Bloomberg BNA’s Corporate Law & Accountability Report is available on the Corporate Law Resource Center. This news service keeps corporate practitioners informed of legal developments of...
By Che Odom
June 11 — A Facebook Inc. shareholder filed a complaint seeking to recoup “unfair excessive compensation” to board members, but a highly regarded law professor doesn't give the lawsuit a great chance for success.
Plaintiff Ernesto Espinoza filed the derivative complaint June 6 in the Delaware Court of Chancery against members of Facebook's board of directors, accusing them of breach of fiduciary duty, waste of corporate assets and unjust enrichment.
According to the complaint, the company's directors “are free to continue to award themselves virtually any amount of compensation they choose into perpetuity.”
The board actually may grant only up to 2.5 million shares to each director annually. But, “[a]t the Company's current stock price, 2.5 million Facebook shares are worth approximately $145 million, and accordingly, is not a true limit,” the complaint says.
Espinoza will not have an easy time overcoming the court's inclination to show deference to board decisions with respect to pay structures, according to Professor Jill E. Fisch of the University of Pennsylvania Law School.
“Absent some strong evidence that the process by which Facebook's pay levels was set was fraudulent or corrupt, I do not see this lawsuit as presenting a compelling case,” she told Bloomberg BNA June 11.
The plaintiff seeks to “impose meaningful restrictions” on the board's ability to award itself compensation. The complaint lists 2013 compensation amounts for the following non-executive directors:
Under Delaware General Corporation Law §141(h), Facebook's board is given the power to set director compensation, Fisch said.
“NASDAQ rules require that listed companies have an independent compensation committee,” she said, “and, although as a controlled company Facebook is not subject to this requirement, it is worth noting that it has voluntarily established a compensation committee consisting of independent directors.”
Facebook pays its non-executive directors 43 percent more than its self-identified peers, despite its net income and revenues being 66 percent and 49 percent lower than its peers, respectively, according to the complaint.
In evaluating the reasonableness of compensation levels, the company's peer group and its financial performance would be considered, Fisch said.
“For example, peer groups can be defined across various dimensions, but it is difficult to understand why the reasonableness of Facebook's director pay would be defined by reference to the pay of directors at Disney or Linkedin, which are very different companies,” she said.
Facebook's peer group consists of Adobe Systems Inc., Amazon.com Inc., Cisco Systems Inc., eBay Inc., EMC Corp., LinkedIn Corp., Netflix Inc., QUALCOMM Inc., SAP AG, The Walt Disney Co., VMware Inc. and Yahoo! Inc., according to the complaint.
Weighing in Facebook's favor, a substantial component of its director compensation is in the form of stock-equity compensation, which is “widely believed to provide better incentives for directors than cash, but equity compensation is also riskier for directors because so many things affect stock price that are outside of the board's control,” Fisch said.
Fisch's work, which focuses on the intersection of business and law, has appeared in top law reviews, including the Harvard Law Review, the Yale Law Journaland the University of Pennsylvania Law Review.
Espinoza is represented by attorneys Christian Douglas Wright and Nicholas J. Rohrer of Young Conaway Stargatt & Taylor LLP of Wilmington, Del.
To contact the reporter on this story: Che Odom in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Jesse Travis at email@example.com
The complaint is available at http://www.bloomberglaw.com/public/document/Espinoza_Ernesto_vs_Mark_Zuckerberg_et_al_Docket_No_9745_Del_Ch_J.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)