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Sept. 8 — Shareholders challenging Facebook Inc.'s plan to create a new class of non-voting stock are asking the Delaware Chancery Court to order the company to produce attorney-client privileged information ( In re Facebook Inc. Class C Reclassification Litig., Del. Ch., No. 12286-VCL, public version of plaintiff's brief filed 9/8/16 ).
Facebook appointed a special committee to negotiate the terms of the stock reclassification. The shareholder plaintiffs, in a filing that became available Sept. 8, are requesting more information about the special committee process. They asserted that the company has withheld more than 40 percent of responsive documents on grounds of privilege and redacted another 6 percent on the same basis.
“The wall of privilege Defendants have erected around the core of the process of how the Special Committee negotiated and approved the reclassification must come down,” the shareholders said in the filing.
In April, Facebook's board announced that it was recommending that shareholders approve the creation of new class C shares, which provide no voting rights.
Currently, stockholders who own Facebook Class A shares have one vote per share, and those with Class B shares have 10 votes per share. Facebook founder Mark 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, the plaintiffs alleged that Facebook directors breached their fiduciary duties by supporting the reclassification of shares. They said the reclassification would allow Zuckerberg to monetize a large portion of his stock without giving up control of the company (85 CARE, 5/3/16) (85 CARE, 5/3/16).
The plaintiffs also argued that under the Garner doctrine, they may access information related to the legal advice the directors sought that would otherwise be privileged. The doctrine recognizes an exception to the attorney-client privilege under certain circumstances.
The Delaware Supreme Court in a 2014 ruling— Wal-Mart Stores Inc. v. Ind. Elec. Workers Pension Trust Fund IBEW—said that privileged information may be obtained under Garner on a showing of “good cause” (12 CARE 857, 7/25/14).
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The plaintiff's brief is available at http://src.bna.com/iqp.
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