In reading Chancellor Andre G. Bouchard’s ruling yesterday in Espinoza v. Zuckerberg, 2015 Del. Ch. LEXIS 273 (Del. Ch. 2015), I was reminded of the theological debate among Christians concerning justification by faith. The case involved a stockholder challenge to the decision by the board of directors of Facebook, Inc. to approve the compensation of its outside, non-management directors. Chancellor Bouchard framed the question as follows:
Can a disinterested controlling stockholder ratify a transaction approved by an interested board of directors, so as to shift the standard of review from entire fairness to the business judgment presumption, by expressing assent to the transaction informally without using one of the methods the Delaware General Corporation Law prescribes to take stockholder action?
Mr. Zuckerberg, who controls over 61% of the voting power of Facebook’s common stock, approved the compensation, but not through a vote at a stockholders’ meeting or by written consent. Instead, he expressed his consent in a deposition and an affidavit.
Was Mr. Zuckerberg’s internal approval sufficient or was some outward manifestation required? Chancellor Bouchard decided that stockholder ratification of an interested director transaction, so as to shift the standard of review from entire fairness to the business judgment presumption, cannot be achieved without complying with the statutory formalities in the Delaware General Corporation law for taking action. In other words, the stockholder must either vote at a meeting or act by written consent. According to Chancellor Bouchard, requiring adherence to corporate formalities promotes transparency and enables stockholders to “stay abreast of corporate decision-making and maintain accountability of boards of directors and controlling stockholders”.