Facebook's Zuckerberg Chided by Judge Over Board Pay

Indian Prime Minister Narendra Modi Meets With Facebook Inc. Chief Executive Officer Mark Zuckerberg

Facebook Inc. Chief Executive Officer Mark Zuckerberg

Photographer: David Paul Morris/Bloomberg
  • Delaware judge rejects company request to toss lawsuit
  • Suit claims directors paid on average $461,000 in stock

Mark Zuckerberg may be Facebook Inc.’s controlling shareholder, but when it comes to moves such as signing off on executive pay a state court judge says the billionaire still has to follow the rules.

Zuckerberg and the company’s board must face an investor’s claims that the world’s largest social network improperly allowed directors to set their own pay in 2013 and that he failed to correctly sanction the compensation decisions after the fact, Delaware Chancery Court Judge Andre Bouchard ruled Tuesday.

“Although he can outvote all other stockholders and thus has the power to effect any stockholder action he chooses, he must still adhere to the corporate formalities,” Bouchard concluded.

Excessive Pay

The ruling clears the way for a trial of shareholder Ernesto Espinoza’s allegations the company improperly allowed directors to award themselves excessive pay in 2013. That year, Facebook’s board paid non-employee directors an average of $461,000 in stock, exceeding industry peers by as much as 43 percent, according to Espinoza’s complaint, which was filed on behalf of the company.

Zuckerberg violated the rights of other investors by failing to vote at a stockholder meeting or acting by written consent in compliance with Delaware corporate law, Espinoza claimed. Instead, Zuckerberg signed off on the stock grants in an affidavit and a deposition taken after the complaint was filed, according to Bouchard’s decision.

Menlo Park, California-based Facebook is incorporated in Delaware.

Espinoza had sued alleging breach of fiduciary duties, waste of corporate assets and unjust enrichment. Bouchard tossed Espinoza’s waste claim, saying he couldn’t prove the directors’ compensation was unjustified. He allowed the other two claims to proceed.

Vanessa Chan, a Facebook spokeswoman, said officials were reviewing the judge’s ruling.

Facebook Likes

Bouchard rebuffed Facebook’s claims that Zuckerberg, who owned shares that gave him more than 60 percent of the voting power in the company in 2013, properly signed off on directors’ stock grants. The billionaire should have used ratification methods outlined in Delaware corporate statutes, Bouchard said.

“If affidavits are sufficient, what about meeting minutes, press releases, conversations with directors or even liking a Facebook post of a proposed corporate action?” the judge questioned in his ruling.

“Zuckerberg may not opt out of the procedures by which stockholders may take corporate action in favor of a less formal method of his choosing,” Bouchard added.

The case is Espinoza v. Zuckerberg, CA9745, Delaware Chancery Court (Wilmington).

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