Indian Prime Minister Narendra Modi Meets With Facebook Inc. Chief Executive Officer Mark Zuckerberg
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Commentary

Here’s why Mark Zuckerberg and Facebook’s board are in hot water

Oct 30, 2015

If you own even just one share in Facebook (fb), a Delaware court judge wants you to know you have rights. In an opinion published on Thursday, Delaware Chancellor Andre G. Bouchard ruled that the social network's minority shareholders are entitled to their day in court over the salaries that Facebook's directors received.

Facebook CEO Mark Zuckerberg and the rest of the company's board are being sued because a shareholder thinks the pay the directors were awarded in 2013 was too high. Board members decide their own pay, but in this case, the dispute is over whether it was excessive and whether the board acted in shareholders’ interests.

After the lawsuit was filed, Zuckerberg, who owns a majority of Facebook's shares, signed an affidavit saying he approved the pay. In a deposition related to the case, he said: “These are the people who I want and—and who I think will serve the company best, and I think that the compensation plan that we have is doing its job of attracting and retaining them over the long term.”

Zuckerberg's lawyers claimed that was enough under Delaware law to conclude the majority of shareholders had approved the director pay packages. That matters under Delaware law (where Facebook and many large corporations are incorporated), because unless shareholders have approved the directors’ pay, the Facebook board has to show the pay was fair. But if shareholders approved board members’ pay, they could rely on a presumption that they exercised sound business judgement.

The judge said not so fast. Just because Zuckerberg signed an affidavit and spoke in a deposition doesn’t mean Facebook is entitled to an easier case.

Delaware law is pretty loose when it comes to shareholder approval. It can be done at a shareholder meeting, by unanimous consent of shareholders, or even by majority shareholder consent “without a meeting, without prior notice and without a vote,” Bouchard wrote.

But Bouchard said protocols under the law on when Zuckerberg was speaking for shareholders matter. To use the majority shareholder consent provision, Zuckerberg not only had to make it clear for whom he was speaking and that he was entitled to speak for the majority, he also had to disclose his action to shareholders following his decision. “In the case of action taken by written consent, [shareholders are entitled] to receive prompt notice after the fact of the action taken,” the judge wrote. According to the judge, these requirements protect the corporation and its shareholders.

The rights of minority shareholders are critical to corporate governance. In fact, it’s one area of governance that countries across the globe have been able to agree on. It’s that basic. So because minority shareholders did not get their due, including receiving notice of Zuckerberg's actions, this case is going forward, as it should.

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (http://www.thevaluealliance.com), an independent board education and advisory firm she founded in 1999. She has been a regular contributor to Fortune since April 2010 and is the author of two books on corporate governance and valuation, Economic Value Management: Applications and Techniques and Value-led Organizations.

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