Meta Defends Making Money at Expense of Broader Portfolios

A lawsuit asking whether the parent company of Facebook and Instagram selfishly puts profits over public health and social well-being aims to destroy the predictability of Delaware corporate law, Meta Platforms Inc. argued Wednesday.

Vice Chancellor J. Travis Laster indicated that the question before the Delaware Court of Chancery—whether short-term gains for stockholders should prevail in consideration of any corporate action that “from a societal standpoint is a net-negative”—is one corporate boards can expect to consider more and more.

“We’re now in a world where the vast majority of our market is moving toward duopoly,” Laster said during the hearing in Wilmington, Del. “This is going to be a recurring event.”

A shareholder activist initially sued Meta and its board in 2022. The amended complaint alleges the directors failed in their fiduciary duties by putting profit over public safety, broad economic welfare, and the interest of Meta’s diversified stockholders, who also invest in other companies. The lawsuit also makes similar claims against Mark Zuckerberg and boardmember Sheryl Sandberg as officers of the company, and against Zuckerberg as a controlling stockholder.

Zuckerberg, Sandberg, and Meta’s other directors have moved to dismiss the lawsuit, arguing that the leaders of Delaware corporations don’t owe a duty to oversee, consider, or protect a stockholder’s investments in other companies.

It’s unclear how to measure a board’s impact on a diversified portfolio, or a portfolio that included shares in one of Meta’s competitors, said one of Meta’s attorneys, James Kramer of Orrick Herrington & Sutcliffe LLP.

“How would a board determine what the diversified holdings of investors are? Does that mean real estate, crypto, or mutual funds?” he said. “Where would the lines be drawn?”

Undermining the stability of Delaware corporate law could have dire consequences for Meta and all other companies incorporated in the state, he said.

“Every one of my clients is interested to hear what happens here because it’s going to affect what they do,” Kramer said. “We need to stay with a consistent rule.”

Tradeoffs

An attorney representing the shareholder, James McRitchie, editor of the online publication Corporate Governance, said it “seems absurd” to say that Delaware law requires destroying broad investment portfolios to benefit investors of a single company.

Considering the diversified holdings of stockholders is the reality of modern investing, said McRitchie’s attorney, Kurt Heyman of Heyman Enerio Gattuso & Hirzel LLP.

“Many risk-forward decisions only make sense because they understand their stockholders generally are diversified,” he said.

Many corporations already consider tradeoffs between financial profits and social good, such as efforts to mitigate the effects of climate change, he said.

“I don’t think a ruling in our favor is going to lead to a flood of litigation,” Heyman said amid lengthy questioning by Laster, who was interested in how a board should regard industry-wide practices that may harm society whenthere’s no single company large enough to cause all the harm alone.

The court’s ability to limit collective action “is probably limited. You’re talking about regulatory duties, not fiduciary duties,” Heyman said.

Laster adjourned the hearing without ruling on Meta’s motion to dismiss, saying he’ll issue a written opinion that he would expect to be appealed to the Delaware Supreme Court.

Meta’s attorney raised Laster’s own social media usage in his arguments, citing comments Laster recently posted to the LinkedIn platform defending Delaware’s position on ESG issues.

“It seems that people pay more attention to my LinkedIn posts than my opinions,” the judge said to chuckles from the attorneys gathered before him.

McRitchie is represented by Heyman Enerio Gattuso & Hirzel LLP. Meta, Zuckerberg, and Meta’s other board members are represented by Ross Aronstam & Moritz and Orrick Herrington & Sutcliffe LLP.

The case is McRitchie v. Zuckerberg, Del. Ch., No. 2022-0890, oral argument 12/20/23.