Mark Zuckerberg—the founder and CEO of Facebook—was sued in a Delaware court in 2018 by his company’s shareholders for a total of $35 billion. The lawsuit alleged that Zach Zuckerberg violated shareholders’ rights by not allowing a vote before he engineered a massive stock reorganization to both centralize control of the company and solidify his immense wealth and power.
For shareholders to become aware of the potential lawsuit, the company was obligated to inform them—but the demand was disregarded, leading to the collective decision to proceed with the legal action. Shareholders argued that Zuckerberg’s actions contradicted the company’s agreement of reserving voting rights for investors. As a result, by depriving investors of their voting powers, the decision could be seen as unfair.
Facebook’s Stock Reorganization Controversy
The core issue in the lawsuit is Facebook’s stock reorganization,which was done to protect Zuckerberg. His Class B shares gave him control of Facebook even with owning lesser amounts of stock, and his plan was to convert those Class B shares into Class A shares, with each Class B share transforming into three Class A shares. This would then allow him to keep a major stake in the company while also protecting his main holdings.
The controversy only grew when it was revealed that there were double standards in the stock conversion process, with Zuckerberg’s special rights accessed before the process was finalized. Zuckerberg’s shareholders accused him and the board of directors of stacking the odds in his favor and making decisions that would only benefit him.
The lawsuit would serve as one of the first major cases in corporate law to advocate for shareholder interests. Shareholders accused Zuckerberg of disregarding stockholder rights through the stock reorganization, which was seen as a ploy to gain control of Facebook without having to acquire a significant amount of the company’s stock.
The complaint lodged against Zuckerberg by Facebook’s shareholders drew heavy attention to the manner in which wealthy corporate executives such as Zuckerberg often prioritize their interests over those of their shareholders.
Delaware Chancery Court Ruling
The Delaware Chancery Court, which took up the case, found Zuckerberg guilty of lacking oversight for shareholders, though did not allow for the lawsuit to move forward due to his new stock not violating the company’s laws. The ruling stated that, although Zuckerberg was guilty of a breach of his fiduciary duty, the suit failed to meet the requirements of a sufficient cause of action.
The court also held that Zuckerberg’s actions did not amount to an actual fraud, as some had argued.
Effects of the Case in Corporate Governance
Despite the defeat in court, the case did have a lasting impact on corporate governance and demonstrated the power of shareholders to challenge executive action. Through the lawsuit, shareholders were able to protect the interest of investors—highlighting the need to hold corporate executives responsible for their decisions.
The case has set a precedent for future corporations and their shareholders, who can take heart in knowing that the right avenues exist to challenge corporate decisions. In addition, the recognition of shareholders’ rights will also help in balancing out the powers between corporations and investors.
The Impact on Mark Zuckerberg’s Reputation
Zuckerberg’s reputation suffered a huge blow after being accused of pushing through his own interests while disregarding those of the shareholders. Although the lawsuit was eventually dismissed, Zuckerberg’s actions still attracted severe criticism from the media and other stakeholders.
The press and other stakeholders heavily criticized Zuckerberg for taking actions which served to benefit him and overstep shareholders rights. This led to public outrage surrounding Zuckerberg and placed Facebook in a difficult legal situation.
The Financial Toll of the Lawsuit
The lawsuit also had a financial toll on Facebook despite the suit voting its way. After the lawsuit, Facebook’s stock dipped in value and the corporation was forced to hire expensive forensic accountants in order to refute shareholder allegations.
In total, the cost of the lawsuit was estimated to exceed the $35 billion originally sought by the shareholders. Such costs included lawyer fees, accounting fees, investigative costs and other legal expenses, which Facebook had to bear.
Mark Zuckerberg’s Tangible Insurance Resources
Regardless of the financial cost of the lawsuit, Zuckerberg still had considerable wealth and resources at his disposal. His fortune had become many times larger through his Facebook shares, thwarting any attempts by shareholders to receive tangible compensation.
Zuckerberg’s shares provided him with an insurance of sorts, as they still held substantial value despite the dip in share price in the wake of the lawsuit. This insurance enabled Zuckerberg to carry on with his business operations without worrying about the costs of the case.
Zuckerberg’s Invulnerability to Legal Action
The financial resources at Zuckerberg’s disposal essentially ensured his invulnerability from any legal repercussions from the lawsuit. As such, his wealth served as an impenetrable protection from any liability arising from the case.
The fact that Zuckerberg was still able to hold and increase his immense wealth in spite of the lawsuit, highlighted the inequality between shareholders and corporate executives. Mainly, Zuckerberg was proof that those in power are often shielded from any financial or legal repercussions and can essentially be immune to legal action.
Tax Implications the Stock Reorganization Created
The stock reorganization had both immediate and future tax implications. Due to the size and complexity of the transaction, it required prompt attention, otherwise it was likely to attract the attention of both state and federal tax authorities.
Zuckerberg and his company were asked to pay taxes on the amount of stock received by each shareholder, as well as the transfer fee, which totaled around $27 million. In addition, the company was required to pay legal and accounting fees, making the reorganization an expensive endeavor for all parties involved.
Implications Beyond the Courtroom
The lawsuit reshaped the narrative of the business world and of Zuckerberg’s life and legacyas a CEO. It showed the vulnerability of powerful, wealthy individuals to legal action and demonstrated the power of shareholders in holding corporate executives accountable.
Moreover, the case was seen as proof of the potential for corporate law to affect the lives and fortunes of the extremely wealthy. The outcome of the case had far-reaching implications for corporate culture and for the protection of shareholders’ rights.
The lawsuit has strengthened the power of shareholders as a collective, ensuring that decisions cannot be made that serve only the interests of powerful executives. It has also provided shareholders with the confidence to challenge corporate decisions and to know that their voices matter.
The case also highlighted the importance of having an informed and involved shareholder base. By having more stakeholders involved in the decision-making process, Zuckerberg could not have bypassed the law and have disregarded the fundamental rights of shareholders.