Delaware’s courts traditionally have said that breach of the duty of oversight claims (sometimes referred to as Caremark claims) are “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.” However, in series of cases following the Delaware Supreme Court’s 2019 decision in Marchand v. Barnhill, Delaware courts have sustained a number of breach of the duty of oversight claims. More recently, Vice Chancellor Laster, in a pair of decisions in the McDonald’s case, elaborated significantly on the reach of duty of oversight. Among other things, Laster made it clear that the duty extends to corporate officers as well as to directors. Some commentators (including me) were concerned that Laster’s elaborations could lead to further lawsuits alleging breach of the duty of oversight.
Now, in what is the first high-profile post-McDonald’s Caremark claim of which I am aware, a group of four institutional investors has brought a breach of the duty of oversight claim against certain directors and officers of Meta, alleging that the executives failed to take sufficient action with respect to allegations that the company’s social media sites were being used for human trafficking. The new complaint appears to have been shaped to reflect many of the implications arising from Laster’s decisions in the McDonald’s case. A copy of the redacted public version of the plaintiffs’ March 20, 2023, complaint in the Meta case can be found here.
The McDonald’s Rulings
Readers will recall that there has been ongoing litigation in the Delaware Chancery Court involving allegations that certain directors and officers of McDonald’s breached their duty of oversight with respect to alleged sexual harassment and other misconduct in the company’s workforce. In two decisions earlier this year, Vice Chancellor Laster assessed the sufficiency of the plaintiffs’ breach of the duty of oversight allegations.
First, in a January 26, 2023, opinion (discussed here, and referred to herein as McDonald’s I), Vice Chancellor Laster held that the duty of oversight applies to corporate officers as well as to directors, and that the plaintiffs’ allegations against the company’s former head of Global HR were sufficient to sustain a claim for breach of the duty of oversight.
Second, in a March 1, 2023, opinion (discussed here, and referred to herein as McDonald’s II), Laster held that the allegations against the director defendants were not sufficient to sustain a claim for breach of the duty of oversight. Importantly, in a clarifying section of the opinion, Vice Chancellor Laster said that it was not necessary in a “red flag” type breach of the duty of oversight claim for the plaintiff to show that the alleged oversight pertained to a “mission critical” operation of the company.
In my commentary on these earlier decisions, I specifically expressed the concern that in the wake of these decisions that they would lead to increased number of breach of the duty of oversight claims against corporate officers and that in light of the decisions it may be easier for plaintiffs to sustain claims against both directors and officers for claims of alleged breach of the duty of oversight. Indeed, I noted that academic commentators had already raised the alarm that oversight breach claims are not in fact the most difficult kind of claim to sustain, and in fact they increasingly are being sustained with alarming frequency.
The Meta Lawsuit
On March 20, 2023, plaintiffs’ lawyers acting on behalf of four institutional investors filed a shareholder derivative lawsuit in Delaware Chancery Court against certain directors and officers of Meta Platforms, Inc, the corporate parent of Facebook, Instagram, and other social media platforms. The case alleges breaches of fiduciary duty by the company’s directors and senior officers with respect to “rampant and systematic sex trafficking, human trafficking, and child sexual exploitation flourishing on the Company’s social media platforms.”
The complaint contends that “although the Board and management have known about this increasing trend, both management and the Board have consciously turned a blind eye to sex trafficking, human trafficking, and child sexual exploitation occurring on Meta’s platforms.” The Board’s and management’s “utter failure to monitor or oversee this problem, to educate themselves about its scope, or even to discuss it in any meeting at all – constitute breach of their fiduciary duties to the Company and its shareholders.”
In support of the allegations that the trafficking is taking place on the company’s platforms, the complaint cites numerous media reports about the activity taking place on the sites. The complaint also notes that between 2013 and 2023, U.S. federal and state courts have issued at least 70 written decisions involving trafficking on Meta’s platforms. Between 2012 and 2023, at least 129 federal and state courts issued written decisions in criminal and civil cases involving child sexual exploitation on Meta’s platforms. Recent federal legislation has clarified that internet service providers such as Meta can be held liable for intentionally facilitating sex trafficking on their platforms. The company’s CEO, Mark Zuckerberg, has repeatedly testified before Congress and publicly discussed the subject of sex trafficking connected to Meta. In October 2021, Facebook whistleblower Frances Haugen appeared on 60 Minutes to discuss her whistleblower report that Meta had misled investors about trafficking on the company’s sites.
The complaint alleges that in response to the plaintiff’s lawyers’ pre-lawsuit books and records request on Section 220 of the Delaware Corporations Code with respect to the topic of trafficking, the defendants “conspicuously failed to produce any minutes whatsoever of any meeting of either the Board, the Audit Committees, or another committee of the Board,” showing attention or action with respect to the topic. The complaint alleges that the “only logical inference is that the Board has consciously decided to permit Meta’s platforms to promote and facilitate sex/human trafficking.”
The Company’s Board and management, the complaint alleges, “have utterly failed to act in good faith to assure the existence of a functioning Board-level system of monitoring and reporting to prevent such heinous conduct, and by consciously failing to monitor or oversee whether management was addressing the endemic scourge of sex trafficking and human trafficking that has lived and grown for years on Meta’s platforms.”
The complaint asserts two substantive claims, one against current and former directors and officers for breach of fiduciary duty, and one against the officer defendants for breach of fiduciary duty. In its prayer for relief, the complaint seeks, among other things, for an award of damages that company allegedly has suffered as a result of the breach; and an order directing the company to take all actions to improve its corporate governance and controls in order to prevent trafficking.
The allegations in the complaint are extraordinary. For those of us who tend to think of Facebook and Instagram as places for people to post pictures of their pets or of their vacation in Florida, the complaint’s detailed trafficking allegations are, to put it mildly, disturbing.
The complaint has only just been filed and it remains to be seen how the complaint will fare. The defendants will of course file a motion to dismiss, alleging among other things, that the plaintiffs’ allegations are insufficient to establish demand futility.
The defendants will also seek to rely on Laster’s comments in McDonald’s II, in which Laster dismissed the breach of the duty of oversight claims against the McDonald’s directors (despite the disturbing allegations in that case), that in order to sustain a breach of the duty of oversight claim, the plaintiffs must plead more than that the directors “responded in a weak, inadequate, or even grossly negligent manner. Rather, Laster said, the pled facts must “indicate a serious failure of oversight sufficient to support an inference of bad faith.”
The plaintiffs’ complaint was clearly shaped by Laster’s holdings in McDonald’s. Indeed, the complaint itself expressly quotes the McDonald’s decisions (see, for example, paragraph 219). There are a number of other ways that the case clearly reflects the McDonald’s rulings.
For starters, undoubtedly in reliance on Laster’s holdings that the duty of oversight extends to corporate officers as well as to directors, the complaint names as defendants several of the company’s executives, and not just the CEO, Zuckerberg. For example, the complaint also names as defendants the company’s General Counsel and its President of Global Affairs. Indeed, one of the two substantive claims asserted in the complaint is directed exclusively against the officer defendants. Many of us anticipated at the time of the McDonald’s decision that breach of the duty of oversight claims increasingly were going to involve corporate officers as well as directors. The new Meta complaint seems to underscore this point.
In addition, the complaint seeks to want to position the plaintiffs’ claims with respect to the question of whether or not “mission critical” allegations are required. To be sure, the complaint tries to anticipate the possibility that the “mission critical” requirement, referenced in several recent breach of the duty of oversight cases, would be applied here. The complaint seeks to argue that the functions the defendants allegedly failed to oversee involved “mission critical” operations. However, the complaint also seems to suggest that the allegations would be sufficient even in the absence of this “mission critical” allegations.
Third, the complaint seems geared to try to meet the standards of liability Laster described in the McDonald’s decisions. For example, to suggest that the defendants ignored an affirmative requirement of positive law, the complaint tries to make the case that the failure of oversight risked the company’s violations of trafficking laws enacted to apply to social media platforms. In order to try to meet the requirement of a showing of bad faith, the complaint refers extensively to the absence in the documents produced pursuant to the books and records request of any showing that the trafficking issues were considered or addressed at the board level.
Then there is the fact of the lawsuit itself. As I noted above, one of my concerns in the wake of the McDonald’s decisions is that plaintiffs’ lawyers would be emboldened to try to pursue breach of the duty of oversight claims, and do try to do so in a wide variety of corporate contexts and involving a broader array of company operations. The new Meta complaint arguably is the realization of these concerns. That is not to suggest that the allegations in the complaint are not serious. As I emphasized above, the complaint’s allegations are disturbing. However, that does not necessarily mean that the individual defendants violated their duties to the company and to investors. It will be very interesting to follow this case as it progresses.
Very special thanks to a loyal reader for supplying me with a copy of the new Meta complaint and for helpful commentary about the complaint, as well.