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In re Facebook, Inc. Section 220 Litig.

Court of Chancery of Delaware

March 7, 2019, Submitted; May 30, 2019, Decided

CONSOLIDATED C.A. No. 2018-0661-JRS

Opinion

MEMORANDUM OPINION

In July 2018, Facebook, Inc. ("Facebook" or the "Company") experienced one of the sharpest single-day market value declines in history when its stock price dropped 19%, wiping out approximately $120 billion of shareholder wealth. This unprecedented misfortune followed news reports that, in 2015, the private data of 50 million Facebook users had been poached by Cambridge Analytica, a British political consulting firm.1 Facebook did not disclose this security breach to its users upon discovery or at any time thereafter. Users first learned of the breach when they read or heard about it in the news.

At the time of the Cambridge Analytica breach, Facebook was subject to a consent decree entered by the Federal Trade Commission (the "FTC") in 2011 (the "Consent Decree") after the FTC determined that [*3]  the Company's data privacy measures were not protecting users' private information. Among other things, the Consent Decree required Facebook to implement more robust and verifiable data security protocols.

Soon after news of the Cambridge Analytica breach broke, reports surfaced that Facebook's business model included incentives to monetize its users' data without their consent. These reports were followed by news that the FTC, Federal Bureau of Investigation ("FBI"), Securities and Exchange Commission ("SEC"), Department of Justice ("DOJ"), European Information Commissioner's Office ("ICO") and other European authorities had all opened investigations into Facebook's data privacy practices.

On April 11, 2018, Plaintiff, Construction and General Building Laborers' Local No. 79 General Fund ("Local No. 79"), served a demand to inspect Facebook's books and records (the "Demand") under Section 220 of the Delaware General Corporation Law ("Section 220").2 As required by statute,3 Local No. 79 stated that its purpose for inspection was to "investigate and assess the actual and potential wrongdoing, mismanagement, and breaches of fiduciary duties by the members of the Company's Board" in connection with the data privacy [*4]  breaches and "to investigate the independence and disinterestedness" of the Company's directors.4 In response, Facebook produced about 1,700 pages of significantly redacted books and records.

When discussions between the parties regarding the scope of Facebook's production broke down, Local No. 79 filed its Verified Complaint to Compel Inspection on September 6, 2018.5 In its answer to that Complaint, Facebook denied Plaintiff had stated a proper purpose for inspection and maintained that, even if a proper purpose had been stated, Plaintiff was not entitled to inspect any documents beyond those already produced.6 Specifically, Facebook asserted the Complaint failed to plead a credible basis to infer that Facebook's directors breached their duty of oversight, or any other aspect of their fiduciary duties, because the Cambridge Analytica breach resulted from the unanticipated acts of third parties who had managed to compromise Facebook's existing (and adequate) data privacy systems.

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2019 Del. Ch. LEXIS 197 *; 2019 WL 2320842

IN RE FACEBOOK, INC. SECTION 220 LITIGATION

Notice: THIS OPINION HAS NOT BEEN RELEASED FOR PUBLICATION. UNTIL RELEASED, IT IS SUBJECT TO REVISION OR WITHDRAWAL.

Subsequent History: Revised: May 31, 2019.

Prior History: In re Facebook, Inc., Consumer Privacy User Profile Litig., 325 F. Supp. 3d 1362, 2018 U.S. Dist. LEXIS 101061 (J.P.M.L., June 6, 2018)

CORE TERMS

user, documents, consent decree, inspection, investigations, privacy, data privacy, Plaintiffs', wrongdoing, platform, books and records, credible, compliance, stockholder, Audit, third party, proper purpose, monitor, emails, mismanagement, policies, Pre-Trial, breaches, fiduciary, practices, infer, third-party, whitelist, consumer, purposes

Business & Corporate Law, Record Inspection & Maintenance, Inspection Rights, Shareholders, Evidence, Burdens of Proof, Allocation, Directors & Officers, Management Duties & Liabilities, Fiduciary Duties, Actions Against Corporations, Derivative Actions, Procedural Matters, Statements as Evidence, Hearsay, Rule Components, Admissibility, Procedural Matters, Rulings on Evidence, Preponderance of Evidence, Fiduciary Duties, Duty of Good Faith, Duty of Loyalty, Privileges, Attorney-Client Privilege, Exceptions