.

The Special Committee Has Given Zuckerberg The Right To Sell


The Bulk of His Minority Economic Interest in Facebook While
Maintaining Lifelong Control
36.

The Share Issuance is a massive gift of future control to Zuckerberg.

It allows him to reduce his personal shareholdings from 14.8% to 5% while


maintaining control.
37.

As Facebook issues additional non-voting shares for corporate

purposes, Zuckerbergs percentage ownership will be further reduced without


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affecting his control position. As one large Facebook investor noted in an April
28, 2016 Bloomberg report, [i]ssues of share dilution come up much sooner for
[technology] companies, which offer a large portion of compensation through
stock. Moreover, Facebook has a history of making large acquisitions with
significant stock components.
38.

Absent the Share Issuance, Zuckerbergs control would be steadily

eroded by dilutive issuances for employee compensation and acquisitions.


Moreover, absent the Share Issuance, the market could fairly expect that
Zuckerberg would sell stock over time, further reducing his control.
39.

The Share Issuance fundamentally changes that dynamic and,

effectively, gives Zuckerberg perpetual control of Facebook. Not only does the
Share Issuance give Zuckerberg a way to liquidate his own stake without reducing
his control, it means that Facebook will now be able to use Class C stock for future
acquisitions and employee compensationhalting the natural erosion of
Zuckerbergs control through future dilutive issuances.
D.

Giving Zuckerberg Perpetual Control Is Not A Get for


Shareholders
40.

Zuckerbergs newfound ability to sell his Class C stock without

sacrificing control is an immense benefit or give of control rights to Zuckerberg.


The get for public stockholders is far from apparent.

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41.

The Preliminary Proxy makes clear that the Special Committee and

Director Defendants are claiming that the extension of Zuckerbergs control is


itself the primary benefit of the Share Issuance. The first two headings under
Reasons for the Reclassification refer to extending Zuckerbergs control:
Allow Us to Maintain Focus on Mr. Zuckerbergs Long-Term Vision for
our Company
Encouraging Mr. Zuckerberg to Remain Involved with Our Company in a
Leadership Role
42.

Under the first heading, the Preliminary Proxy explicitly recites the

Director Defendantss claim that public stockholders will benefit from


Zuckerbergs continued control:
The Reclassification will provide our board of directors with the
ability to prolong the period of time during which Mr. Zuckerberg
maintains majority voting control over us, which, as noted above, the
Special Committee and the board of directors believe is in the best
interest of us and our stockholders (other than Mr. Zuckerberg and his
affiliated entities, as to whom no determination is made). The
Reclassification will allow Mr. Zuckerberg to sell or transfer shares of
Class C capital stock without affecting Mr. Zuckerberg's majority
voting control over us, and will also allow us to make one or more
large stock-based acquisitions and to continue to grant equity awards
to our service providers, without affecting Mr. Zuckerberg's majority
voting control over us. Being able to issue shares of Class C capital
stock in the future, instead of shares of Class A common stock or
Class B common stock, will enable our board of directors to issue
shares of capital stock without affecting our existing voting and
governance structure.
The Special Committee and our board of directors believe the
Reclassification is an appropriate way to make it more likely that

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Mr. Zuckerberg will remain in a position to influence our direction for


many years, and we believe that this influence has been and will be
beneficial to our growth, strategy, and stability. Mr. Zuckerberg will
still lose voting power when he sells or transfers shares of Class A
common stock or Class B common stock, or when we issue additional
Class A common stock or Class B common stock, which we may
choose to do from time to time.
43.

Zuckerberg himself is even more blunt. In an April 27, 2016 Note

on the Facebook website,2 Zuckerberg summarized the Share Issuance as follows:


Today, Facebooks board of directors is announcing a proposal to
create a new class of stock that will allow us to achieve both goals. Ill
be able to keep founder control of Facebook so we can continue to
build for the long term, and Priscilla and I will be able to give our
money to fund important work sooner. Right now, there are amazing
scientists, educators and doctors around the world doing incredible
work. We want to help them make a bigger difference today, not 30 or
40 years down the road.
44.

Even assuming that Zuckerbergs continued leadership of Facebook in

the best interests of the Company over the foreseeable future, it is not obvious why
Zuckerbergs control over Facebok should be cemented over his lifetime, into the
far, unforeseeable future. Zuckerberg will turn 32 years of age on May 14, 2016.
He potentially could retain control over Facebook for the next six decades, long
after his percentage ownership of the Company could be miniscule. Zuckerbergs
accomplishments to date do not justify cementing his control for the next sixty

Available at: http://newsroom.fb.com/news/2016/04/marknote/

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years. The well-publicized troubles of AOL, 3 Yahoo!, 4 MySpace, 5 Groupon, 6


Zynga, 7 LinkedIn, 8 Twitter, 9 and others make plain that past results are no
guarantee of future performanceparticularly in the fast-changing technology
sector.
45.

Very few companies remain at the cutting-edge of innovation for

decades. 10 At some point, Facebook will confront challenges that other mature
technology companies, such as Apple or Microsoft, face in which case different
skill sets and perspectives may be deemed essential. The Board of Directors has
foreclosed a future board from having the power to make hard decisions about the
future leadership of the Company, even after Zuckerberg may have sold off his
3

See, e.g., Tim Arango, How the AOL-Time Warner Merger Went So Wrong, N.Y.
Times (Jan. 10, 2010).
4

See, e.g., Nicholas Carlson, MARISSA MAYER AND THE FIGHT TO SAVE YAHOO!
(2015).

See, e.g., Eyder Perelta, News Corp. Takes Huge Loss, Selling Myspace for $35
million, NPR (June 29, 2011).
6

See, e.g., Jason Del Rey, Groupon Founder Says Groupon Is Like Morphine.
New CEO Says Its Just Misunderstood, RE/CODE (November 21, 2015).
7

See, e.g., Kieren McCarthy, Zynga CEO resignsagainafter terrible results,


THE REGISTER (Mar. 2, 2016).
8

See, e.g., Jim Cramer, What the LinkedIn disaster means to you, CNBC (Feb. 8,
2016).

See, e.g., Christopher Williams, Hard and hurting: what now for Twitter, The
Telegraph (Jan. 25, 2016).
10

See, e.g., Jim Collins, HOW THE MIGHTY FALL (2011).

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Class C stock and may have radically misaligned incentives. The Share Issuance
disables the stockholders and Board from taking action in the future to replace
Zuckerberg as CEO without cause.
E. The Board And Special Committee Were Conflicted
46.

The Boards acquiescence to Zuckerbergs demand for guaranteed

control divested from ownership is no surprise, considering the makeup of


Zuckerbergs hand-picked Board. Zuckerberg has stacked the Board with true
believers in the prerogatives of founders persons who would be loathe to cross
Zuckerberg and challenge his demand for guaranteed future control.
47.

The eight-person Board includes: Zuckerberg: two lavishly

compensated Facebook employees, Sandberg and Koum, the latter of whom was
the co-founder of WhatsApp; three other founders, Hastings, Thiel, and
Andreessen, two of whom espouse a pro-founder business approach and each of
whom has benefited professionally from their ties to Zuckerberg; plus DesmondHellman, who is closely tied to Bill Gates and the facilitation of tech founder
philanthropy.
48.

Hastings is the founder and CEO of Netflix, a key business partner of

Facebook. Through the so-called Friends and Community initiative, Facebook


users can share data about their Netflix viewing habits with their Facebook
friendsdriving further users to Netflix. This partnership is so important to

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Netflix that Hastings personally lobbied Congress for an amendment to the Video
Privacy Protection Act of 1988 to permit this form of sharing. When the initiative
was launched in March 2013, Netflix shares shot up by over 6%.
49.

Thiel, one of Facebooks earliest investors and a co-founder of

PayPal, is a strong advocate of giving control to founders. In his book, Zero to


One: Notes on Startups or How to Build the Future, Thiel writes approvingly of a
system of autocratic control for founders:
[C]ompanies that create new technology often resemble feudal
monarchies rather than organizations that are supposedly more
modern. A unique founder can make authoritative decisions, inspire
strong personal loyalty, and plan ahead for decades. Paradoxically,
impersonal bureaucracies staffed by trained professionals can last
longer than any lifetime, but they usually act with short time horizons.
Since its inception in 2005, Mr. Thiels venture capital fund, The Founders Fund,
has marketed itself as uniquely deferential to founders. The firms manifesto
What Happened To The Future 11 boasts of the Founders Funds efforts to
cement founders control over outside investors: 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.
50.

A February 2016 story by Business Insider described Thiel as a

mentor and longtime friend of Zuckerbergs. A September 2012 story by


11

Available at: http://foundersfund.com/the-future/

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Business Insider stated that for Thiel, the appeal of being on Facebooks board is
obvious. As one source who has discussed Facebook with him put it, Is it that bad
to be on the board of a $40 billion company? No, it is not that bad. Especially for
a startup investor like Thiel, who gets good deal flow thanks to his high profile.
51.

Andreessen, a co-founder of Netscape, is also a prominent venture

capitalist who has benefited from his board seat at Facebook. In his own words:
Deal flow is everything If youre in a second-tier firm, you never get a chance
at that great company. In 2012, Zuckerberg agreed that Facebook would purchase
Instagraman Andreessen Horowitz portfolio companyin a cash-and-stock
transaction valued at $1 billion at a time when the company had just thirteen
employees and no revenue. As a result of the sale of Instagram, Andreessen
Horowitz made $78 million from a $250,000 seed investment. 12

In 2014,

Zuckerberg announced that Facebook would purchase another Andreessen


Horowitz portfolio companyOculus Rift, a maker of virtual reality headsetsfor
cash-and-stock valued at approximately $2 billion. At the time of the purchase
Oculus had essentially no revenue, nor even a commercial product. The news
website Quartz wrote at the time, In buying Oculus, Facebook has become
Andreessen Horowitzs billion-dollar candy machine.
12

See Andreessen Horowitz, Instagram, (April 22, 2012),


https://a16z.com/2012/04/22/instagram/

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52.

An October 2015 VANITY FAIR article described how Andreessen

leveraged his Facebook connections into the Oculus investment:


Andreessen, who is also a Facebook board member, had previously
been skeptical of funding a virtual-reality company; now he was so
hot for the deal that he suggested [Oculus founder Brendan] Iribe talk
to Mark Zuckerberg, as a reference.
The first call between Zuckerberg and Iribe lasted 10 minutes.
Zuckerberg sang the praises of Andreessen, and then he turned the
discussion to Oculus.
53.

Andreessen protects his deal flow by being deferential to Zuckerberg.

As Felix Salmon wrote in an April 26, 2012 piece for Reuters, Andreessens main
job there [on Facebooks board] is to ensure that Mark [Zuckerberg] can do
whatever he wants, to provide a layer of insulation between Zuckerberg and
shareholders.
54.

Andreessen Horowitz positions itself as deferential to founders,

generally. In a long-form profile of the firm in 2012, Techonomy wrote:


Andreessen Horowitz is positioning itself as extremely founder-friendly. Every
partner is himself a founder and an operator. Andreessens partner, Ben Horowitz
echoed this point in a January 2012 post, writing Marc and I share a simple belief
that became the basis for our new venture capital firm: in general, founding CEOs
perform better than professional CEOs over the long term, and a venture capital
firm that enables founding CEOs to succeed would help build the best companies

22
{FG-W0408049.}

and yield superior investment returns. [W]e set out to design a venture capital
firm that would enable founders to run their own companies[.] (emphasis
original). 13 Andreessen could not resist Zuckerbergs attempts to cement his
control over Facebook without repudiating his firms core sales pitch.
55.

Over the first two weeks of November 2015long after negotiations

regarding the Share Issuance began and shortly before Zuckerberg announced the
Chan Zuckerberg InitiativeAndreessen sold more than 73% of his total
ownership stake in Facebook for approximately $160 million.
56.

Desmond-Hellmann is the CEO of the Bill & Melinda Gates

Foundationthe mammoth charitable organization to which the Chan Zuckerberg


Initiative is frequently compared. Given that Bill Gates and Zuckerberg are the
two most prominent proponents of tech founder philanthropy, and that Zuckerberg
was an early signatory of the Gates Giving Pledge, Desmond-Hellmann is the
last person who would have stood in the way of Zuckerbergs philanthropic plans.

13

Available at: https://a16z.com/2012/01/30/why-has-andreessen-horowitz-raised2-7b-in-3-years/

23
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CLASS ACTION ALLEGATIONS


57.

Plaintiff, a stockholder in the Company, brings this action

(a) individually, and (b) as a class action pursuant to Rule 23 of the Rules of the
Court of Chancery of the State of Delaware on behalf of himself and all
stockholders of Facebook (except the Defendants herein, and any person, firm,
trust, corporation or other entity related to or affiliated with any of the Defendants)
to redress the Defendants breaches of fiduciary duty.
58.

This action is properly maintainable as a class action.

59.

A class action is superior to other available methods of fair and

efficient adjudication of this controversy.


60.

The Class is so numerous that joinder of all members is

impracticable. The Company has over 2.3 billion Class A shares outstanding.
Consequently, the number of Class members is believed to be in the hundreds of
thousands and scattered across the world.

Moreover, damages suffered by

individual Class members may be small, making it overly expensive and


burdensome for individual Class members to pursue redress on their own.
61.

There are questions of law and fact which are common to all Class

members and which predominate over any questions affecting only individuals,
including:

24
{FG-W0408049.}

a.

whether the defendants have breached and continue to breach


their fiduciary duties by granting Zuckerberg future control of
the Company without obtaining adequate value in return; and

b.

whether the Class is entitled to damages and/or injunctive


relief.

62.

Plaintiffs claims and defenses are typical of the claims and

defenses of other class members and Plaintiff has no interests antagonistic or


adverse to the interests of other class members. Plaintiff will fairly and adequately
protect the interest of the Class.
63.

Plaintiff is committed to prosecuting this action and has retained

competent counsel experienced in litigation of this nature.


64.

Defendants have acted in a manner that affects Plaintiff and all

members of the Class alike, thereby making appropriate injunctive relief and/or
corresponding declaratory relief with respect to the Class as a whole.
65.

The prosecution of separate actions by individual members of the

Class would create a risk of inconsistent or varying adjudications with respect to


individual members of the Class, which would establish incompatible standards of
conduct for Defendants; or adjudications with respect to individual members of the
Class would, as a practical matter, be dispositive of the interest of other members
or substantially impair or impede their ability to protect their interests.
25
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COUNT I
Breach of Fiduciary Duty Against Director Defendants
66.

Plaintiff repeats and realleges each and every allegation above as if set

forth in full herein.


67.

The Director Defendants owe Plaintiff and the Class the utmost

fiduciary duties of care and loyalty.


68.

By reason of the foregoing, the Director Defendants have breached

and continue to breach their fiduciary duties.

In particular, the Director

Defendants have violated their fiduciary duties of care and loyalty by, among other
things, agreeing to the Share Issuance which will unfairly transfer future control to
Zuckerberg.
69.

As a result of the foregoing, Plaintiff and the Class have been harmed,

as their influence over Company operations and strategy will be diminished and
they stand to be frozen out of management decisions on an ongoing, long-term
basis, and the value of their investment is at immediate risk.
70. The Plaintiff and the Class have no adequate remedy at law.
COUNT II
Breach of Fiduciary Duty Against Zuckerberg
71.

Plaintiff repeats and realleges each and every allegation above as if set

forth in full herein.

26
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72.

Zuckerberg is the controlling shareholder of Facebook and, as such,

owes Plaintiff and the Class the utmost fiduciary duties of care and loyalty.
73.

By reason of the foregoing, Zuckerberg has breached his fiduciary

duties and continue to breach his fiduciary duties. In particular, Zuckerberg has
violated his fiduciary duties by, among other things, causing the Board to agree to
the Share Issuance which will unfairly transfer future control to Zuckerberg.
74.

As a result of the foregoing, Plaintiff and the Class have been harmed,

as their influence over Company operations and strategy will be diminished and
they stand to be frozen out of management decisions on an ongoing, long-term
basis, and the value of their investment is at immediate risk.
75.

The Plaintiff and the Class have no adequate remedy at law.


COUNT III
Injunctive Relief Against Facebook

76.

Plaintiff repeats and realleges each and every allegation above as if set

forth in full herein.


77.

By reason of the foregoing, Zuckerberg and the Director Defendants

breached their fiduciary duties and continue to breach their fiduciary duties.
78.

As a result of the foregoing, Plaintiff and the Class will suffer

irreparable harm unless the Share Issuance is enjoined.

27
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PRAYERS FOR RELIEF


WHEREFORE, Plaintiff demands judgment and preliminary and permanent
relief, including injunctive relief, in his favor, and in favor of the Class, and against
all Defendants as follows:
A.

Certifying this case as a class action, certifying the proposed Class,


and designating Plaintiff and the undersigned as representatives of the
Class;

B.

Enjoining Defendants and any and all other employees, agents, or


representatives of the Company and persons acting in concert with
any one or more of any of the foregoing, during the pendency of this
action, from taking any action to consummate the Share Issuance until
such time as Defendants have fully complied with their fiduciary
duties;

C.

Awarding Plaintiff and the Class appropriate compensatory damages,


together with pre- and post-judgment interest;

D.

Awarding Plaintiff the costs, expenses, and disbursements of this


action, including any attorneys and experts fees and, if applicable,
pre-judgment and post-judgment interest; and

E.

Awarding Plaintiff and the Class such other relief as this Court deems
just, equitable and proper.

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

/s/ Joel Friedlander


Joel Friedlander (#3163)
Jeffrey M. Gorris (#5012)
Christopher P. Quinn (#5823)
FRIEDLANDER & GORRIS, P.A.
1201 N. Market Street, Suite 2200
Wilmington, Delaware 19801
(302) 573-3500
Counsel for Plaintiff

DATED: May 6, 2016

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