Meta Trial on Privacy Scandal Features Tech, Politics A-List (1)

Behind-the-scenes details of an agreement between Facebook and US privacy regulators in 2019 emerged in a Delaware court Wednesday, during a trial on investor claims the settlement cost them at least $7 billion.

A company director at the time, Jeffrey Zients, who was later former President Joe Biden’s chief of staff, said the board asked its lawyers to approach the Federal Trade Commission with a proposal. The company, now known as Meta Platforms Inc., was willing to pay billions of dollars to settle allegations related to a privacy scandal but would not accept any settlement that held founder Mark Zuckerberg personally responsible.

Board members “felt it was important to get this behind us so we could focus on growth,” Zients said on the first day of an eight-day trial in Delaware Chancery Court. They believed Zuckerberg, as CEO, was essential to the business and “there wasn’t any indication” he personally had anything to do with the privacy missteps related to political consulting firm Cambridge Analytica, he said.

Jeff Zients

Photographer: Al Drago/Bloomberg

A parade of Silicon Valley celebrities is expected to testify in the Meta trial over the next two weeks, led by Zuckerberg. Others on the witness list include the company’s former chief operating officer Sheryl Sandberg and prominent venture capital investors Marc Andreessen and Peter Thiel. Andreessen, who still sits on the company’s board, is expected to testify Thursday.

The investors contend directors of the company hurt share prices through actions tied to the decade-old incident that resulted in Cambridge Analytica acquiring data on millions of Facebook users. The data was used in work the firm did for the 2016 campaign to elect President Donald Trump to his first term.

The suit alleges Meta directors engineered the company’s $5 billion settlement with the FTC, overpaying to protect Zuckerberg from being held personally liable and to the detriment of shareholders.

Meta representatives didn’t immediately respond to a request for comment about Zients’ testimony Wednesday.

Zuckerberg’s much-anticipated testimony is expected next week. The case is unusual because it’s the first time that director-oversight claims involving a public company have gone to trial in Delaware Chancery Court, the premier venue for business disputes in the US. Other cases have been dismissed or settled.

A group of pension funds who hold Meta shares allege Zuckerberg and Sandberg led Facebook to violate a 2012 Federal Trade Commission order covering data-sharing practices. Facebook directors also are accused of failing to properly monitor the platform’s adherence to that order, according to court filings. Investors also accuse Zuckerberg of insider trading.

The insider-trading claims prompted Zuckerberg to demand his stock-trading strategies be kept under seal in the trial. The tech titan moved to shield the price thresholds that trigger his automatic sales. The public can understand the allegations without that highly confidential information, he said in a court filing.

Meta Platforms Inc. CEO Mark Zuckerberg departs federal court in Washington in April.

Photographer: Kent Nishimura/Bloomberg

In early 2018, Facebook executives admitted Cambridge Analytica had been allowed to improperly gather data about tens of millions of the company’s users. Zuckerberg later apologized, acknowledging Facebook must better safeguard users’ information. A year later, the FTC announced the settlement over violations of the order under which Facebook would pay the $5 billion fine. Investors, including pension funds, filed suit in the wake of that order.

The case was filed as a derivative lawsuit, one that allows investors to sue company executives or board members on behalf of the company itself. Any recovery will go back to the company rather than any individual shareholder.

Zuckerberg, the 41-year-old CEO and chairman of Meta’s board, controls about 61% of the company’s voting power through a dual-class share structure, effectively granting him sole control over the board composition and corporate strategy — past, present and future. Repeated investor efforts to raise concerns about corporate governance have fallen flat due to his concentrated voting power.

Bloomberg Intelligence If Meta’s unable to knock out this case ahead of trial, it theoretically could face a $2 billion settlement,

The trial is being overseen by Chancellor Kathaleen St. J. McCormick – the same judge who rejected Tesla Inc. CEO Elon Musk’s $55 billion pay package. That ruling and a handful of others — part of a court crackdown on insider conflicts of interest — prompted several companies to shift their states of incorporation to Nevada and Texas, including Tesla and Bill Ackman’s Pershing Capital. They cited alleged judicial bias against tech leaders such as Musk and Zuckerberg.

The wave of exits from Delaware, which funds more than a quarter of its budget with billions in corporate fees, led to a major overhaul of the state’s best-in-class corporate laws earlier this year. The changes were drafted by an expert panel that included former judges now practicing law at firms linked to Musk and Zuckerberg, including one involved in the Cambridge Analytica case.

Meta officials have publicly said they are weighing whether to yank their incorporation papers out of Delaware, which is the corporate home to more than 60% of Fortune 500 companies. Firms come to Delaware to get access to chancery court, where sophisticated business judges hear cases without juries.

Last week, a venture capital firm co-founded by Meta director Andreessen cited a creeping pattern of uncertainty about how the law applies to startups and tech firms to explain its decision to relocate to Nevada.

The case is IN RE Facebook Inc. Derivative Litigation, 2018-0307, Delaware Chancery Court (Wilmington).

(Updates with additional Zients testimony.)

--With assistance from Riley Griffin, Michael Leonard, Jennifer Kay and Kurt Wagner.

To contact the reporter on this story:
Jef Feeley in Wilmington, Delaware at jfeeley@bloomberg.net

To contact the editors responsible for this story:
Sara Forden at sforden@bloomberg.net

Elizabeth Wasserman, Steve Stroth

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