By Tom Hals
WILMINGTON, Delaware (Reuters) -A last-minute settlement between Meta Platforms shareholders and the company’s leadership last week ended an $8 billion trial and spared Mark Zuckerberg from testifying about alleged violations of Facebook users’ data. It also took the heat off the state of Delaware, which has been plagued by criticism from technology and business leaders.
The second day of the eight-day trial in Delaware’s Court of Chancery was about to start on Thursday when the legal team for the shareholder plaintiffs announced they had reached a deal to resolve the case.
The terms are still being hammered out, but the agreement ends a case that had the potential to fuel a trend of companies abandoning the state as their legal home.
Since last year, Elon Musk and other business leaders have attacked the state’s courts, once the key reason companies incorporated in Delaware, for rulings that they say made it easier for shareholders to sue directors.
Musk encouraged companies to leave the state and in the past year Dropbox, Trump Media & Technology, Roblox and Simon Property Group were among the large public companies that reincorporated outside Delaware, a trend dubbed “Dexit.”
Critics claim the state’s courts are biased against company founders — an uncomfortable backdrop for the Meta case, whose 11 defendants included the billionaires Zuckerberg, Sheryl Sandberg, Marc Andreessen, Palantir Technologies co-founder Peter Thiel and Reed Hastings, who co-founded Netflix.
A ruling that spared the defendants might have given the impression the court caved to pressure to let them off the hook, while one that favored the plaintiffs could have led to further calls for companies to leave Delaware.
“It was going to be really awkward for the court,” said Ann Lipton, a professor at Colorado Law School.
Meta, which owns Facebook, Instagram and WhatsApp, and lawyers for Meta investors and the defendants did not respond to requests for comment.
Meta shareholders alleged current and former officers and directors of Facebook were liable for failing to protect users’ data. The shareholder plaintiffs wanted the court to order the defendants to use their personal fortune to reimburse the company for the $8 billion in legal costs that Facebook had shelled out for violating user privacy, including a $5 billion fine paid to the Federal Trade Commission in 2019.
The case put a spotlight on Delaware courts and the judge handling the case, Chancellor Kathaleen McCormick, who gained prominence last year for rescinding Musk’s $56 billion pay package from Tesla. That ruling is on appeal.
Adding to the high stakes, Andreessen’s venture capital firm, Andreessen Horowitz, said earlier this month it was moving its incorporation to Nevada from Delaware and encouraged other companies to follow. “In particular, Delaware courts can at times appear biased against technology startup founders and their boards,” said a blog post on the firm’s website, citing McCormick’s Musk pay ruling. The firm did not respond to a request for comment.
Earlier this year, representatives from Meta met with Delaware’s governor and soon after the state changed its widely used corporate law to make it harder for shareholders to sue corporate boards over deals with controlling shareholders like Zuckerberg.
Delaware’s political leaders said the changes were meant to keep Meta and other companies from fleeing the state. Delaware gets more than a quarter of its budget revenue from fees associated with chartering businesses.
Despite the new law, some companies, like Affirm Holdings, still opted to leave, saying it was unclear how it would be interpreted by Delaware courts.
Lawrence Cunningham, director of the Weinberg Center for Corporate Governance in Delaware, said the Meta shareholder settlement highlighted the strengths of the Delaware court in handling a complicated case and guiding it to a resolution, which might be hard to replicate elsewhere. “It was a very desired judicial outcome,” he said of the case.
(Reporting by Tom Hals in Wilmington, Delaware; Editing by Noeleen Walder and Daniel Wallis)
