Facebook Investors Get Mixed Rulings Over Privileged Docs

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By Michael Greene

Nov. 16 — Facebook Inc. shareholders can’t obtain certain attorney-client privileged information in a lawsuit challenging the company’s plan to create a new class of non-voting stock, the Delaware Chancery Court ruled Nov. 16 ( In re Facebook Inc. Class C Reclassification Litig. , Del. Ch., No. 12286-VCL, 11/16/16 ).

Vice Chancellor J. Travis Laster said the investors couldn’t get more information under the Garner doctrine about the process a special committee of directors used to negotiate the reclassification with Facebook founder Mark Zuckerberg. The doctrine requires companies to turn over attorney-client privileged data to shareholders during litigation if there is “good cause” for doing so.

The court, in a separate order, said it will privately review documents withheld by Evercore Partners, the special committee’s financial adviser, and Goldman Sachs & Co., Zuckerberg’s financial adviser, to determine if they properly asserted the attorney-client privilege shield.

High Standard Not Met

In April, Facebook’s board recommended that shareholders approve the creation of new class C shares, which provide no voting rights. The reclassification would allow Facebook to declare a dividend of two new shares of non-voting stock for each outstanding share.

Currently, stockholders who own Facebook Class A shares have one vote per share, and those with Class B shares have 10 votes per share. Zuckerberg, who owns or controls the majority of Facebook’s Class B stock, has over 60 percent of the voting power in the company.

In the underlying lawsuit, shareholders claimed that Facebook directors breached their fiduciary duties by supporting the reclassification. According to the court’s order, Zuckerberg in August 2015 proposed the capital restructuring so that he could use a significant block of his high voting shares to fund philanthropic endeavors.

In the Garner ruling, Laster said the standard for showing good cause is high He found that the shareholders failed to meet this standard because the information could be obtained from other sources, such as depositions. He also determined that the shareholders failed to specifically identify the materials they sought.

In his ruling requiring Evercore and Goldman to submit documents for a private review, Laster said that a document-specific inquiry was needed to determine whether the materials involved legal advice. He also cited Goldman’s revision of its privilege logs on multiple occasions and the shareholders’ allegations of “facially dubious back-channel communications” between Zuckerberg and a special committee member.

To contact the reporter on this story: Michael Greene in Washington at mGreene@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com

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