Claim Over ‘Excessive Pay' for Facebook Directors Needs More, Professor Says

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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.

List of Director Pay

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:

  •  Donald Graham, lead independent director — $387,874;
  •  Peter Thiel, director — $387,874;
  •  Marc Andreessen, director — $387,874;
  •  Reed Hastings, director — $387,874;
  •  Erskine Bowles, director — $387,874; and
  •  Susan Desmond-Hellmann, director — $935,874.

  • Authority Bestowed by Law

    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.

    Peer Group Examined

    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 codom@bna.com

    To contact the editor responsible for this story: Jesse Travis at jtravis@bna.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.