EFiled: Sep 22 2017 03:20PM EDT

Transaction ID 61152101
Case No. 12286-VCL
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

IN RE FACEBOOK, INC. CLASS C

CONSOLIDATED C.A. No. 12286-VCL
RECLASSIFICATION LITIGATION

PUBLIC VERSION FILED:

September 22, 2017

DEFENDANTS PRE-TRIAL BRIEF

POTTER ANDERSON & CORROON LLP

OF COUNSEL: Stephen C. Norman (No. 2686)
Kevin R. Shannon (No. 3137)
William Savitt Berton W. Ashman, Jr. (No. 4681)
Ryan A. McLeod (No. 5038) Tyler J. Leavengood (No. 5506)
Anitha Reddy Jaclyn C. Levy (No. 5631)
Scott Stevenson 1313 N. Market Street
WACHTELL, LIPTON, ROSEN Hercules Plaza, 6th Floor
& KATZ Wilmington, Delaware 19801
51 West 52nd Street (302) 984-6000
New York, New York 10019
(212) 403-1000 Attorneys for Defendants Marc L.
Andreessen, Erskine B. Bowles, Susan D.
Desmond-Hellmann, Reed Hastings and
Peter A. Thiel
 RICHARDS, LAYTON & FINGER, P.A.
OF COUNSEL: Raymond J. DiCamillo (No. 3188)
Kevin M. Gallagher (No. 5337)
George M. Garvey Nicholas R. Rodriguez (No. 6196)
Mark B. Helm 920 N. King Street
Laura Lin Wilmington, Delaware 19801
MUNGER, TOLLES (302) 651-7700
& OLSON LLP
350 S. Grand Avenue, 50th Floor Attorneys for Defendant Mark Zuckerberg
Los Angeles, California 90071
(213) 683-9100
ROSS ARONSTAM & MORITZ LLP
David E. Ross (No. 5228)
Garrett B. Moritz (No. 5646)
Benjamin Z. Grossberg (No. 5615)
100 South West Street, Suite 400
Wilmington, Delaware 19801
(302) 576-1600

Attorneys for Defendants Jan Koum

Dated: September 15, 2017 and Facebook, Inc.
 TABLE OF CONTENTS

PRELIMINARY STATEMENT ...............................................................................1

BACKGROUND .......................................................................................................3

A. Facebooks capital structure and historical performance ........................3

B. Facebooks board of directors..................................................................6

C. Zuckerbergs philanthropic plans ..........................................................10

D. Zuckerberg proposes a reclassification and the board of directors

forms the Special Committee.................................................................12

E. The Special Committee retains advisors and gathers information ........14

F. Zuckerberg announces the creation of the Chan Zuckerberg

Initiative .................................................................................................21

G. Negotiations begin to focus on terms of a potential

reclassification that would trigger collapse of the multi-class
share structure ........................................................................................23

H. The Special Committee presents the terms it is considering for a

potential reclassification to the Facebook board ...................................25

I. The Special Committee insists that a potential reclassification be

conditioned on the eventual mandatory collapse of the multi-class
share structure ........................................................................................29

J. The Special Committee obtains a term mandating the collapse of

the multi-class share structure upon Zuckerbergs resignation
from Facebook by agreeing to a narrow exception for a
resignation to pursue government service .............................................36

K. The Special Committee and Zuckerberg reach agreement on the

terms of a potential reclassification and share the proposed terms
with the other independent directors......................................................39
L. The Special Committee unanimously recommends, and the board
approves, the potential reclassification..................................................42
 M. The terms of the Reclassification Plan ..................................................43

N. Facebook announces the Reclassification Plan and submits it to a

stockholder vote at its annual meeting...................................................48

O. Stockholder plaintiffs challenge the Reclassification Plan as a

breach of fiduciary duty .........................................................................50

ARGUMENT ...........................................................................................................55

I. THE RECLASSIFICATION IS SUBJECT TO THE BUSINESS

JUDGMENT STANDARD BECAUSE IT TREATS FACEBOOK
STOCKHOLDERS EQUALLY ......................................................................55

II. THE RECLASSIFICATION IS PROTECTED BY THE

BUSINESS JUDGMENT RULE BECAUSE IT TREATS
FACEBOOK STOCKHOLDERS EQUALLY AND WAS
APPROVED BY DISINTERESTED AND INDEPENDENT
DIRECTORS....................................................................................................60

III. THE RECLASSIFICATION PLAN IS ENTIRELY FAIR ............................64

A. The Reclassification Plan is the product of fair dealing ........................66

B. The Reclassification Plan reflects a fair price....................................71

CONCLUSION........................................................................................................86

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 TABLE OF AUTHORITIES

Cases
Aronson v. Lewis,
473 A.2d 805 (Del. 1984).....................................................................................62

Cinerama, Inc. v. Technicolor, Inc.,

663 A.2d 1134 (Del. Ch. 1994), affd 663 A.2d 1156 (Del. 1995)......... 64, 69, 85

Gelfman v. Weeden Inv'rs, L.P.,

859 A.2d 89 (Del. Ch. 2004) ................................................................................75

In re Cysive, Inc. Sholders Litig.,

836 A.2d 531 (Del. Ch. 2003) ..............................................................................70

In re John Q. Hammons Hotels Inc. Sholder Litig.,

2011 WL 227634 (Del. Ch. Jan. 14, 2011) ..........................................................70

In re Loral Space & Commcns Inc. Consol. Litig.,

2008 WL 4293781 (Del. Ch. Sept. 19, 2008). .....................................................66

In re MFW Sholders Litig.,

67 A.3d 496 (Del. Ch. 2013), affd, 88 A.3d 635 (Del. 2014).............................69

In re Mortons Rest. Grp., Inc. Sholders Litig.,

74 A.3d 656 (Del. Ch. 2013) ................................................................................56

In re Synthes, Inc. Sholder Litig.,

50 A.3d 1022 (Del. Ch. 2012) ................................................................. 57, 58, 59

Kahn v. Tremont Corp.,

694 A.2d 422 (Del. 1997).....................................................................................64

Orman v. Cullman,
794 A.2d 5 (Del. Ch. 2002) ........................................................................... 61, 63

S. Muoio & Co. LLC v. Hallmark Entmt Invs. Co.,

2011 WL 863007 (Del. Ch. Mar. 9, 2011),
affd, 35 A.3d 419 (Del. 2011) .............................................................................70

Sinclair Oil Corp. v. Levien,

280 A.2d 717 (Del. 1971)............................................................................. passim

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Van de Walle v. Unimation, Inc.,
1991 WL 29303 (Del. Ch. Mar. 7, 1991) ...................................................... 70, 71

Weinberger v. UOP, Inc.,

457 A.2d 701 (Del. 1983).............................................................................. 64, 66

Williams v. Geier,
671 A.2d 1368 (Del. 1996)........................................................................... passim

Miscellaneous
William T. Allen, Jack B. Jacobs & Leo E. Strine, Jr., Function Over
Form: A Reassessment of Standards of Review in Delaware
Corporation Law, 56 Bus. L. 1287 (2001).............................................. 64, 65, 71

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 PRELIMINARY STATEMENT
At issue in this lawsuit is a proposed reclassification and dividend of non-

voting Class C shares of Facebook. The proposed pro rata dividend will treat each

Facebook stockholder equally and will not alter any stockholders economic rights

or voting power. The proposed dividend was approved by a Special Committee of

independent Facebook directors and by Facebooks majority-independent board.

And the proposed dividend is conditioned on substantial revisions to Facebooks

capital structure and corporate governance that will require, among other things,

automatic sunsets of the companys high-vote shares and control structure.

Plaintiffs nevertheless attack the proposed reclassification and dividend

because they allege that it will impermissibly permit Mark Zuckerberg, Facebooks

founder, to sell shares to support his philanthropic activities without losing voting

control of the company. Plaintiffs thus seek a permanent injunction against the

proposed reclassification that would perpetuate the companys dual-class structure.

Plaintiffs case will not withstand the evidence and is not justified under law.

Although plaintiffs emphasize the substantial value of control to Zuckerberg, they

imagine that without a reclassification he will abandon control of the company he

founded. But the evidence is to the contrary: Zuckerberg has made clear that he

intends to retain control for the indefinite future, reclassification or no

reclassification. Plaintiffs contend that the Special Committee failed to extract

substantial concessions from Zuckerberg. But the evidence is to the contrary:

Zuckerberg was repeatedly pushed to his limit, and he ultimately agreed to

governance concessions that substantially constrain his optionality. Plaintiffs

assert that Zuckerbergs concessions are of no importance. But the evidence is to

the contrary: the revised charter negotiated by the Special Committee identifies

precisely those situations where control is riskiest for minority stockholdersfor

example, situations involving absent controllers, or the intergenerational passage of

controland categorially eliminates them from Facebooks corporate governance.

Because the proposed dividend is pro rata, it is subject to the business

judgment rule and, for that reason alone, plaintiffs position fails. But the dividend

and reclassification plan survive any level of judicial scrutiny. The reclassification

ensures that Facebook will be controlled only as long as Zuckerberg remains an

engaged leader of the company. That arrangement is eminently sensible as a

matter of business judgment, as Zuckerberg has created extraordinary value for

Facebooks minority stockholders, and the Special Committee reasonably

concluded that incentivizing his continued leadership is in the minoritys best

interest. And the reclassification is entirely fair to Facebooks minority

stockholders because it dramatically improves Facebooks corporate governance

and ensures that the company will be controlled only when control makes sense.

Judgment should be entered for defendants.

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 BACKGROUND
A. Facebooks capital structure and historical performance

Facebook, Inc. is incorporated in Delaware, headquartered in California, and

listed on the NASDAQ stock exchange.1 Facebook provides a family of apps and

services (including Facebook, WhatsApp, Instagram, Messenger, and Oculus) for

all the ways people and businesses connect. Its mission is to give people the power

to build community and bring the world closer together. The company generates

substantially all of its revenue from selling advertising placements to marketers.2

Since it went public in 2012, Facebook has had two classes of stock: Class A

stock with one vote per share, and Class B stock with ten votes per share.3 After

the completion of the initial public offering, Mark ZuckerbergFacebooks

founder, chairman, and chief executive officerheld 22.9% of the companys

outstanding capital stock, and, by virtue of his Class B stockholdings as well as

voting proxy agreements, controlled 57.6% of its voting power.4 Zuckerberg

1
JX1320 (Facebook, Inc., Annual Report (Form 10-K) (Feb. 3, 2017) (2017 10-
K)), at 7. All documents cited herein will be included in the Joint Exhibits
submitted to the Court before trial.
2
Id. at 5.
3
JX0260 (Facebook, Inc., Prospectus (Rule 424(B)(4) (May 18, 2012) (Facebook
IPO Prospectus)), at 8.
4
JX1360 (Expert Report of Daniel R. Fischel (Fischel Opening Report)) at 10
& Ex. 2; JX0260 (Facebook IPO Prospectus), at 141.

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currently holds 14.3% of the companys outstanding capital stock, representing

53.4% of its voting power.5 He also controls another 6.3% of the companys

voting power by virtue of an irrevocable proxy over another stockholders shares,

bringing his total voting power to 59.7%.6

Under Facebooks charter at the time of the initial public offering, and as it

remains today, the rights of Class A and Class B stockholders are identical, except

voting and conversion rights.7 Class A and Class B shares are generally entitled to

ratable treatment in the instance of any dividend, liquidation of the company, or

distribution upon a merger of the company or similar transaction.8 Differential

treatment is permitted, however, if approved by holders of a majority of the

outstanding Class A and Class B shares in separate class votes.9

Class B shares can be converted into Class A shares in one of three ways:

(1) A stockholder can elect to convert her Class B shares into Class A shares.10

5
JX1360 (Fischel Opening Report) at Ex. 2; JX1331 (Facebook, Inc., 2017
Definitive Proxy Statement (Form DEF 14A) (Apr. 14, 2017) (2017 Proxy)), at
36-37. Zuckerberg holds approximately 77% of outstanding Class B shares.
JX1360 (Fischel Opening Report) at Ex. 2; JX1331 (2017 Proxy), at 37.
6
JX1331 (2017 Proxy), at 36-37.
7
JX0260 (Facebook IPO Prospectus), at cover; JX0261 (Facebook, Inc. Restated
Certificate of Incorporation (Current Charter)), Art. IV, 3.1.
8
JX0261 (Current Charter), Art. IV, 3.3, 3.5, 3.6.
9
Id., 3.3, 3.5, 3.6.
10
Id., 3.8(a).

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(2) Holders of a majority of outstanding Class B shares can vote to have all Class

B shares converted into Class A shares.11 (3) In general, Class B shares

automatically convert into Class A shares upon transfer to a third party; they retain

their high-vote status, however, if they are transferred (including by inheritance) to

family members of the holder, or to entities exclusively owned by the holder or by

family members of the holder.12

In the five years since Facebook went public, the number of its daily active

users has more than doubled, from 483 million to 1.23 billion; its annual revenue

has grown more than sevenfold, from $3.71 billion to $27.64 billion; and its annual

net income has grown more than tenfold, from $1 billion to $10.22 billion.13

During the same period, Facebooks stock price has increased by over 300 percent,

outperforming both market and industry indices.14 Facebook is now one of the ten

largest companies in the world by market capitalization.

11
Id., Art. IV, 3.8(b).
12
Id., Art. IV, 3.8(b) 4.8-4.11.
13
JX1360 (Fischel Opening Report), 36, 37; JX0260 (IPO Prospectus) at 1, 10;
JX1320 (2017 10-K) at 33.
14
JX1360 (Fischel Opening Report), 37 (citing Fischel Exhibit 7, Bloomberg,
Capital IQ).

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 B. Facebooks board of directors

Facebooks board of directors has eight members.15 Zuckerberg is the

chairman. Two other directors are also Facebook executives: Sheryl Sandberg,

the chief operating officer; and Jan Koum, the chief executive officer of the

subsidiary WhatsApp.16 The remaining five directors have never been employed

by Facebook:

Dr. Susan Desmond-Hellmann, the lead independent director, joined the

board in 2013.17 She is the chief executive officer of the Bill & Melinda Gates

Foundation, a private philanthropic organization funded and controlled by the

Gates family and Warren Buffett.18 Before joining the Gates Foundation in 2014,

she was the first female chancellor of the University of California at San Francisco.

Earlier in her career, she was the head of product development at the

biotechnology company Genentech, Inc., where she led the development of a

number of breakthrough medicines, including two of the first gene-targeted

therapies for cancer.19 She has been named one of the worlds most powerful

15
JX1331 (2017 Proxy) at 10-12.
16
Id.
17
Id. at 11.
18
Id.; JX1398 (Who We Are, BILL & MELINDA GATES FOUNDATION).
19
JX1395 (Sue Desmond-Hellmann, BILL & MELINDA GATES FOUNDATION).

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innovators by Forbes Magazine and one of the 50 most powerful women in

business by Fortune Magazine.20

Erskine Bowles has served as a director since 2011.21 Bowles began his

career in finance at Morgan Stanley, and then went on to found an investment

banking firm and a private equity firm. He is currently the lead director of Morgan

Stanley.22 Before joining the Facebook board, Bowles was the president of the

University of North Carolina.23 He served as the White House Chief of Staff

during the Clinton administration and was Co-Chair of the National Commission

on Fiscal Responsibility and Reform in 2010.24

Marc Andreessen has served as a director since 2008.25 He is a co-founder

and general partner of Andreessen Horowitz, a venture capital firm. 26 Before

starting that firm, he co-created Mosaic, the first widely used web browser. He co-

founded Netscape Communications, which was sold to AOL for $4.2 billion,27 and

20
Id.
21
JX1331 (2017 Proxy) at 10-11.
22
JX1326 (Morgan Stanley, Definitive Proxy Statement (Form DEF 14A) (Apr. 7,
2017)), at 6.
23
Id.
24
Id.; JX1331 (2017 Proxy) at 11.
25
JX1331 (2017 Proxy) at 11.
26
Id.
27
Id.; JX0172 (AOL, Netscape tie knot, CNN MONEY (Nov. 24, 1998)).

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Opsware, Inc. (formerly known as Loudcloud Inc.), which was sold to Hewlett-

Packard Co. for $1.6 billion.28 He has been named one of the top 100 innovators in

the world by the MIT Technology Review and one of the 100 most influential

people in the world by Time magazine.29

Peter Thiel has served as a director since 2005.30 He is a co-founder and

partner of several investment and venture capital firms, including Thiel Capital,

Clarium Capital, and Founders Fund.31 He serves as the chairman of Palantir

Technologies Inc., a private big data analysis company that he co-founded in

2003 and is now valued at $20 billion.32 Thiel co-founded and served as the chief

executive officer of PayPal Inc. until its sale to eBay Inc. for approximately $1.5

billion.33

28
JX1331 (2017 Proxy) at 11; JX0220 (Hewlett-Packard Co., Current Report
(Form 8-K) (July 20, 2007)).
29
JX0177 (The 1999 TR100, MIT TECH. REV., Nov. 1, 1999), at 106; JX0254 (The
100 Most Influential People in the World, TIME (April 18, 2012)).
30
JX1331 (2017 Proxy) at 12.
31
Id.
32
JX0807 (Elizabeth Dowskin, Rolf Winkler & Susan Pulliam, Palantir and
Investors Spar Over How to Cash In, WALL STREET JOURNAL (Dec. 29, 2015)).
33
JX1331 (2017 Proxy) at 12; JX0195 (eBay, Inc., Current Report (Form 8-K)
(Oct. 3, 2002)), at Ex. 99.1.

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 Reed Hastings has served as a director since 2011.34 He is the co-founder,

chairman, and chief executive officer of Netflix, Inc.35 Before starting Netflix, he

co-founded Pure Software Inc., which eventually went public, and served as its

chief executive officer.36 Hastings has been named Businessperson of the Year

by Fortune Magazine and a Global Game Changer by Forbes.37

As a controlled company, Facebook is exempt from NASDAQ rules

requiring listed companies to have a majority of independent directors and an

independent compensation committee.38 The companys corporate governance

guidelines nevertheless provide that a majority of the board shall be composed of

independent directors.39 All five of Facebooks outside directors qualify as

independent under NASDAQ rules.40 In addition, the compensation committee is

currently composed of only independent directorsHastings, Andreessen, and

34
JX1331 (2017 Proxy) at 12.
35
JX1333 (Netflix, Inc., Definitive Proxy Statement (Form DEF14A) (Apr. 24,
2017)), at 5.
36
JX1331 (2017 Proxy) at 12.
37
JX0235 (Reed Hastings: Leader of the pack, FORTUNE (Nov. 18, 2010)); JX1147
(Steve Schaefer, Forbes Global Game Changers: The Full List, FORBES (Apr. 13,
2016)).
38
JX1331 (2017 Proxy) at 13.
39
Id.
40
Id.

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Thiel.41 At Zuckerbergs request, Facebook has paid him a base annual salary of

$1 and no bonus or stock options since January 1, 2013.42

Under SEC and NASDAQ rules, Facebook is required to maintain an

independent audit committee that, among other things, reviews related-party

transactions with the company.43 Bowles, Andreessen, and Desmond-Hellmann

comprise the audit committee, with Bowles serving as the chair and designated

financial expert.44

C. Zuckerbergs philanthropic plans

In the past decade, Zuckerberg and his wife, Dr. Priscilla Chana

pediatrician, former teacher, and founder and CEO of Menlo Parks Primary

Schoolhave made substantial charitable donations. For example, in 2010 they

donated $100 million to improve public schools in Newark, New Jersey.45 The

same year, Zuckerberg took the Giving Pledge, which was conceived by Bill and

Melinda Gates and Warren Buffet as an invitation to billionaires to commit to give

41
Id. at 14.
42
Id. at 19, 22; JX1258 (Facebook Inc., Definitive Proxy (Form DEF 14A) (June 6,
2016) (2016 Definitive Proxy)) at 20-23; JX0308 (Facebook Inc., Definitive
Proxy (Form DEF 14A) (Apr. 24, 2015) (2015 Proxy)) at 19-22; JX0281
(Facebook Inc., Definitive Proxy (Form DEF 14A) (Mar. 31, 2014)) at 21-22;
JX0273 (Facebook Inc., Definitive Proxy (Form DEF 14A) (Apr. 26, 2013)) at 19.
43
JX1331 (2017 Proxy) at 13-14.
44
Id.
45
JX1357 (Zuckerberg Dep.) 79:23-24.

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more than half of their wealth to philanthropic causes either before or upon their

death.46

In March 2015, Zuckerberg raised with Facebooks general counsel the

possibility of transferring all of his Facebook stock to a charitable organization and

inquired whether he could do so while maintaining voting control of the

company.47 Zuckerberg noted that he would consult with an outside lawyer instead

if the general counsel preferred. The general counsel responded that while

Zuckerberg would eventually have to engage his own counsel, it was appropriate

for him to discuss the possibility with the companys lawyers at the outset because

his plans would have major implications for Facebook.48

In June, Zuckerberg informed the board that he was planning on

significantly ramping up [his] personal philanthropy soon, and therefore would

begin selling some of [his] stock.49 This is relevant for our corporate

governance, he explained, because these sales will reduce my voting percentage

over time.50 Zuckerberg added: Given my desire to increase my philanthropy, I

46
JX1386 (Mark Zuckerberg and Priscilla Chan, THE GIVING PLEDGE).
47
JX0299 (Mar. 25, 2015 email from M. Zuckerberg to D. Kling Re: Follow-up re:
Philanthropy -- privileged and confidential) at 273.
48
Id.
49
JX0325 (June 9, 2015 email from C. Stretch to M. Zuckerberg) at 030.
50
Id.

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would like to begin a discussion with the board as to what my stock sales may

mean for Facebook and how we can best position the company for continued

success.51

A few months later, in an update letter to the board in advance of its planned

meeting on August 20, Zuckerberg previewed that he had asked outside counsel

to look into what creating a new class of stock might look like and that his

counsel would present to you at the board meeting on that subject.52

D. Zuckerberg proposes a reclassification and the board of directors

forms the Special Committee

At the August 20, 2015 board meeting, Zuckerberg expressed his view that

his voting control of Facebook allowed it to focus on creating long-term value for

stockholders and observed that his control will likely be diluted by future

issuances of stock by the Company . . . as well as by potential sales or

philanthropic contributions by him of his stock.53 He therefore had been

considering whether Facebook would benefit from changes to its capital structure

that would preserve his voting control.54 His lawyer, William Hinman of Simpson

51
Id.
52
JX0394 (Aug. 19, 2015 email from M. Zuckerberg to ) at 704.
53
JX0400 (Aug. 20, 2015 Minutes of a Meeting of the Board of Directors of
Facebook) at 002.
54
Id.

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Thacher & Bartlett, explained that other dual-class, controlled companiesnotably

Google Inc., Under Armour, Inc., and Zillow Group, Inc.had recently distributed

as dividends shares of a new Class C of non-voting stock to preserve their

founders voting control.55 Hinman proposed that the board consider similarly

altering Facebooks capital structure in light of the potential for erosion of

Zuckerbergs control.56

In response, the board unanimously resolved to create a Special

Committee.57 The board authorized the Special Committee to retain its own

advisors, to evaluate and negotiate any proposal by Zuckerberg to alter the

companys capital structure, and to evaluate and negotiate any alternatives to such

a proposal.58 In addition, the board unanimously resolved that it would not

approve any proposal by Zuckerberg to alter the companys capital structure, or

any alternative proposal, without the Committees prior recommendation.59

The five independent directors determined to appoint the members of the

audit committee as the members of the Special Committee.60 To avoid any

55
Id.
56
Id. at 002-03.
57
Id. at 003.
58
Id. at 010.
59
Id.
60
Id. at 003-04.

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appearance of a conflict of interest, the board conditioned appointment to the

Special Committee on the members agreement to irrevocably convert any Class B

shares they held into Class A shares.61

E. The Special Committee retains advisors and gathers information

The Special Committee met for the first time on September 3.62 Facebooks

counsel attended the meeting at the invitation of the Committee, as the Committee

did not yet have its own counsel.63 The Committee appointed Desmond-Hellmann

as its chair.64 After discussing candidates for counsel, the Committee unanimously

decided to retain Wachtell, Lipton, Rosen & Katz as its legal advisor.65 Wachtell

Lipton had not previously been engaged by either Facebook or Zuckerberg.

When the Special Committee next met on September 23, its counsel

delivered a presentation reviewing the terms of recent reclassifications by founder-

61
Id. at 004, 009. Andreessen and Bowles subsequently executed, or directed the
execution of, notices of election to irrevocably convert the Class B shares they
beneficially owned. JX1179 (Andreessen Horowitz Notice of Irrevocable Election
to Convert); JX1042 (Bowles Notice of Irrevocable Election to Convert).
Desmond-Hellmann did not beneficially own any Class B shares when she was
appointed to the Committee and has not come to beneficially own any Class B
shares since. JX1331 (2017 Proxy) at 37; JX1258 (2016 Definitive Proxy) at 38;
JX0308 (2015 Proxy) at 36.
62
JX0419 (Sept. 3, 2015 Minutes of a Meeting of the Special Committee).
63
Id.
64
Id.
65
Id.

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controlled companies that had been effected via a pro rata dividend of shares of a

new class of low-vote or no-vote stock.66 The Committees counsel reported that

Zuckerbergs counsel had suggested that it might be more efficient for the

Committee, rather than Zuckerberg, to suggest structures, i.e., terms, for a

potential reclassification.67 After discussing the advantages and disadvantages of

being the first party to suggest specific terms, the Committee agreed that it would

be willing to initiat[e] the structuring conversations, provided that the record was

entirely clear that maintaining the Companys controlled status was Mr.

Zuckerbergs suggestion, not the Boards.68 The Committee also discussed

retaining a financial advisor, but did not then settle on a firm. 69

A few weeks later, on October 12, the Committee unanimously agreed to

retain Evercore as its financial advisor, and Desmond-Hellmann engaged Evercore

66
JX0467 (Sep. 23, 2015 Minutes of a Meeting of the Special Committee); JX0470
(Sep. 23, 2015 Wachtell Lipton: Presentation to the Special Committee).
67
JX0467 at 003.
68
Id.
69
Id.; JX0439 (Sept. 10, 2015 email from S. Desmond-Hellmann to E. Bowles
Fwd: Facebook Special Committee) at 700.

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on the Committees behalf.70 Evercore had not previously been engaged by either

Facebook or Zuckerberg.71

On October 20, the Committee met briefly to direct its counsel, Wachtell

Lipton, to work with Evercore to develop recommendations regarding the terms of

a potential reclassification.72

The Committee met next on November 9. Evercore delivered a presentation,

prepared in collaboration with Wachtell Lipton, regarding the terms of a potential

reclassification that would be effected via the creation of a new Class C of non-

voting stock and pro rata dividend of one Class C share for each outstanding share,

whether Class A or Class B.73 Evercore identified several key considerations

relevant to evaluating a potential reclassification.74 It explained that the creation

and dividend of non-voting stock would allow Zuckerberg to sell more Facebook

shares, and the company to issue more stock, without diminishing Zuckerbergs

70
JX0477 (Oct. 12, 2015 email from E. Bowles to S. Hellmann Re: Financial
advisor).
71
JX1342 (Defendant Mark Zuckerbergs Responses and Objections to Plaintiffs
First Set of Interrogatories Directed to Defendants), at 21; JX1340 (Defendants
Jan Koum and Facebook, Inc.s Responses and Objections to Plaintiffs First Set of
Interrogatories Directed to Defendants), at 21.
72
JX0493 (Oct. 20, 2015 Minutes of a Meeting of the Special Committee).
73
See JX0565 (Nov. 9, 2015 Evercore: Project Factory Presentation to the Special
Committee).
74
Id. at 011.

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controlling voting interest.75 Evercore noted that the distribution of a pro rata

dividend of non-voting stock would not affect any stockholders relative economic

or voting interest.76 Absent such a reclassification and dividend, Evercore

explained, Zuckerberg would not retain majority voting control if he sold more

than about $6.5 billion in shares or if the company issued about $70 billion in

Class A stock at the companys then-current stock prices.77

Evercore further explained that the primary empirical driver of any

disparity in the trading prices of a companys voting and non-voting stock appears

to be [the] relative liquidity [of the two stock classes] rather than voting rights,

and that such disparities tended to be less than 5%.78 Evercore also noted that a

differential in trading price could reflect the different values that investors assigned

to shares in each class of stock, rather than an overall decline in the companys

value.79

Evercore also expressed the view that [e]xisting and prospective

governance and other protections may limit any risk to unaffiliated shareholders of

75
Id. at 011.
76
Id. at 010.
77
Id. This analysis did not take into account the shares owned by others over
which Zuckerberg has voting power by virtue of irrevocable proxies. Id. at 010.
78
Id. at 011, 014.
79
Id. at 011.

-17-
potentially detrimental future actions by [Zuckerberg] and could avoid any trading

differential.80 Evercore identified potential protections on which a reclassification

could be conditioned as options for Special Committee consideration.81 These

included (1) sunset provisions collapsing the multi-class share structure if

Zuckerberg is terminated for cause or resigns without good reason, or if his voting

power falls below a specified floor; (2) an expansion of the charters current equal

treatment provisions to, among other things, cover Class C shares and absolutely

prohibit the payment of differential consideration for different classes of stock;

(3) a requirement that Zuckerberg enter into a non-competition and non-solicitation

agreement with Facebook; (4) a requirement that the independent directors

consider the impact on Class A stockholders of issuances of Class C stock for use

as acquisition currency; (5) a permanent waiver of Facebooks right to avail itself

of exemptions to NASDAQ rules for controlled companies; (6) elimination of the

current charter provision requiring separate Class B approval of a change-in-

control transaction as long as Class B shares represent at least 35% of the

companys outstanding voting power; (7) a true-up payment by Facebook to

Class C stockholders based on the trading price differential between Class A and

Class C shares over a one-year period; (8) a provision conditioning the potential

80
Id.
81
Id. at 017-19.

-18-
reclassification on separate Class A approval; and (9) restrictions on Zuckerbergs

ability to dispose of his Facebook shares.82

With respect to the last three potential termsa true-up payment, separate

Class A approval, and transfer restrictionsEvercore noted that Zuckerberg has

already rejected [those] options.83 Evercore commented that though transfer

restrictions had been included in the reclassification effected by Google, they had

not been instituted in other reclassifications.84 It also commented that separate

Class A approval of a reclassification proposal was unlikely to be obtained.85

After discussion of these options, the Special Committee directed its

advisors to raise the first six potential terms with Zuckerbergs counsel and with

the company.86 Although the Special Committee did not consider the last three

potential terms to be permanently off the table just because Zuckerberg had

initially rejected them, they decided not to pursue them further at that time. 87

82
Id.
83
Id. at 019.
84
Id.
85
Id.
86
JX0569 (Nov. 9, 2015 Minutes of a Meeting of the Special Committee).
87
JX1352 (Andreessen Dep.) at 115 ([M]y assumption in any negotiation is you
have to negotiate over time to find out what people are actually willing to do or not
do, and I didnt conclude anything from this at this time.).

-19-
 Accordingly, the Committees counsel relayed those terms to Zuckerbergs

counsel.88 It also sent them to Facebooks counsel for the purpose of discussing

whether any of them would have an adverse impact on the company. 89 In

discussions with the Special Committees advisors, Facebooks management and

the companys financial advisor, Morgan Stanley, expressed the view that a new

Class C of non-voting stock would be more useful as a currency for stock-based

acquisitions and employee compensation if the trading spread between shares of

Class C and Class A stock was minimized.90 Morgan Stanley concluded that a 2:1

or 3:1 stock dividend ratio would reduce the risk of the Class C shares trading

lower than the Class A shares by ensuring that the Class C stock had greater

liquidity relative to that of the Class A stock.91 Morgan Stanley further concluded

that expanding the equal treatment provisions in Facebooks charter and providing

for a collapse of the triple-class share structure if Zuckerbergs voting power fell

below a specified floor, or if he no longer worked full-time for Facebook, would

88
JX0582 (Nov. 11, 2015 email from D. Shapiro to W. Hinman re FB).
89
JX0588 (Nov. 12, 2015 email from D. Shapiro to D. Kling FW: Factory
Reclassification Considerations).
90
E.g., JX0754 (Dec. 15, 2015 email from D. Kling to D. Wehner re Agenda for
meeting with Evercore a/c priv).
91
JX0718 (Dec. 4, 2015 email from D. Kling to D. Shapiro re Morgan Stanley
Presentation) at 227.

-20-
also reduce the risk of a trading discount.92 Facebooks management shared

Morgan Stanleys analysis and recommendations with the Committees counsel on

December 4 and discussed it on a call with Evercore on December 16.93

F. Zuckerberg announces the creation of the Chan Zuckerberg

Initiative

On December 1, 2015, Zuckerberg and his wife announced the creation of

the Chan Zuckerberg Initiative (CZI) in an open letter to their newborn

daughter.94 CZIs mission, they explained, was to join people across the world to

advance human potential and promote equality.95 They pledged to support that

mission using their Facebook wealth: We will give 99% of our Facebook

sharescurrently about $45 billionduring our lives to advance this mission.96

Zuckerberg added, I will continue to serve as Facebooks CEO for many, many

years to come, but these issues are too important to wait until you or we are older

92
Id.
93
Id.; JX0725 (Dec. 7, 2015 email from D. Wehner to D. Kling RE: Wehner
meeting with special committee advisors a/c priv); JX0768 (Dec. 16, 2015 Meeting
Invitation FW: Morgan Stanley Presentation Conference Call).
94
JX0671 (Mark Zuckerberg & Priscilla Chan, A letter to our daughter, Dec. 1,
2015).
95
Id.
96
Id.

-21-
to begin this work. By starting at a young age, we hope to see compounding

benefits throughout our lives.97

The same day, Facebook filed a Form 8-K with the Securities and Exchange

Commission disclosing that Zuckerberg had announced that, during his lifetime,

he will gift or otherwise direct substantially all of his shares of Facebook stock, or

the net after-tax proceeds from sales of such shares, to further the mission of

advancing human potential and promoting equality by means of philanthropic,

public advocacy, and other activities for the public good.98 Facebook explained

that CZI, the entity Zuckerberg had established for this purpose, is a limited

liability company and that Zuckerberg would control the voting and disposition of

any shares held by [CZI].99 Facebook also disclosed that Zuckerberg plans to

sell or gift no more than $1 billion of Facebook stock each year for the next three

years and . . . intends to retain his majority voting position in our stock for the

foreseeable future.100

97
Id.
98
JX0680 (Facebook, Inc., Current Report (Form 8-K) (Dec. 1, 2015)).
99
Id.
100
Id.

-22-
 Later that month, Zuckerberg contributed 99% of his Facebook shares to

CZI.101 The contribution did not affect Zuckerbergs voting power because CZI is

controlled by Zuckerberg and his wife.102 Upon Zuckerbergs death, any Class B

shares held by CZI will continue to retain their high-vote status so long as CZI is

solely owned by Zuckerbergs heirs.103

G. Negotiations begin to focus on terms of a potential reclassification

that would trigger collapse of the multi-class share structure

The Special Committee reconvened on January 11, 2016.104 Evercore

informed the Committee that Facebooks management and Facebooks financial

advisor, Morgan Stanley, believed that a 2:1 dividend ratio for the contemplated

pro rata dividend of non-voting stock would be preferable to a 1:1 ratio, and that

Zuckerbergs financial advisor, Goldman Sachs, and Evercore agreed with that

101
JX1342 (Defendant Zuckerbergs Responses and Objections to Plaintiffs First
Set of Interrogatories) at 30 (In December 2015, Mr. Zuckerbergs personal
trust, in its capacity as CZI Holdings, LLCs sole member, contributed to the
capital of CZI Holdings, LLC approximately 99 percent of the shares in Facebook
beneficially owned by Mr. Zuckerberg at that time.).
102
See supra p. 5; JX0261 (Current Charter), Art. IV, 3.8(b) 4.8, 4.11.
103
Id.
104
JX0844 (Jan. 11, 2016 Minutes of a Meeting of the Special Committee).

-23-
assessment.105 After discussion, the Committee directed its advisors to inform the

company and Zuckerbergs advisors that it concurred.106

The Committee discussed with its advisors additional potential sunset

provisions containing triggers for the collapse of the companys triple-class

structure, most notably a provision requiring the automatic conversion of all Class

B and Class C shares into Class A shares within one year of Zuckerbergs death.107

Desmond-Hellmann stated that she would contact Zuckerberg to discuss this

term.108 At the conclusion of the meeting, the Committee directed its advisors to

inform the company and Zuckerbergs advisors of the additional terms it was

considering.109

Zuckerberg and his advisors told Desmond-Hellmann and the Committees

advisors that he was opposed to a mandatory, rather than discretionary, collapse of

the multi-class share structure after his death and that, in any event, the one-year

transition period proposed by the Committee was too short.110

105
Id.
106
Id.
107
Id. at 044.
108
Id.
109
Id.
110
JX0854 (Jan. 15, 2016 email from E. Bowles to S. Desmond-Hellmann Re:
Phone Call); JX0860 (Jan. 18, 2016 email from S. Desmond-Hellmann to M.
(footnote continued on next page)
-24-
 H. The Special Committee presents the terms it is considering for a
potential reclassification to the Facebook board

The full Facebook board held a regularly scheduled meeting on February 11

to discuss a variety of topics, including the status of the Special Committees

consideration of a potential reclassification and an update on the audit committees

work.111 An hour before the meeting began, Andreessen texted Zuckerberg:

Between us re special board session. 1 new share class

will happen. 2 everyone loves CZI. That said, we have a
few serious implementation issues to discuss with you on
both - specifically: Succession planning re the share
class. And entanglement of CZI and Facebook. Its all
intended to protect the company and you personally from
no good deed goes unpunished consequences. I think
its all around the edges of the big things you want but
we can discuss more after if you want.112

At the beginning of the meeting, attendance was limited to only the five

independent directors so that the Special Committee could update Hastings and

Thiel in the absence of the inside directors.113 After recounting the Special

Committees work with its advisors since September, Desmond-Hellmann outlined

(footnote continued from previous page)

Andreessen Re: Phone call/FB special committee); JX0874 (Jan. 29, 2016 email
from D. Shapiro to R. Altman RE: Sue Desmond Hellmann).
111
JX0884 (Feb. 11, 2016 Minutes of a Meeting of the Board of Directors) at 079.
112
JX0883 (Feb. 11, 2016 text message conversation between M. Andreessen and
M. Zuckerberg) at 915.
113
JX0884 at 079.

-25-
the terms of a potential reclassification that the Committee was considering.114 The

potential reclassification would be effected by creating a new Class C of non-

voting stock that would be initially distributed as a dividend of two Class C shares

for every outstanding Class A and Class B share.115 Desmond-Hellmann explained

that the potential reclassification would be conditioned on several terms that the

Committee was discussing with Zuckerberg:

(1) an automatic conversion provision, under which

Zuckerbergs death, permanent physical or mental
disability, termination for cause, or resignation would
trigger the collapse of the triple-class structure following
a one-year period (to allow for an orderly transition of
the companys leadership);

(2) equal treatment provisions broader than those

contained in the current charter, prohibiting payment of
differential consideration for any of the three classes of
stock in a merger or similar transaction, or in a third-
party tender offer agreed to or recommended by the
company;

(3) a mandatory conversion provision, requiring

Zuckerberg to use his majority voting control of the
outstanding Class B shares to elect to cause the collapse
of the triple-class structure before engaging in a
transaction that would result in a loss of that control; and

(4) an amendment of the companys corporate

governance guidelines to provide that the company
would not avail itself of the controlled company

114
Id.
115
Id.

-26-
 exemption to NASDAQ rules requiring listed companies
to maintain an independent compensation committee.116

Desmond-Hellmann then explained that, in the Committees view, a

reclassification on these terms would benefit Facebooks minority stockholders

because it would (i) allow the company to maintain its focus on long-term value

creation, even as Zuckerberg liquidated portions of his stockholdings to fund his

philanthropic pursuits; (ii) encourage Zuckerberg to continue as Facebooks chief

executive officer or in a similar executive capacity and reduce the risk that he

might leave the company, a possibility that the Special Committee viewed as

contrary to the best interests of Facebook and its stockholders; (iii) mitigate

succession risk following Zuckerbergs departure from the company; and

(iv) allow the company to manage future potential voting dilution as a result of

stock issuances.117

The independent directors discussed the terms under consideration by the

Committee, and more generally, when and how the triple-class structure should

terminate after a potential reclassification.118 Zuckerberg then joined the meeting,

and he and the independent directors discussed the terms under consideration by

116
Id. at 080-81.
117
Id. at 079-80.
118
Id. at 081.

-27-
the Committee.119 Zuckerberg told the independent directors that he was opposed

to terms that required the collapse of the triple-class structure following a

triggering event.120 Rather, Zuckerberg explained, his preference [was] to retain

the flexibility of the Companys current capital structure, which does not mandate

conversion of the Class B shares to Class A shares following a Triggering

Event.121 Zuckerberg also stated that he was unwilling to accept a transition

period of only one year before a triggering event would result in a collapse of the

triple-class structure.122

The full board then received an update on the activities of the audit

committeewhich was composed of the same members as the Special

Committee.123 The board discussed Zuckerbergs suggestion that Facebook and

CZI should undertake joint projects, and in particular, that Facebook employees

should be permitted to work on CZI projects.124 Andreessen strongly disagreed

119
Id.
120
Id.
121
Id.
122
JX0885 (Feb. 11, 2016 email from M. Shaffer to D. Shapiro re Hinman
Update).
123
JX0884 (Feb. 11, 2016 Minutes of a Meeting of the Board of Directors) at 081.
124
JX1352 (Andreessen Dep.) at 172-73.

-28-
with that suggestion and expressed the view that the two organizations should

remain separate.125 After the meeting ended, Andreessen again texted Zuckerberg:

1. All our feedback is entirely intended to protect you and

the company. We love the intent. 2. You should know
that the reality warping that I brought up has already
started. Several of your senior staff think this
[entanglement of CZI and Facebook] is a big mistake and
wish you would stop but dont want to challenge you.
That said, I love the goals . And I would be thrilled if
Facebook proper pursued more long term science and
tech efforts internally including health and education.126

I. The Special Committee insists that a potential reclassification be

conditioned on the eventual mandatory collapse of the multi-class
share structure

On February 27, Desmond-Hellmann and Andreessen met separately with

Zuckerberg to discuss his opposition to the automatic conversion provision

proposed by the Special Committee.127 At her meeting with Zuckerberg,

Desmond-Hellmann invited him to make a counterproposal.128

125
Id.
126
JX0883 at 916.
127
JX0907 (Mar. 1, 2016 email from S. Desmond-Hellmann to M. Andreessen Re:
Special committee/confidential); JX0924 (Mar. 4, 2016 Minutes of a Meeting of
the Special Committee) at 080.
128
JX0907.

-29-
 Zuckerbergs counsel responded with a written counterproposal.129 Under

Zuckerbergs new proposal, his death or disability would not necessarily trigger a

collapse of the triple-class share structure. Instead, he would develop a Founder

Transition Plan that would transfer voting control of the company to a Facebook

executive for three years, after which the triple-class share structure would

collapse.130 The Plan could be altered, and the collapse avoided, however, with the

unanimous approval of the independent directors.131 Zuckerbergs proposal thus

permitted the possibility that the triple-class structure and the voting power

associated with his Class B shares could remain in place indefinitely, or for a long

period after his death. In other words, Zuckerberg advocated an optional rather

than mandatory sunset of the triple-class structure after his death.

In addition, Zuckerbergs proposal included an exception to the automatic

conversion trigger linked to his voluntary resignation. Under his proposal, he

could resign to pursue either government or other public service indefinitely

without triggering a collapse of the triple-class structure, as long he first discussed

129
Id. at 126-28.
130
JX0918 (Mar. 3, 2016 email from W. Hinman to D. Shapiro re: modifications to
draft proposal regarding transition matters).
131
Id.

-30-
the service with the independent directors and he returned to the company within

twelve months of finishing that service.132

The Special Committee met again on March 4.133 The members discussed

their concerns with approving any reclassification under terms that could result in

control of the company passing to Zuckerbergs heirs for a considerable period of

time, or that would permit Zuckerberg to maintain control of the company during a

voluntary leave of absence.134 They also discussed the advantages and

disadvantages of Zuckerbergs latest proposal and decided to set up a call with him

to discuss his proposal further.135

The conference call was scheduled for 3:30 p.m. the following day,

Saturday, March 5, with only the Special Committee members and Zuckerberg

invited to participate.136 The call quickly became a tense debate over the Special

Committees insistence that Zuckerbergs death or disability trigger a mandatory

collapse of the triple-class structure, and do so after a relatively short transition

132
Id. at 033.
133
JX0924 (Mar. 4, 2016 Minutes of a Meeting of the Special Committee).
134
Id.
135
Id. at 081.
136
JX0932 (Mar. 5, 2016 Meeting invitation re 3:30pm CALL Special Committee
+ Mark).

-31-
period.137 Zuckerberg expressed the view that such a rigid provision was not in the

companys best interests because, for example, a one-year transition period would

be insufficient to ensure an orderly transition to both new leadership and

uncontrolled status, especially if his death or disability were unexpected.

Furthermore, Zuckerberg argued, maintenance of the triple-class structure

permitted the possibility that his bequeathed control could be used to help the

board and a talented successorsuch as one of Facebooks current senior

executivescontinue to manage the company with the goal of maximizing long-

term value.138 The Special Committee members, however, were steadfast in the

view that Zuckerberg was the secret sauce to Facebooks remarkable success and

there was no assurance that his appointed successor would be similarly talented.139

They were therefore unwilling to risk allowing the passage of control to anyone

else.140

The discussion became sufficiently contentious that Zuckerberg suggested

that the Committee was not interested in reaching an agreement and was instead

proposing terms that were obvious non-startersan accusation that Andreessen

137
JX1352 (Andreessen Dep.) at 196-97.
138
JX1352 (Andreessen Dep.) at 196-97; JX1356 (Desmond-Hellmann Dep.) at
265-66.
139
JX1305 (Bowles Dep.) at 72:2-3.
140
JX1356 (Desmond-Hellmann Dep.) at 267.

-32-
viewed as completely nonproductive.141 About twenty minutes into the call,

Andreessen texted Zuckerberg, The committee wants to do this. You dont need

to question that.142 And then a few minutes later, This line of argument is not

helping .143 About half an hour later, Andreessen texted Zuckerberg, They

[Desmond-Hellmann and Bowles] are both genuinely trying to get to the right

answer. THIS is the key topic.144 Zuckerberg wrote back, Agree.145 The

tension subsided and Zuckerberg and the Committee members began to engage in

earnest over the disputed parts of the automatic conversion trigger. 146 About

fifteen minutes later, Andreessen texted Zuckerberg, NOW WERE COOKING

WITH GAS147in recognition that Zuckerberg was finally now having the

serious conversation with the Committee of the specifics of the possible

recalibration of the terms of control.148

141
JX1352 (Andreessen Dep.) at 192.
142
JX0927.
143
Id.
144
Id.
145
Id.
146
JX1352 (Andreessen Dep.) at 195-96.
147
JX0927.
148
JX1352 (Andreessen Dep.) at 195-96.

-33-
 The call ended with the Committee refusing to give ground on the

mandatory death sunset. If Zuckerberg retreated on that point, a compromise

might be possible on the length of the transition period between his death and the

collapse of the triple-class structure. Andreessen thus texted Zuckerberg, Ill push

them [Desmond-Hellmann and Bowles] on having a longer [transition] period at

least for Sheryl [Sandberg, Facebooks chief operating officer,] and Chris [Cox,

Facebooks chief product officer]. Dont know if thats helpful but.149

The Special Committee met again less than a week later, on March 10.150

Desmond-Hellmann stated that she and the Committees counsel had spoken with

Facebooks management, including the general counsel and the chief financial

officer, to discuss its views on Zuckerbergs proposal regarding the automatic

conversion provision.151 Desmond-Hellmann reported that management had

expressed concerns with terms that could result in control of the company passing

to Zuckerbergs heirs for a considerable period of time, or that would permit

Zuckerberg to maintain control of the company during a voluntary leave of

absence.152 The Committee members again discussed with their advisors the

149
JX0927.
150
JX0947 (Mar. 10, 2016 Minutes of a Meeting of the Special Committee).
151
Id. at 082.
152
Id.

-34-
advantages and disadvantages of Zuckerbergs proposal.153 Evaluating

Zuckerbergs position, the Committee members found some merit in his view that

a one-year transition period could be too short to ensure an orderly leadership

transition after his death or disability, especially if either were premature or

unexpected.154 At the end of the meeting, the Committee members decided that

Desmond-Hellmann should call Zuckerberg to convey their views.155

Ultimately, the Committee offered to agree that the triple-class structure

would not collapse until three years after Zuckerbergs death. But it reiterated its

insistence that the collapse be mandatory, not discretionary, and occur after three

years without exception. Zuckerberg accepted the solution. A few days after the

Committees March 10 meeting, Zuckerberg texted Andreessen: Thanks for the

talk last night and for pushing on this. If this happens, I think it will only be

because you pushed me and the others on it.156

153
Id.
154
JX1356 (Desmond-Hellmann Dep.) at 267-68; JX1305 (Bowles Dep.) at 294-
95.
155
JX0947 at 082.
156
JX0958 at 920.

-35-
 J. The Special Committee obtains a term mandating the collapse of
the multi-class share structure upon Zuckerbergs resignation
from Facebook by agreeing to a narrow exception for a
resignation to pursue government service

By mid-March, the Special Committee was still unwilling to agree to

Zuckerbergs proposal that the triple-class structure remain in place if he resigned

to pursue government or public service, potentially indefinitely and even if he sold

down his economic interest in the company. Bowles especially was emphatic that

such an arrangement would not be in the best interests of the minority

stockholders. So Zuckerberg made a further revised proposal to narrow the

circumstances in which he could resign without triggering an automatic collapse of

the triple-class structure. Under his revised proposal, his voluntary resignation

would not trigger a collapse if (1) he took indefinite leave to serve in a government

position (but not another type of public service position), as long as he owned more

than 30% of the Class B shares he owned when the reclassification was

implemented and he first discussed the leave with the independent directors; (2) he

took leave to serve in a government position for no more than two years and he

first discussed the leave with the independent directors; or (3) his voluntary

resignation was approved by a majority of the independent directors.157

157
JX0997 (Mar. 24, 2016 Evercore: Project Factory Presentation to the Special
Committee) at 087; JX0971 (Mar. 16, 2016 email from K. Schultz to M. Shaffer
RE: latest proposal) at 582.

-36-
 The Special Committee reviewed this revised proposal with its advisors at a

meeting on March 24.158 As Evercore explained to the Committee, the 30% Class

B ownership threshold Zuckerberg proposed did not effectively constrain his

ability to take leave while maintaining control, given the other terms already under

consideration.159 That was so because, as a practical matter, a threshold set at 30%

of Zuckerbergs current Class B stockholdings was effectively the same as the

threshold for the mandatory conversion trigger, set at Zuckerbergs ownership of

50.1% of the outstanding Class B shares.160 At the end of the meeting, the Special

Committee members decided that they would together call Zuckerberg to discuss

his proposal.161

Shortly after the meeting, Zuckerberg texted Andreessen: How did it go

this morning?162 Andreessen responded:

Good. Now were deep into the final details. Were

setting up a group call with you to go through all those
details. I think the biggest remaining issue is still around
the government serviceafter you sell down below 30%
of your starting stake. But Sue and I have an idea for you

158
JX0994 (Mar. 24, 2016 Minutes of a Meeting of the Special Committee) at
083.
159
See JX0997 at 089.
160
Id.; see also JX0977 (Mar. 21, 2016 email from D. Shapiro to M. Shaffer RE:
FB Committee Materials).
161
JX0994 at 084.
162
JX1022.

-37-
 on that. I continue to think this is doable if you and the
committee can wiggle through the last details with a little
flex on both sides.163

The next day, after the Committee members and Zuckerberg had their group

call, Andreessen texted Zuckerberg:

Erskine is just massively uncomfortable with you getting

to low economic ownership and then going off on leave
with no involvement by the board and still retaining
control. We rediscuss it on every call. I think youre
both arguing too hard on this point. Him because you
already have this ability, you because government service
would most likely require you to give up control of
Facebook anyway.164

Later that day, Zuckerberg further revised his proposal.165 The new proposal

revised the 30% ownership threshold to apply to his total current Facebook

stockholdings instead of only to his current Class B stockholdings.166 The effect of

the change was to move the 30% threshold for the government service exception

significantly above the 50.1% threshold in the mandatory conversion trigger. 167

Under the new proposal, Zuckerberg could sell approximately $42 billion of his

Facebook shares (at the then-current trading price) before triggering the mandatory

163
Id. at 912.
164
Id.
165
JX1021 (Mar. 25, 2016 email from M. Kushner to M. Shaffer RE: Factory
Revised Documents) at 034.
166
Id. at 038.
167
Id.

-38-
conversion provision, but could sell only approximately $33 billion of his

Facebook shares before reaching the 30% threshold for the government service

exception.168

The Committee did not accept Zuckerbergs revised proposal. In particular,

the Committee was unwilling to agree to an exception to the voluntary resignation

trigger for any voluntary resignation approved by the independent directors.

Instead, the Committee limited the exception to a leave in connection with

government service. It did, however, agree that Zuckerberg could take a leave in

connection with government service for more than two years without triggering a

collapse of the triple-class structure if his economic stake exceeded the revised

30% threshold and he did so after discussion with the independent directors.169

K. The Special Committee and Zuckerberg reach agreement on the

terms of a potential reclassification and share the proposed terms
with the other independent directors

By April 1, the Special Committee and Zuckerberg were close to reaching an

agreement on the scope of the government service exception to the voluntary

resignation trigger, and the Committees advisors had begun drafting a report

summarizing the terms of the potential reclassification and the Committees

168
Id.
169
JX1258 (2016 Definitive Proxy) at App. A-1 (Proposed Charter), Art. IV,
4.18(a).

-39-
reasons for recommending it. The Committee invited Thiel and Zuckerberg to its

meeting on April 5 to discuss the proposed terms of the reclassification and their

implications for the company. The Committee also discussed with Zuckerberg the

remaining open issues regarding the scope of the government service exception.

Following the meeting, the Committee and Zuckerberg negotiated how soon

he would have to return to the company as an executive after a leave for

government service. Zuckerberg proposed six months, but Bowles insisted that he

return within two months, and Zuckerberg capitulated.170 At that point, the Special

Committee had obtained Zuckerbergs agreement to a complete package of terms

governing a potential reclassification that it could accept or reject.

The Special Committee met again on April 13.171 Thiel and Hastings

attended the beginning of the meeting at the Committees invitation. They and the

Committee members discussed the final proposed terms of the reclassification and

reviewed the Committees draft report and recommendation regarding the

reclassification.172 After Thiel and Hastings left the meeting, the Committee

170
JX1085 (Apr. 8, 2016 email from D. Shapiro to S. Desmond-Hellmann FW:
Status); JX1305 (Bowles Dep.) at 320; JX1143 (Apr. 13, 2016 email from W.
Hinman to D. Shapiro Re: Sea Biscuit).
171
JX1128 (Apr. 13, 2016 Minutes of a Meeting of the Special Committee).
172
Id. at 093.

-40-
members discussed with their advisors the advantages and disadvantages of the

potential reclassification on the table.173

During this discussion, the Committee members

affirmed that, in light of Mr. Zuckerbergs intention to

retain majority voting control over the Company for the
foreseeable future, their overarching consideration in
evaluating and negotiating a potential reclassification
was the extent to which they could link Mr. Zuckerbergs
control to his leadership of the Company, leadership they
unanimously believed had been, and would continue to
be, crucial to the Companys success.174

They determined that the proposed terms of the reclassification not only increased

the likelihood that the Company would continue to benefit from Mr. Zuckerbergs

leadership and management influence, but also reduced the risk that, in the absence

of that benefit, the Company would remain controlled by Mr. Zuckerberg or his

family.175 In their view, the proposed terms also served the interests of the

Companys minority stockholders by imposing governance safeguards and

prohibiting differential consideration in the context of specified corporate

transaction.176

173
Id. at 093-94.
174
Id. at 094.
175
Id.
176
Id.

-41-
 The Committee members concluded that the proposed terms represented

the most favorable set of terms they could obtain and that in their business

judgment, the reclassification proposal they had negotiated was in the best interests

of the Company and its stockholders and was superior to maintaining the status

quo. 177 Accordingly, the Committee unanimously voted to recommend that the

board proceed with the reclassification on the terms it had negotiated.178

L. The Special Committee unanimously recommends, and the board

approves, the potential reclassification

The Special Committee delivered its recommendation at a meeting of the

board the following day, April 14.179 Zuckerberg and the other inside directors

then left the meeting, and the five independent directors voted unanimously to

proceed with the reclassification, as recommended by the Special Committee, and

directed the companys management to finalize the related documents.180

The board met again on April 22.181 Zuckerberg and the other inside

directors again recused themselves from this meeting, and the five independent

177
Id.
178
Id.
179
JX1149 (Apr. 14, 2016 Minutes of a Meeting of the Board of Directors) at 153-
54.
180
Id. at 154-55.
181
JX1175 (Apr. 22, 2016 Minutes of a Meeting of the Board of Directors).

-42-
directors unanimously approved the various resolutions and documents necessary

to effect the reclassification on the negotiated terms.182

M. The terms of the Reclassification Plan

The proposed reclassification would create a new Class C of non-voting

stock with the same economic rights as the existing Class A and Class B stock.183

The Class C stock would be initially distributed as a pro rata dividend of two

shares of Class C stock for every one share of Class A or Class B stock.184 (We

refer to the creation of the Class C stock, together with the contemplated dividend,

as the Reclassification.) The Reclassification is conditioned on terms designed

to benefit the minority stockholders of Facebook. (We refer to those terms,

together with the Reclassification, as the Reclassification Plan.) The terms of

the Reclassification Plan would be implemented through amendments to

Facebooks charter, a Founder Agreement between Zuckerberg and Facebook, and

amendments to Facebooks corporate governance guidelines:

Automatic Conversion Provision. Under the Reclassification Plan,

Facebooks charter would be amended to provide that Class B and Class C shares

will automatically convert into Class A shares after a transition period following

182
Id. at 202, 210.
183
JX1258 (2016 Definitive Proxy), at 55.
184
Id.

-43-
Zuckerbergs voluntary or involuntary departure from a leadership role at the

company, with an exception for a leave of absence or resignation in connection

with government service.

Death or disability. Zuckerbergs death, or his permanent physical or

mental disability, triggers an automatic conversion after a three-year transition

period.185

Voluntary resignation. Zuckerbergs voluntary resignation as an Approved

Executive Officer186 triggers an automatic conversion after a one-year transition

period or a shorter period approved by a majority of the independent directors.187

The sole exception is for a leave of absence or resignation in connection with

government service.188 If Zuckerberg owns at least 30% of the number of

Facebook shares he owned at the time the Reclassification Plan is implemented,

such a leave or resignation will not trigger an automatic conversion as long as he

185
JX1258 (Proposed Charter), Art. IV, 3.8(b).
186
The Proposed Charter defines an Approved Executive Officer as (i) the
Chief Executive Officer of the corporation, (ii) the Executive Chairman of the
Board of Directors, (iii) any other position that would constitute an executive
officer of the corporation under Rule 3b-7 of the Securities Exchange Act of 1934,
as amended, or (iv) with the approval of the Founder and a majority of the
Independent Directors, any other position or role with the corporation designated
as an Approved Executive Officer. Id. 4.1.
187
Id. 3.8(b). An independent director for the purpose of the Proposed Charter is
one who qualifies as independent under NASDAQ rules. Id. 4.10.
188
Id. 4.18.

-44-
first discusses it with the independent directors.189 If Zuckerberg owns less than

30% of the number of Facebook shares he owned at the time the Reclassification

Plan is implemented, such a leave or resignation will not trigger an automatic

conversion as long as he first discusses it with the independent directors and the

length of leave does not exceed two years or is approved by a majority of the

independent directors.190

The proposed charter provisions that would effect the automatic conversion

provision cannot be amended or eliminated without the approval of a majority of

the holders of Class A, Class B, and Class C stock, voting as separate classes.191

Mandatory Conversion Provision. Under the Reclassification Plan,

Zuckerberg is required to use his majority voting control of the outstanding Class

B stock to elect an automatic conversion of all Class B and Class C stock into

Class A stock before engaging in any transfer of his Class B stock that would cause

189
Id.
190
Id.
191
Id. 3.10.

-45-
him to own less than a majority of the outstanding Class B stock.192 That

requirement is contained in the Founder Agreement, a contract between

Zuckerberg and Facebook to be executed upon implementation of the Plan. The

Founder Agreement may not be amended without the approval of a majority of the

independent directors.193

Equal Treatment Provisions. Facebooks current charter requires ratable

treatment of Class A and Class B stock in the instance of any dividend, liquidation

of the company, or distribution upon a merger of the company or similar

transaction, and permits differential treatment only if approved by holders of a

majority of the outstanding Class A and Class B shares in separate class votes.194

Under the Reclassification Plan, the charters existing equal treatment provisions

would be amended to cover Class C stock and to prohibit the payment of

differential consideration not only in mergers or similar transactions, but also in

tender or exchange offers by third parties that are agreed to or recommended by the

192
JX1260 (Founder Agreement attached to the Definitive Proxy Statement
(Founder Agreement)), 2. Under both the current and the proposed charter, the
holders of the majority of outstanding Class B shares have the power to vote to
collapse the multi-class share structure into a single-class share structure. See
supra pp. 4-5; JX0261 (Current Charter), Art. IV 3.8(b)(ii); JX1258 (Proposed
Charter), Art. IV, 3.8(b)(ii).
193
JX1260 (Founder Agreement), 11(c).
194
JX0261 (Current Charter), Art. IV, 3.3, 3.5, 3.6.

-46-
company.195 The charter would also be amended to eliminate the current provision

permitting the payment of differential consideration if approved by holders of each

class of stock voting separately.196

The proposed amendments to the charters equal treatment provisions

cannot be amended or eliminated without the approval of a majority of the holders

of Class A, Class B, and Class C stock, voting as separate classes.197

The Founder Agreement also reinforces the prohibition on the payment of

differential consideration by separately barring Zuckerberg from selling or

transferring any of his shares for differential consideration in the types of

transactions covered by the expanded equal treatment provisions.198

Independent Compensation Committee. Under the Reclassification Plan,

Facebooks corporate governance guidelines would be amended to waive the

companys ability to avail itself of exemptions to NASDAQ rules that permit a

controlled company, such as Facebook, to have a compensation committee that is

not fully independent.199

195
JX1258 (Proposed Charter), Art. IV, 3.6(b).
196
Id. 3.6(a); JX0261 (Current Charter), Art. IV, 3.6.
197
JX1258 (Proposed Charter), Art. IV, 3.10.
198
JX1260 (Founder Agreement), 3.
199
JX1151 (Apr. 14, 2016 Report of the Special Committee) at 103 .

-47-
 N. Facebook announces the Reclassification Plan and submits it to a
stockholder vote at its annual meeting

Facebook announced the Reclassification Plan, along with its first quarter

earnings, in a Form 8-K filing with the SEC on April 27, 2016.200 On the first

trading day after the announcement, April 28, the closing price of Facebooks

stock rose by 7.2%.201

The charter amendments necessary to effect the Reclassification Plan were

presented to stockholders as Proposal Seven in the companys proxy statement for

its annual meeting, also filed with the SEC on April 27.202 The proxy statement

explained that Proposal Seven consisted of four separate sub-proposals to amend

the companys charter and that the Reclassification Plan could not proceed without

stockholder approval of each one: Proposal 7A established a Class C of non-

voting stock. Proposal 7B increased the number of authorized shares of Class A

stock to accommodate the potential conversion of all authorized Class C shares

into Class A shares. Proposal 7C authorized the equal treatment provisions of the

200
JX1206 (Facebook, Inc., Current Report (Form 8-K) (Apr. 27, 2016)).
201
JX1360 (Fischel Opening Report), 55 n.118.
202
JX1220 (Facebook, Inc., Preliminary Proxy (Form PRE 14A) (Apr. 27, 2016))
at 55.

-48-
Reclassification Plan. Proposal 7D authorized the automatic conversion provisions

of the Reclassification Plan.203

The proxy statement disclosed that, as a result of his majority voting control

over the company, as well as over the outstanding Class B shares, Zuckerberg has

the power to approve the adoption of [these amendments of the charter] without the

affirmative vote of any other stockholder.204 At the annual meeting, a majority of

the voting Class A shares (though not a majority of the outstanding Class A shares)

were voted against Proposal 7A (to establish the Class C stock) and Proposal 7B

(to increase the number of issuable Class A shares), and both sub-proposals were

approved as a result of the exercise of Zuckerbergs majority voting power. 205 An

overwhelming majority of the voting Class A shares, constituting a majority of the

outstanding Class A shares, were voted in favor of Proposal 7C (to authorize the

equal treatment provisions) and Proposal 7D (to authorize the automatic

conversion provisions).206

203
Id. at 55-56. The terms of the Reclassification Plan that were not to be
implemented through proposed amendments to the charter were not submitted for
stockholder approval.
204
Id. at 58.
205
JX1278 (Facebook, Inc., Current Report (Form 8-K) (June 20, 2016)); JX1360
(Fischel Opening Report) 58 n.123 & n.124.
206
JX1278; JX1360 (Fischel Opening Report) 57 & Ex. 11.

-49-
 O. Stockholder plaintiffs challenge the Reclassification Plan as a
breach of fiduciary duty

After the Reclassification Plan was announced, stockholder plaintiffs filed

suit in this Court. The operative complaint in this consolidated action asserts two

claims of breach of fiduciary duty, one against Zuckerberg, in his capacity as

Facebooks controlling stockholder, and the other against Facebooks five

independent directors and one of its inside directors, Koum.207

The complaint alleges that the Reclassification Plan is a self-interested

transaction that will give Zuckerberg the ability to donate/monetize his Class C

shares without giving up the voting control he enjoys through his Class B super-

voting shares.208 The complaint further alleges that the Reclassification Plan will

have a negative effect . . . on the public Class A stockholders for two reasons:

First, the Reclassification Plan

will extend Zuckerbergs control of Facebook for a term

of his lifetime plus three years of control by his estate . . .
at the expense of the minority holders of Class A Stock,
who will . . . receive no real consideration for this grant
of extension of control for Zuckerberg . . . have two-
thirds of their equity interest in Facebook forcibly

207
JX1264 (Consolidated Verified Class Action Complaint (Compl.), (June 6,
2016)) 97-106. As Facebook executives, both Koum and Sandberg recused
themselves from the boards consideration of the Reclassification Plan. Other than
identifying Koum as a Facebook executive and director, see id. 25, the complaint
does not mention Koum.
208
Id. 8.

-50-
 converted from voting Class A shares to non-voting
Class C shares[] and . . . be deprived of any influence
over the Company.209

Second, the non-voting Class C shares will trade at a discount to the Class A

shares because of the lack of voting rights, and that [e]ven at a modest 2%

discount, the collective loss to the roughly 2,296,000,000 Class A shares not

owned by Zuckerberg would be roughly $3.7 billion, thus caus[ing] immediate

financial damage to the Class.210 As relief, the complaint seeks a permanent

injunction against the Reclassification Plan.211

Shortly after the complaint was filed, Facebook agreed that it would not

implement the Reclassification Plan during the pendency of proceedings in this

Court.212

In the course of discovery, defendants produced over 8,800 documents, and

third parties Evercore, Morgan Stanley, Goldman Sachs, and Wachtell Lipton

produced another 16,174. Plaintiffs deposed 10 fact witnesses, and defendants

deposed representatives of each lead plaintiff. Expert discovery followed, with

each side putting forth two experts.

209
Id. 10.
210
Id. 11, 105.
211
Id. 107-10.
212
JX1280 (Stipulation and Order Governing Case Schedule (June 24, 2016)), at 2.

-51-
 Reviewing the academic literature, defendants expert Professor Daniel

Fischel found no substantial prospect that the Reclassification Plan would cause

economic harm to Facebook stockholders.213 Precedent reclassification

transactions, Fischel demonstrated, resulted in statistically significant share price

increases, to the benefit of minority stockholders. Fischel concluded that,

consistent with the optimal contracting hypothesis, the Reclassification Plan is

likely to increase Facebooks value because, among other reasons, it will create a

closer link between Zuckerbergs control and his leadership of the company. 214

Defendants expert Professor Guhan Subramanian offered two opinions.

First, he concluded that the Special Committee followed best negotiation practices

in engaging with Zuckerberg.215 Second, he reviewed the Reclassification Plans

governance modifications and opined that they benefited Facebooks minority

stockholders by addressing and mitigating specific governance risks that controlled

companies faced, in particular because the automatic conversion provisions

213
JX1360 (Fischel Opening Report), 26-30.
214
Id., 39-42.
215
See JX1361 (Expert Report of Guhan Subramanian (Subramanian Report)),
14, 37-63.

-52-
addressed the scenarios in which continued control of Facebook was most likely to

impair firm and stockholder value.216

Plaintiffs expert Benjamin Sacks asserted that the reclassification will cause

a diminution of Facebooks value somewhere between 1.2% and 7.2%.217 Sacks

opined that a firms value decreases as the wedge (that is, the difference between

a controlling stockholders voting rights and ownership interest) increases because

the market expects a controlling stockholder to pursue more private benefits at

shareholders expense as the wedge increases.218 Although the wedge

between Zuckerbergs voting rights and ownership interests is large, and has

increased since Facebooks initial public offering, Sacks did not find that

Zuckerberg ever had extracted private benefits of control, or that he ever would.

Sacks did not account for the absence of those findings in reaching his conclusion.

Sacks also did not consider the governance modifications that would be imposed

under the Reclassification Plan or account for them in reaching his conclusion.

Plaintiffs expert Professor Lucian Bebchuk, offered only as a rebuttal

witness, opines that Zuckerberg would have relinquished control of Facebook

absent a reclassification and that the Special Committee thus allowed Zuckerberg

216
Id., 64-79.
217
JX1362 (Expert Report of Benjamin Sacks (Sacks Opening Report)), 6.
218
Id., 14-15.

-53-
to prolong his control without making sufficient concessions to the minority

stockholders.219 Bebchuk devalues the automatic conversion triggers because he

concludes they address only remote possibilities and because he believes

Zuckerberg can find ways to avoid their enforcement.220

219
JX1373 (Rebuttal Expert Report of Lucian A. Bebchuk (Bebchuk Report)),
31-48.
220
Id. at 97-117.

-54-
 ARGUMENT
Trial will establish that the Reclassification Plan survives challenge under

any standard of review and regardless of which side bears the burden of proof.

I. THE RECLASSIFICATION IS SUBJECT TO THE BUSINESS

JUDGMENT STANDARD BECAUSE IT TREATS FACEBOOK
STOCKHOLDERS EQUALLY
Sinclair Oil Corp. v. Levien, 280 A.2d 717 (Del. 1971), set forth the

circumstances in which the entire fairness standard applies to dealings between a

corporation and its controlling stockholder. Sinclair explained that although a

controlling stockholder owes a fiduciary duty to the corporation when the

controlling stockholder deals with the corporation, that proposition alone will not

evoke the intrinsic fairness standard. Id. at 720. Rather, that standard will be

applied only when the [controlling stockholders] fiduciary duty is accompanied by

self-dealing, which occurs when the parent, by virtue of its domination of the

subsidiary, causes the subsidiary to act in such a way that the parent receives

something from the subsidiary to the exclusion of, and detriment to, the minority

stockholders of the subsidiary. Id.

Using that definition, Sinclair concluded that the business judgment standard

applied to the decision of a board of directors of a controlled subsidiary to approve

a pro rata cash dividend. Id. at 721-22. The Court acknowledged that [t]he

dividends resulted in great sums of money being transferred from [the subsidiary]

-55-
Sinven to [the parent] Sinclair during a period when [the parent] had a need for

large amounts of cash. Id. at 721. But the Court explained that these dividends

were not self-dealing because a proportionate share of this money was received

by the minority shareholders of Sinven and so Sinclair received nothing from

Sinven to the exclusion of its minority stockholders. Id. at 721-22. That was so

even though a majority of the subsidiarys directors had been found to be not

independent of the parent. Id. at 719; see also In re Mortons Rest. Grp., Inc.

Sholders Litig., 74 A.3d 656, 661-62 (Del. Ch. 2013) (explaining that the mere

presence of a controlling stockholder is not enough to trigger entire fairness

review because a conflict of interest with the other stockholders is also

necessary).

Under Sinclairs framework, the business judgment standard governs the

Reclassification Plan. The Reclassification creates a new Class C non-voting stock

and contemplates the distribution of two shares of Class C stock as a dividend on

each outstanding share of Facebook stock, whether Class A or Class B.221

Although the contemplated dividend will result in the transfer of a great number of

Class C shares from Facebook to Zuckerberg, Facebooks minority stockholders

will receive a proportionate share of the dividended Class C shares and so

221
JX1258 (2016 Definitive Proxy) at 55.

-56-
Zuckerberg will receive nothing from Facebook to the exclusion of its minority

stockholders.222 Just as in Sinclair, the Reclassification and contemplated dividend

are not self-dealing and thus are subject to the business judgment standard, not

the entire fairness standard. 280 A.2d at 722.

The contemplated dividend will permit all Facebook stockholders, including

Zuckerberg, to maintain their current voting power while selling up to two-thirds

of their economic interest in the company. It follows that because Zuckerberg

currently holds a majority voting position, the contemplated dividend will permit

him to sell up to two-thirds of his economic interest while maintaining his majority

voting power. That observation, however, does not imply that the Reclassification

is self-dealing subject to entire fairness review. Generally speaking, a

fiduciarys financial interest in a transaction as a stockholder (such as receiving

liquidity value for her shares) does not establish a disabling conflict of interest

when the transaction treats all stockholders equally . . . . In re Synthes, Inc.

Sholder Litig., 50 A.3d 1022, 1035 (Del. Ch. 2012).

Williams v. Geier, 671 A.2d 1368 (Del. 1996), confirmed that this general

rule holds good in the specific case of a pro rata reclassification of a controlled

companys capital structure. At issue in Williams was a reclassification

222
Id.

-57-
implementing a tenure voting plan under which each outstanding share of stock,

carrying one vote, would be converted into a share carrying ten votes until

transferred, when it would revert to a one-vote share until it was consecutively held

by its new owner for three years. Id. at 1370. The plaintiff, a minority

stockholder, contended that the reclassification was subject to entire fairness

review because it would allow the majority blocthe Geier Family Group and

affiliated personsto sell a portion of its holdings while retaining control of the

company. Id. at 1370-71, 1378. The Delaware Supreme Court recognized that

the reclassification would have that effect. See id. at 1373 n.10. But it

nevertheless rejected the plaintiffs contention that the nature of the reclassification

therefore rebutted the business judgment presumption, explaining that there was

no non-pro rata or disproportionate benefit which accrued to the Family Group on

the face of the Recapitalization, although the dynamics of how the Plan would

work in practice had the effect of strengthening the Family Groups control. Id. at

1378.

As then-Chancellor Strine has noted, [i]t may be that there are very narrow

circumstances in which a controlling stockholders immediate need for liquidity

could constitute a disabling conflict of interest irrespective of pro rata treatment.

Synthes, 50 A.3d at 1036. Those circumstances would have to involve a crisis,

fire sale where the controller, in order to satisfy an exigent need (such as a margin

-58-
call or default in a larger investment) agreed to a sale of the corporation without

any effort to make logical buyers aware of the chance to sell, give them a chance to

do due diligence, and to raise the financing necessary to make a bid that would

reflect the genuine fair market value of the corporation. Id.

This potential exception to the general rule that minority pro rata treatment

. . . dock[s] within the safe harbor created by the business judgment rule has no

application here. Id. at 1035. Most important, the Reclassification Plan does not

entail a sale of the corporation at all, much less a sale at a price below fair market

value. To the contrary, each Facebook stockholder, including every minority

stockholder, will possess exactly the same economic and voting interest in the

company after the Reclassification that she did before the Reclassification. The

form of that interest will be different, since the interest will be newly divided

among three freely tradeable shares. But the substance will be unaltered.

Moreover, there is no evidence that Zuckerberg had an exigent need for

liquidity, such as one arising from a margin call or default in a larger investment.

Id. at 1036.

Accordingly, the Reclassification Plan is properly reviewed only under the

business judgment standard.

-59-
II. THE RECLASSIFICATION IS PROTECTED BY THE BUSINESS
JUDGMENT RULE BECAUSE IT TREATS FACEBOOK
STOCKHOLDERS EQUALLY AND WAS APPROVED BY
DISINTERESTED AND INDEPENDENT DIRECTORS
Sinclair holds that pro rata treatment of stockholders by a controlled

company is subject to business judgment review even if the companys board of

directors is dominated by the controlling stockholder. 280 A.2d at 719, 721-22.

Under Sinclair, the pro rata reclassification at issue in Williams was subject to

business judgment review regardless of whether the companys board was

dominated by the controlling Family Group. In ruling that the plaintiff had failed

to rebut the business judgment presumption, however, the Williams court noted not

only that the record showed no non-pro rata or disproportionate benefit which

accrued to the Family Group on the face of the Recapitalization, but also that no

evidence [was] adduced to show that a majority of the Board was interested . . .

[or] was dominated or controlled by the Family Group. 671 A.2d at 1378.

Facebooks Reclassification Plan is entitled to the protection of the business

judgment rule even taking into account Williamss supplemental inquiry into

whether a pro rata distribution was approved by a disinterested and independent

board. Like the reclassification at issue in Williams, the Reclassification Plan here

(1) treats all stockholders equally, see Point I, supra, and (2) was approved by

disinterested and independent directors.

-60-
 The evidence will show that a majority of the Special Committee or the

board was not interested in the Reclassification. Because the Reclassification

treats all stockholders equally, none of the directors does (or can) have an interest

in the Reclassification that diverges from that of any stockholder, including any

minority stockholder. See Orman v. Cullman, 794 A.2d 5, 25 n.50 (Del. Ch. 2002)

(to have a disabling interest, a director must personally receiv[e] a benefit . . .

from[] the challenged transaction . . . which is not generally shared with . . . the

other shareholders). And even if, contrary to fact, there were some disparate

treatment of Facebooks outstanding classes of stock, the members of the Special

Committee agreed as a condition to their service to irrevocably convert any Class

B shares they beneficially owned into Class A shares, which are the only shares

held by the vast majority of Facebooks minority stockholders.223

Nor will the evidence show that a majority of the Committee or the board

was not independent from Zuckerberg. See Orman, 794 A.2d at 25 n.50 (a director

lacks independence from another if in fact he is dominated by that other party,

whether through close personal or familial relationship or through force of will, or

if he is beholden to the allegedly controlling entity). The fact that Zuckerberg is

223
See JX0400 (Aug. 20, 2015 Minutes of a Meeting of the Board of Directors);
JX1179 (Andreessen Horowitz Notice of Irrevocable Election to Convert); JX1042
(Bowles Notice of Irrevocable Election to Convert).

-61-
Facebooks controlling stockholder is insufficient to rebut the presumption of

independence that attaches to each of Facebooks directors. See Williams, 671

A.2d at 1378 n.22 (citing Aronson v. Lewis, 473 A.2d 805, 816-17 (Del. 1984)).

Unless rebutted by evidence of actual domination and control, the presumption

remains intact. Id.

Five of Facebooks eight directors are outside directorsAndreessen,

Bowles, Desmond-Hellmann, Hastings, and Thiel. None has a prior employment

relationship with Facebook or Zuckerberg.224 Bowles, Desmond-Hellmann, and

Hastings met Zuckerberg a few times or not at all before joining the Facebook

board.225 Thiel met Zuckerberg when he invested in Facebook as one of its earliest

investors.226 And Thiel introduced Andreessen to Zuckerberg while Facebook was

still a private company because Thiel thought it would be helpful for Zuckerberg to

talk to others who had experience starting a company.227 None of the outside

directors derives substantial income, directly or indirectly, from Facebook or

224
JX1357 (Zuckerberg Dep.) at 9, 20, 32-33; JX1305 (Bowles Dep.) at 14, 16;
JX1356 (Desmond-Hellmann Dep.) at 20, 22; JX1351 (Hastings Dep.) at 23.
225
JX1357 (Zuckerberg Dep.) at 9, 20, 32-33; JX1305 (Bowles Dep.) at 14, 16;
JX1356 (Desmond-Hellmann Dep.) at 20, 22; JX1351 (Hastings Dep.) at 23.
226
JX1357 (Zuckerberg Dep.) at 35.
227
Id. at 23-26; JX1352 (Andreessen Dep.) at 11-12.

-62-
Zuckerberg.228 Nor do any of the outside directors have a close personal

relationship with Zuckerberg.229 Finally, all of the outside directors are

independent as that term is defined under the rules of NASDAQ and the

independence standards established by applicable SEC and IRS rules for members

of a companys audit and compensation committees.230 Accordingly, the evidence

will show that no outside director was so under Zuckerbergs influence that his or

her discretion regarding the Reclassification was sterilized. Orman, 794 A.2d at

24. As a pro rata distribution approved by a fully independent Special Committee

and majority-independent board, the Reclassification is thus protected by the

business judgment rule.

228
See JX1331 (2017 Proxy) at 13.
229
JX1351 (Hastings Dep.) at 24; JX1352 (Andreessen Dep.) at 14; JX1356
(Desmond-Hellmann Dep.) at 21.
230
JX1331 (2017 Proxy) at 13. As previously mentioned, Bowles, Andreessen,
and Desmond-Hellmann compose Facebooks audit committee and Andreessen,
Hastings, and Thiel compose Facebooks compensation & governance committee.
Id.

-63-
III. THE RECLASSIFICATION PLAN IS ENTIRELY FAIR
The basic rationale for entire fairness review is the difficulty of

ascertaining, in non-arms-length transactions, the price at which the deal would

have been effected in the market. William T. Allen, Jack B. Jacobs & Leo E.

Strine, Jr., Function Over Form: A Reassessment of Standards of Review in

Delaware Corporation Law, 56 Bus. L. 1287, 1322 (2001). Accordingly, to prove

that a transaction was entirely fair, the defendants generally must establish that

the transaction was the product of both fair dealing and fair price. Cinerama, Inc.

v. Technicolor, Inc., 663 A.2d 1156, 1163 (Del. 1995); see also Weinberger v.

UOP, Inc., 457 A.2d 701, 711 (Del. 1983) (explaining that nevertheless the test

for fairness is not a bifurcated one and fairness must be examined as a whole).

The defendants can shift to the plaintiff the burden of proving that the transaction

was not entirely fair by establishing that the transaction was approved by a

sufficiently authorized board committee composed of independent and

disinterested directors that function[ed] in a manner which indicates that the

controlling shareholder did not dictate the terms of the transaction and that the

committee exercised real bargaining power at an arms-length. Kahn v. Tremont

Corp., 694 A.2d 422, 429 (Del. 1997).

The Reclassification Plan does not fit the framework for the entire fairness

inquiry. As a pro rata stock distribution conditioned on one-way concessions

-64-
made by the majority stockholder for the benefit of the minority stockholders, the

Reclassification Plan has no analogue among commercial exchanges between third

parties bargaining at arms-length. It is thus fundamentally unlike transactions in

which a controlling stockholder is said to stand on both sides, such as, for example,

an acquisition of a controlled company by its controlling stockholder or a sale of

property or services to a controlled company by its controlling stockholder. For

those transactions, a hypothetical market-based transaction (e.g., an acquisition of

the controlled company by a third party, a sale of property or services to the

controlled company by a third party) anchors the fairness analysis. But for cases

not involving a specific transaction, there is no such mooring, and so the entire

fairness analysis is of little or no utility. Allen, Jacobs & Strine, Function Over

Form, 56 Bus. L. at 1303; see id. (explaining that cases in non-transactional

settings, such as challenges to decisions on corporate distributions, do not

involve discrete market-based events that lend themselves to a fairness analysis).

That the Reclassification Plan does not fit comfortably into the entire

fairness framework is a further doctrinal indication that it is properly subject to

business judgment review. But even assuming that the Reclassification Plan could

be subject to entire fairness review, the evidence will show that the burden is

properly shifted to plaintiffs and that the Reclassification Plan is entirely fair.

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 A. The Reclassification Plan is the product of fair dealing

Fair dealing embraces questions of when the transaction was timed, how it

was initiated, structured, negotiated, disclosed to the directors, and how the

approvals of the directors and the stockholders were obtained. Weinberger, 457

A.2d at 711. The critical issue is whether the Special Committee functioned as

an effective proxy for arms-length bargaining, such that a fair outcome equivalent

to a market-tested deal resulted. In re Loral Space & Commcns Inc. Consol.

Litig., 2008 WL 4293781, at *22 (Del. Ch. Sept. 19, 2008). Judged in light of

these issues, the evidence will show that the Reclassification Plan is the product of

fair dealing.

Zuckerberg raised the idea of altering Facebooks capital structure to create a

class of non-voting stock, and of initially distributing that stock via dividend, at a

meeting of the board on August 20, 2015.231 At that meeting, he committed to not

implementing such a reclassification without the approval of Facebooks five

independent directors.232 In addition, he and Facebooks two other inside directors

recused themselves from the boards further consideration of a potential

231
JX0400 (Aug. 20, 2015 Minutes of a Meeting of the Board of Directors).
232
Id. at 010.

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reclassification.233 The independent directors then resolved to create a special

committee to consider Zuckerbergs proposal.234

The independent directors selected the three members of the boards audit

committeeDesmond-Hellmann, Bowles, and Andreessento serve as the

members of the Special Committee.235 Each of these Committee members agreed

to irrevocably convert all shares of Class B stock that they beneficially owned, if

any, in order to ensure that the Committee members holdings of Facebook stock

would not diverge from the holdings of the vast majority of Facebooks minority

stockholders, who hold only Class A stock.236 The independent directors

unanimously resolved to endow the Special Committee with broad powers,

including the power to retain its own independent advisors, to consider and

negotiate Zuckerbergs proposal, to consider and negotiate alternatives to

Zuckerbergs proposal, and to say no to any proposal at any time.237

The evidence will show that the Special Committee used these powers to

bargain at arms length for terms that were in the interests of Facebooks minority

233
Id. at 004.
234
Id. at 004, 009-11.
235
Id. at 004.
236
Id. Andreessen and Bowles executed notices of irrevocable conversion.
JX1179 (Andreessen Horowitz Notice of Irrevocable Election to Convert); JX1042
(Bowles Notice of Irrevocable Election to Convert).
237
JX0400 at 010.

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stockholders. The Committee hired independent and experienced legal and

financial advisors who had not previously been engaged by either Zuckerberg or

the company.238 Over the course of eight months, ten formal meetings, and regular

informal discussion, the Committee, with the assistance of its advisors, considered

and negotiated Zuckerbergs proposal, considered and proposed alternatives and

modifications to his proposal, and ultimately examined the question of whether the

proposal on the table was better than no deal at all.239 The Committee proceeded at

its own pace, with no pressure from Zuckerberg to speed its study of potential

reclassifications or concessions by Zuckerberg.240 It did not propose a detailed

package of concessions on which a potential reclassification would be conditioned

until early 2016, more than four months after it was formed.241 And the Committee

insisted on the concessions most important to it: a mandatory collapse of

Facebooks multi-class share structure and the conditioning of Zuckerbergs

continued control on his continued executive leadership, with only a narrow

238
JX0419 (Sept. 3, 2015 Minutes of a Meeting of the Special Committee);
JX0493 (Oct. 20, 2015 Minutes of a Meeting of the Special Committee); see also
Background Part E, supra.
239
See Background Parts G-L, supra.
240
See id.
241
JX0884 at 079 (Feb. 11, 2016 Minutes of a Meeting of the Board of Directors).

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exception for leave for only one purposegovernment service.242 As the evidence

will show, the Committee was prepared to reject a potential reclassification if

Zuckerberg did not agree to these concessions.243 The Reclassification Plan was

unanimously approved by the independent directors at a meeting from which the

inside directors had recused themselves.244

This process bears all the hallmarks of fair dealing. The Committee was

fully empowered to negotiate Zuckerbergs proposal or any alternative proposal, or

to simply reject any change to the companys capital structure at all. See, e.g., In

re MFW Sholders Litig., 67 A.3d 496, 507 n.30 (Del. Ch. 2013) (a special

committee should have the mandate to review, evaluate, negotiate, and to

recommend, or reject, a proposed transaction (internal quotations omitted)), affd,

88 A.3d 635 (Del. 2014). The Committee was authorized to, and did, hire

independent advisors. See Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1134,

1140 (Del. Ch. 1994), affd 663 A.2d 1156 (Del. 1995) (special committees

retention of independent, expert advisors is indicative of fair dealing).

242
See Background Parts I-K, supra.
243
See, e.g., JX1305 (Bowles Dep.) at 320 (They subsequently came back and
tried to extend the two years by six months, and I told, when David told me that, I
said I am out. It aint going to happen.).
244
JX1175 (Apr. 22, 2016 Minutes of a Meeting of the Board of Directors).

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 The Committee members all were accomplished businesspeople versed in

negotiation tactics as a result of their own professional experience. And as

members of the audit committee, they were especially well-informed regarding the

companys financial status and the risks of related-party transactions, and thus well

positioned to protect the interests of the companys minority stockholders. See,

e.g., S. Muoio & Co. LLC v. Hallmark Entmt Invs. Co., 2011 WL 863007, at *12

(Del. Ch. Mar. 9, 2011) (experience and sophistication of Special Committee

important factor contributing to fair dealing), affd, 35 A.3d 419 (Del. 2011); In re

Cysive, Inc. Sholders Litig., 836 A.2d 531, 554 (Del. Ch. 2003) (same).

The Committee members were active and diligent, formally meeting ten

times, regularly engaging in informal discussions, and repeatedly negotiating

directly with Zuckerberg. See In re John Q. Hammons Hotels Inc. Sholder Litig.,

2011 WL 227634, at *2 n.10 (Del. Ch. Jan. 14, 2011) (significant engagement of

special committee is indicative of fair dealing).

That the Reclassification Plan was unanimously approved by Facebooks

independent directors in a vote from which the inside directors recused themselves

is also evidence of fair dealing. See In re Cysive, 836 A.2d at 555; Van de Walle v.

Unimation, Inc., 1991 WL 29303, at *13-14 (Del. Ch. Mar. 7, 1991) (approval by

full, well-informed, majority-independent board indicative of fair dealing).

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 Finally, the fact that the stockholder vote on the Reclassification Plan was

not conditioned on a majority-of-the-minority vote, or that such a vote was not

obtained, is not evidence of unfairness, as a matter of law. See id. at *14; see also

Williams, 671 A.2d at 1382 (the failure to obtain a majority of the minority does

not give rise to any adverse inference of invalidity).

B. The Reclassification Plan reflects a fair price

The fair price part of the entire fairness inquiry compares the price

achieved with the price at which the deal would have been effected in the

market. Allen, Jacobs & Strine, Function Over Form, 56 Bus. L. at 1303. As

explained above, that comparison is impossible here because no market-based

transaction corresponds to the Reclassification Plan. In the absence of such a

benchmark, the Reclassification Plan can be evaluated as an exchange of the

Special Committees consent to the pro rata reclassification (and dividend) for

Zuckerbergs consent to concessions designed to improve the companys corporate

governance structure for minority stockholders. The evidence will show that, so

evaluated, the Reclassification Plan reflects a fair price.

The contemplated pro rata dividend is economically equivalent to a 3-for-1

stock split. It will not alter any stockholders relative economic or voting interest

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in the company.245 And it will not alter the companys assets or liabilities.246 None

of this is disputed by either of the two experts plaintiffs have retained to articulate

why the Reclassification harms minority stockholders.

Plaintiffs asserted in their complaint that the contemplated dividend of Class

C non-voting stock would harm Facebooks stockholders, including Facebooks

minority stockholders, because such stock generally trades at a discount to voting

stock.247 According to the complaint, a trading discount between Facebooks Class

C and Class A stock would necessarily imply a loss in the total value of the

economic interest in the company held by every stockholder who received the

Class C dividend.248 This theory of harm reflects an elementary misunderstanding

of corporate finance. As defendants expert Fischel explained, a trading discount

between Class C and Class A stock (which may not occur) does not mean that

Facebooks existing Class A stockholders would incur a loss, because shareholder

welfare will depend on the sum of the post-dividend prices of Facebooks Class A

and Class C shares, not the difference between the prices of Facebooks Class A

245
JX1360 (Fischel Opening Report), 26.
246
Id.
247
JX1264 (Compl.), 11.
248
Id.

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and Class C shares.249 Neither of plaintiffs experts endorsed this theory of harm,

and one even disavowed it as incorrect.250

Plaintiffs experts now advance a totally different theory of harm. They

point out that, after the distribution of the dividend, Zuckerberg (like all Facebook

stockholders) will have the ability to sell two-thirds of his economic interest in

Facebook while retaining his majority voting position.251 If he does that, plaintiffs

say, the wedge between his proportionate economic interest in the company and

his proportionate voting interest in the company will expand.252 According to

plaintiffs experts, this expansion of the wedge will increase Zuckerbergs

incentive to use his control to extract private benefits from Facebook, because

his declining economic interest will mean that he bears a declining cost of those

benefits even though he alone enjoys them.253

Plaintiffs do not contend that Zuckerberg has ever previously used his

control to extract personal financial benefits from Facebook to the detriment of

249
JX1360 (Fischel Opening Report), 28.
250
JX1372 (Expert Rebuttal Report of Benjamin Sacks (Sacks Rebuttal Report)),
49 n.56 (The potential trading discount does not measure the impact of the
issuance of Class C stock on Facebooks value.).
251
JX1373 (Bebchuk Report), 26.
252
JX1362 (Sacks Opening Report), 20; JX1373 (Bebchuk Report), at 27.
253
JX1362 (Sacks Opening Report), 21-28; JX1373 (Bebchuk Report), at 30,
53-61.

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minority stockholders despite the wedge between his economic and voting interest

that has existed since Facebooks founding. Nor do plaintiffs contend that, if the

wedge expands, he necessarily will use his control to extract financial benefits

from Facebook and thus will certainly harm minority stockholders in the future.

They do not even say it is likely that Zuckerberg will extract private financial

benefits to the detriment of public stockholders, or predict that Zuckerberg will do

so. Rather, plaintiffs contend only that the market will predict that Zuckerberg will

use his control to extract financial benefits from Facebook in the future, and that

the future expected loss in firm value (i.e., the expected amount of financial

benefits that will be extracted by Zuckerberg), will be impounded in Facebooks

market capitalization today.254 According to plaintiffs expert Sacks, that amount

is 1.2% to 7.2% of Facebooks market valueor $3 billion to $19 billion.255 So,

plaintiffs say, the Reclassification will harm minority stockholders by that much.

There are multiple problems with this theory of loss. First, it assumes that

the Reclassification will increase the wedge, but the evidence does not support the

conclusion. The wedge disappears immediately and completely when Facebooks

254
JX1362 (Sacks Opening Report), 22, 24-25; JX1373 (Bebchuk Report), at
61.
255
JX1362 (Sacks Opening Report), 30-37.

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multi-class share structure collapses, and only the Reclassification ensures that will

happen.

Second even imagining, contrary to the evidence, that plaintiffs could show

that the Reclassification increases the wedge, courts award remedies for proven

past breaches of fiduciary duty, not for market predictions of unproven

hypothetical breaches of fiduciary duty. See Gelfman v. Weeden Invrs, L.P., 859

A.2d 89, 127 (Del. Ch. 2004) (refusing to premise . . . decision on the [controlling

stockholder]s assumed intent to breach its fiduciary duties in the future). It

would be especially inappropriate to award such a remedy here, where plaintiffs

will not be able to provide evidence that Zuckerberg has extracted private benefits

of control in the past.256

Third, even setting aside that fundamental legal flaw with plaintiffs theory

of harm, plaintiffs experts are unable to identify any decline in Facebooks stock

price caused by the Reclassification Plan. Plaintiffs expert Sacks points to the

movement in Facebooks stock price on the day the Reclassification Plan was

announced.257 But the stock price rose that day, and Sacks concedes that he cannot

256
Plaintiffs are seeking an injunction against the reclassification. JX1264
(Compl.) Prayer for Relief, A. Any claim against Facebooks outside directors
for monetary damages would fail due to the exculpatory clause in Facebooks
charter. JX0261 (Current Charter), Art. VII, 1.
257
JX1362 (Sacks Opening Report), 38-39.

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tease out any statistically significant decline attributable to the announcement of

the Reclassification Plan.258

In an attempt to circumvent this lack of evidence, Sacks infers from certain

academic studies that an expansion in the size of a controllers wedge causes a

decline in firm value, and extrapolates that the potential wedge expansion that

could occur as a result of the Reclassification implies a loss in Facebooks market

value of 1.2% to 7.2%.259 But those studies examine large samples of firms and do

not establish a causal relationship between wedge size and firm value, much less

provide a basis to predict a stock price reaction to the announcement of a

reclassification at a particular company.260 The directly relevant studiesstudies

of how a firms stock price reacts to the announcement of a reclassification

creating a new class of stock with inferior voting rightsshow that stock price

rises by a statistically significant amount, as Fischels report demonstrates.261

Finally, even assuming (contrary to the law and the empirical evidence) that

Sacks estimate of a market value decline of 1.2% to 7.2% is an appropriate

estimate of the harm to minority stockholders of the Reclassification considered

258
Id., 39, 49, 51.
259
Id., 30-37.
260
Id.
261
JX1360 (Fischel Opening Report), 53-56.

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alone, it is irrelevant to any assessment of injury because, by his own admission,

that range does not reflect any attempt to value the substantial corporate

governance changes on which the Reclassification is conditioned and which

redound to the benefit Facebooks minority stockholders.262

As defendants experts will show, those changes have substantial value to

Facebooks minority stockholders because they mitigate specific corporate

governance risks that controlled companies can face.

Automatic Conversion Triggers. With a single exception for a leave or

resignation exclusively in connection with government service, the automatic

conversion triggers require the collapse of Facebooks multi-class share structure

(after a specified transition period) if Zuckerberg is no longer in a leadership role

at the companywhether because he has voluntarily resigned, been terminated for

cause, become permanently disabled, or died.

Today, Zuckerberg may retain his voting control of Facebook if he leaves

his executive position at the company for any reasonto head a charitable

foundation, run another company, or just sit on the beach. But if the

Reclassification Plan is implemented, Zuckerberg will be able to leave an

executive position at the company and retain voting control only if his leave is in

262
JX1372 (Sacks Rebuttal Report), 8; JX1378 (Sacks Dep.) at 65-68.

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connection with government service and only if he returns to Facebook after such

service.263 The automatic conversion trigger for voluntary resignation thus both

narrows the circumstances in which control is decoupled from executive leadership

by the companys founder and incentivizes the companys founder to serve in an

executive leadership role at the company.264

Today, Zuckerberg may retain voting control of Facebook even if he

commits misconduct that justifies a termination for cause. But if the

Reclassification Plan is implemented, not only will the board be able to terminate

Zuckerbergs employment for such misconduct, the termination of his employment

will be accompanied by termination of his voting control.265 The automatic

conversion trigger for termination for cause thus ensures that, once ousted,

Zuckerberg cannot use his voting control to influence the selection of Facebooks

executive leadership.266

Today, Zuckerberg may retain voting control of Facebook even if he

becomes permanently disabled. But if the Reclassification Plan is implemented, a

determination that Zuckerberg is permanently disabled will result in a loss of his

263
See JX1258 (Proposed Charter), Art. IV, 3.8(b), 4.18.
264
JX1361 (Subramanian Report), 65, 67; JX1360 (Fischel Opening Report),
39-42.
265
See JX1258 (Proposed Charter), Art. IV, 3.8(b). 4.2.
266
JX1361 (Subramanian Report), 68.

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voting control. The automatic trigger for permanent disability thus mitigates the

risk that Facebook could be controlled by Zuckerberg even if he is judged to be

mentally incompetent.267

Today, Zuckerberg may bequeath voting control of Facebook to his heirs,

and his heirs may bequeath voting control of Facebook to their heirs, and so on.

But if the Reclassification Plan is implemented, Zuckerbergs heirs will lose voting

control of Facebook immediately upon his death and Facebooks multi-class share

structure will collapse three years after his death. The automatic trigger for death

thus ensures that Zuckerbergs heirs cannot install themselves in management

regardless of their talents or use voting control over the company to extract private

benefits for themselves.268

Mandatory Conversion Trigger. The mandatory conversion trigger requires

Zuckerberg to use his majority voting control of the outstanding Class B shares to

collapse the companys multi-class share structure before engaging in any transfer

of his Class B shares that would cause him to own less than a majority of the

outstanding Class B shares.269 The mandatory conversion trigger guarantees that

even as Zuckerberg engages in transactions that result in a decline of his voting

267
Id., 65.
268
Id., 65, 66.
269
See JX1260 (Founder Agreement), 2.

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interest, other holders of Class B shares cannot use their high-vote shares to obtain

working control over Facebook. Together with the automatic conversion trigger

for death, the mandatory conversion trigger ensures that after Zuckerbergs voting

control ends, Facebook will return to a one-share, one-vote model that will allow

its stockholder body to select, via its election of directors, the executive leadership

it believes will best maximize stockholder value.270

Equal Treatment Provisions. Facebooks present charter generally prohibits

the payment of differential consideration to Class A and Class B stockholders in a

merger or similar transactionunless the stockholders, voting separately by class,

approve the transaction. If the Reclassification Plan is implemented, Facebooks

charter would be amended to absolutely prohibit the payment of differential

consideration for different classes of stock, not only in a merger or similar

transaction but also in tender or exchange offers made by agreement with the

company or with the companys recommendation.271 Furthermore, the Founder

Agreement between Zuckerberg and the company would prohibit Zuckerberg from

accepting differential consideration for his own shares in such transactions.272

Together, these provisions ensure that Zuckerberg cannot threaten to use his voting

270
JX1361 (Subramanian Report), 70-74.
271
See JX1258 (Proposed Charter), Art. IV, 3.6(a), (b).
272
See JX1260 (Founder Agreement), 3.

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control to block a deal unless he receives a premium for his shares not offered to

other stockholders.273

Independent Compensation Committee. Although the compensation

committee of the Facebook board is currently composed entirely of independent

directors, no rule or regulation requires that to be so. If the Reclassification Plan is

implemented, the companys corporate governance guidelines would be amended

to waive the companys right to avail itself of controlled company exemptions to

NASDAQ rules requiring listed companies to have fully independent

compensation committees.274 Because the interests of independent directors are

aligned with those of the minority stockholders, a fully independent compensation

committee can mitigate the risk that the board will approve inefficient and

excessive pay for Zuckerberg and other executives.275

Considered as an exchange of the Special Committees consent to the

creation and dividend of non-voting stock for Zuckerbergs consent to the

corporate governance changes, the Reclassification Plan was a bargain struck at a

fair price. On the one hand, the creation and dividend of non-voting stock do not

273
JX1361 (Subramanian Report), 77, 78; JX1360 (Fischel Opening Report),
45, 46.
274
See JX1175 (Apr. 22, 2016 Minutes of a Meeting of the Board of Directors).
275
JX1361 (Subramanian Report), 79; JX1360 (Fischel Opening Report), 47.

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by themselves alter any stockholders relative voting or economic interest.276 And

plaintiffs evidence fails to show that the creation and dividend of non-voting stock

will by themselves cause any decline in the absolute value in the firm, and thus in

the absolute value of any individual stockholders economic interest. All plaintiffs

offer is a methodologically flawed inference of a market surmise of massive future

defalcation by Zuckerberg.277 In sum, the creation and dividend of non-voting

stock will leave Facebooks minority stockholders with the same interest in the

firm they held before (with the new ability to sell a portion of their economic

interest while retaining their voting interest). The Reclassification thus will not

result in any loss to Facebooks minority stockholders. To the contrary,

defendants evidence regarding precedent reclassifications shows that the

Reclassification here should be expected to increase Facebooks value.278

On the other hand, the corporate governance changes on which the

Reclassification is conditioned are certain and provide substantial value to

Facebooks minority stockholders.279 Those changes generally condition

276
JX1360 (Fischel Opening Report), 26.
277
See JX1362 (Sacks Opening Report), 21-28; JX1373 (Bebchuk Report), 61-
62.
278
See JX1360 (Fischel Opening Report), 33-56.
279
JX1361 (Subramanian Report), 64-79; id. 81 (In my opinion, the
Reclassification Plan created significant value, by addressing and mitigating
(footnote continued on next page)
-82-
Zuckerbergs continued voting control on his continued executive engagement and

thus ensure that Facebook will become an uncontrolled company after his death or

sooner.280 They ensure that no other Class B stockholders can use their high-vote

stock to obtain effective control of Facebook after Zuckerbergs term of voting

control ends,281 that minority stockholders will share equally in any premium paid

in an acquisition of Facebook by a third party,282 and that a fully independent

compensation committee will oversee the pay and benefits awarded to Facebooks

management, including Zuckerberg.283

The Reclassification Plan guarantees that Facebook cannot remain

controlled once Zuckerberg is no longer engaged as one of its leaders. The

Reclassification Plan thus solves for the controlling-stockholder scenarios most

likely to reduce stockholder value: controllers who are absent from corporate

management; controllers who have disengaged from the corporate leadership;

controllers freed from accountability for misconduct; and the intergenerational

(footnote continued from previous page)

specific corporate governance risks that controlled companies, and Facebook in
particular, can face.).
280
E.g., id., 73-74.
281
Id., 70-71.
282
Id., 75-76.
283
Id., 79.

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transfer of corporate control. The Reclassification Plan will transform Facebook

from a perpetual dual-class company to a company with sunset provisions

calibrated to facilitate Zuckerbergs long-term leadership of Facebook and to

eliminate control when it is no longer valuable. These are very substantial benefits

to Facebooks minority stockholders. And, of course, the minority stockholders

will suffer no harm in allowing Zuckerberg to give more of his wealth to charity

now rather than decades in the future.

Plaintiffs contrary theory hinges on the idea that without the

Reclassification, Zuckerberg would have relinquished control of Facebook, that the

Reclassification prolongs Zuckerbergs period of control, and that the companys

minority stockholders will be harmed because the Reclassification defers the day

that control passes to the public. But the evidence supports no element of this

logical train. The evidence does, and at trial will, show that Zuckerberg has no

intention of ceding control of Facebook in any foreseeable time horizon, with or

without the Reclassification. The evidence does not show that the Reclassification

will extend Zuckerbergs control; to the contrary, it will show that the

Reclassification provides the only certain path to decontrolling Facebook. And

plaintiffs have produced and will produce no evidence that decontrolling Facebook

will add any value to the company or to its minority stockholders.

-84-
 Setting the give against the get in this case thus yields the conclusion

that the Reclassification Plan is economically fair because minority stockholders

will lose nothing (and likely gain much) by the creation and dividend of non-voting

stock, but will gain substantial value from the corporate governance changes

implemented by the Reclassification Plan. That is a trade that a reasonable seller,

under all of the circumstances, would regard as within a range of fair value.

Cinerama, 663 A.2d at 1143.

-85-
 CONCLUSION
For the foregoing reasons, trial will establish that judgment should be

entered for defendants.

POTTER ANDERSON & CORROON LLP

OF COUNSEL:
By: /s/ Kevin R. Shannon
William Savitt Stephen C. Norman (No. 2686)
Ryan A. McLeod (No. 5038) Kevin R. Shannon (No. 3137)
Anitha Reddy Berton W. Ashman, Jr. (No. 4681)
Scott Stevenson Tyler J. Leavengood (No. 5506)
WACHTELL, LIPTON, ROSEN Jaclyn C. Levy (No. 5631)
& KATZ 1313 N. Market Street
51 West 52nd Street Hercules Plaza, 6th Floor
New York, New York 10019 Wilmington, Delaware 19801
(212) 403-1000 (302) 984-6000

Attorneys for Defendants Marc L.

Andreessen, Erskine B. Bowles, Susan D.
Desmond-Hellmann, Reed Hastings and
Peter A. Thiel

RICHARDS, LAYTON & FINGER, P.A.

OF COUNSEL:
By: /s/ Raymond J. DiCamillo
George M. Garvey Raymond J. DiCamillo (No. 3188)
Mark B. Helm Kevin M. Gallagher (No. 5337)
Laura Lin Nicholas R. Rodriguez (No. 6196)
MUNGER, TOLLES 920 N. King Street
& OLSON LLP Wilmington, Delaware 19801
350 S. Grand Avenue, 50th Floor (302) 651-7700
Los Angeles, California 90071
(213) 683-9100 Attorneys for Defendant Mark Zuckerberg

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 ROSS ARONSTAM & MORITZ LLP

By: /s/ David E. Ross

David E. Ross (No. 5228)
Garrett B. Moritz (No. 5646)
Benjamin Z. Grossberg (No. 5615)
100 South West Street, Suite 400
Wilmington, Delaware 19801
(302) 576-1600

Attorneys for Defendants Jan Koum

Dated: September 15, 2017 and Facebook, Inc.
5394043

Words: 17,388
PUBLIC VERSION FILED:
September 22, 2017

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