Meta is the world's largest social media network, encompassing Facebook, Instagram, Messenger, and WhatsApp, used by 3.59 billion monthly and 2.82 billion daily users. These platforms collectively handle over 140 billion messages daily. In 2021, Meta reported $118 billion in revenue and $39.3 billion in profit, primarily through advertising. User engagement is critical as it increases ad views and revenue.
Plaintiff James McRitchie is a self-described shareholder activist. In this complaint, MacRitchie alleged that Meta's directors, being concentrated investors with substantial holdings in Meta stock, prioritize firm-specific gains over broader economic interests. This supposedly conflicts with diversified investors' interests, who benefit when company performance aligns with general economic trends.
The complaint argued that under Modern Portfolio Theory, investors should diversify. It suggested that fiduciary duties should serve diversified investors, implying that corporate management should focus on the broader economy's health.
The plaintiff argued that Delaware law has adopted—or should adopt— a diversified-investor model, particularly for systemically significant corporations like Meta, which the plaintiff claims impacts the economy significantly.
The complaint alleged that Meta's management, driven by Mark Zuckerberg's control, maximizes user engagement and profits at the cost of user safety and the economy. This claim was supported by whistleblower revelations and the "The Facebook Files" series by The Wall Street Journal.
In response, Meta's defendants argued that Delaware law currently supports a firm-specific model, which justifies their management approach. They sought to dismiss the complaint for failure to state a valid claim.
The complaint listed three counts. Count I alleged Meta's Board members breached fiduciary duties by ignoring the interests of diversified stockholders, focusing solely on increasing Meta’s share price and profit. Count II accused Zuckerberg and Sandberg of breaching their duties as officers by engaging Meta in activities harmful to the diversified portfolios of the company’s stockholders. Count III asserted that Zuckerberg, acting as a controller, engaged in similar detrimental practices.
As the court pointed out, the plaintiff thus charged all major Meta fiduciaries with breaching the same fiduciary standards, assuming these standards apply uniformly across roles. The court devoted a very long footnote (omitted) to challenging the uniformity of standards applicable to each role. But the analysis primarily addressed the directors' actions. For simplicity’s sake, the edit focuses exclusively on the board.
VC Travis Laster granted the motion to dismiss:
Under the standard Delaware formulation, directors owe fiduciary duties to the corporation and its stockholders. Implicitly, the “stockholders” are the stockholders of the specific corporation that the directors serve, i.e., “its” stockholders. The standard Delaware formulation thus contemplates a single-firm model (or firm-specific model) in which directors of a corporation owe duties to the stockholders as investors in that corporation. That point is so basic that no Delaware decisions have felt the need to say it. Fish don’t talk about water.
I think the opinion is interesting for several reasons. First, if confirms that Delaware follows Dodge. Second, the discussion about using a firm-specific versus a diversified-investor approach to fiduciary duties is an long-standing issue in the academic literature. Third, it gives you an opportunity to talk about a wide variety of foundational issues. Having said that, however, from my perspective as a casebook author, the opinion is problematic in several ways. One is its sheer length (over 100 pages in Westlaw). Another is the extensive discussion of issues to which students will not be exposed until much later in the casebook, such as the standard of review in conflicted interest transactions, cases that they will not read until later in the book, and lines of cases that the casebook simply does not address.
Some thoughts:
1. Does it matter whether we think of a corporation’s stockholders as “shareholders” or as “investors”? VC Laster explained:
The plaintiff hitches its wagon to the word “stockholders.” The plaintiff points out that stockholders are investors, then observes that “[s]mart investors diversify.” Therefore, says the plaintiff, managing a corporation for the ultimate benefit of its stockholders must mean managing it for the benefit of diversified investors. The plaintiff next argues that “[f]or a diversified Meta stockholder, the critical factor determining financial return will not be how Meta or any other individual company performs (‘alpha’), but rather how the market performs as a whole (‘beta’).” The plaintiff asserts that over time, a diversified investor’s portfolio will track the returns from the market as a whole. Not only that, but market returns will generally track the performance of the economy itself. “While valuation multiples rise and fall, they revert to a mean, leaving GDP as the key determinant of diversified portfolio value.”
Other than a gloss on the word “stockholders,” the plaintiff offers scant support for this radical claim.
2. Is Delaware law as stated in MacRitchie consistent with Dodge v. Ford Motor Co.? Yes. Laster at least implicitly treats Dodge as being consistent with the trend of Delaware case law. (It would have been nice if he had cited my article, Why We Should Keep Teaching Dodge v. Ford Motor Co., 48 Journal of Corporation Law 77 (2022), which makes the point at length. Available at SSRN: https://ssrn.com/abstract=4076182.)
3. Does Delaware law require directors to maximize profits in the short term or the long term? Should it encourage directors to favor one over the other? Laster explained:
Delaware decisions have long instructed directors to prioritize the long-term value of the corporation. The deep structure of Delaware corporate law explains why. Because a stockholder makes a presumptively permanent investment in a presumptively perpetual firm, the proper orientation of the directors’ fiduciary duties is toward maximizing the value of the firm over a long-term investment horizon. These features mean the corporation is “uniquely designed for extreme long-term capital allocation.”
4. The court asserts that businesses do not internalize the negative externalities they generate. Is that true of all businesses? Would you expect partnerships or close corporations to internalize more or less of their negative externalities than public corporations? The problem, of course, is limited liability. In the partnership setting, the prospect of unlimited personal liability doubtless operates as a constraint on which partners are willing to risk liability by externalizing costs. In the close corporation setting, veil piercing may have somewhat of a constraining influence.
5. Does the court’s analysis of private ordering suggest that a corporation could amend its articles of incorporation to opt out of the shareholder value maximization rule and into a more stakeholder-focused model? The question of whether one can use charter provisions to contract out of the shareholder value maximization norm is a highly contested one. My view is that Chancellor William Chandler was right when he wrote that:
Having chosen a for-profit corporate form, the craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders. The “Inc.” after the company name has to mean at least that.
eBay Dom. Holdings, Inc. v. Newmark, 16 A.3d 1, 34 (Del. Ch. 2010). If the shareholder value maximization norm is thus an inherent aspect of the corporation, it would seem unlikely that one can opt out. On the other hand, if VC Laster’s reading of the three relevant provisions is correct, there is no obvious firebreak between managing for diversified investors and managing for stakeholders.
6. If the court is correct that the Board Power Exception would allow a corporation’s articles of incorporation to effectively adopt a public benefit corporation model of fiduciary duties, why did Delaware adopt the Public Benefit Corporation statute? I think the adoption of the Private Benefit Corporation statute casts doubt on whether you can get there through private ordering.
7. Should Delaware law be changed to allow (or even require) directors to manage for the interests of diversified investors? Laster explained:
[T]he plaintiff cites The Economic Structure of Corporate Law by Frank Easterbrook and Daniel Fischel. Published in 1991, the authors advance a book-length argument for reconceiving corporate law to fit the premises of the law-and-economics movement. Like other scholars from that movement, they assume that legal rules should be evaluated from the perspective of diversified investors. Thus, they argue that,
the investor wants to maximize the value of his holdings, not the value of a given stock. Whenever there is a question about the apportionment of gain, the investor prefers whatever rule maximizes the net gain to be had—which means increasing the probability of a gain-producing transaction and reducing the costs of realizing each gain. The rules for dealing with gain-creating opportunities will be established before any particular opportunity is in sight, and so each investor will prefer the set of rules that maximizes the total value (wealth) enjoyed by investors, without regard to how the return is shared among corporations.
They also anticipate the plaintiff’s argument that “[a] person who holds a diversified portfolio has an investment in the economy as a whole and therefore wants whatever social or private governance rules maximize the value of all firms put together. He is not interested in maximizing one firm’s value if that comes out of the hide of some other corporation.” …
Meanwhile, the plaintiff does not address compelling counterarguments to a diversified-investor model. An important article by Professors Marcel Kahan and Edward Rock explains that orienting fiduciary duties toward diversified investors creates pathologies of its own. They refer to the diversified-investor model as a form of “welfarism,” which
rejects the faith that market forces will promote general welfare and lacks confidence in the government’s ability to set proper boundary constraints. Because it rejects these underpinnings of shareholderism, it also departs from the focus that shareholderism places on firm value. Instead, it embraces a corporate purpose that includes objectives that are extraneous to the corporation. As the political system has proven itself ineffective in addressing major social problems, welfarism thus looks to corporations to internalize externalities, and promote social welfare, directly.
They identify three strands of welfarism: portfolio welfarism, shareholder welfarism, and direct social welfarism. The plaintiff’s diversified-investor model is a form of portfolio welfarism, endorsed by the Shareholder Commons, which argues that highly diversified investors should “adopt stewardship practices designed to curtail corporate activities that externalize social and environmental costs that are likely to decrease the returns of portfolios that are diversified in accordance with portfolio theory, even if such curtailment could decrease returns at the externalizing company.”
But as Kahan and Rock explain, portfolio welfarism has “a dark side.
Intra-portfolio externalities do not always align with social externalities. Consider, as an example, externalities among competing firms. By raising output, a firm may harm its competitors. While doing so may maximize the value of the firm, it may reduce the value of a portfolio held by an owner with stakes in the firm’s competitors. If competing companies took account of intra-portfolio externalities by, for example, lowering output and raising prices, portfolio values may increase—but, in this case, social welfare would decline.
Welfarism also has to confront the same lack of consensus about the proper responses to social and economic problems that inhibits political solutions. “[I]f we, as citizens and voters in political elections, cannot generate effective political solutions [to social and economic problems], why would we, as shareholders and voters in corporate elections, be more successful in inducing companies to create solutions at the firm level?” The lack of consensus also creates political vulnerability.
While supporters of welfarism may point to the government’s inability to adopt regulations like a carbon tax as evidence of political dysfunction, opponents may view that failure as the outcome of a functioning democratic process and view some forms of welfarism as ‘woke capitalism.’ The very lack of political consensus for substantive solutions will thus also reduce political support for welfarism.
In short, the diversified-stockholder model is not a panacea. It too generates tradeoffs.
