In United Food and Commercial Workers Union v. Zuckerberg, decided by the Delaware Supreme Court on September 23, 2021, a Facebook shareholder’s derivative lawsuit against Mark Zuckerberg and five fellow directors was dismissed. The plaintiffs lost, but the decision reshaped Delaware corporate law: the court used the case to replace two decades-old tests for shareholder derivative suits with a single, unified three-part standard that now governs every such case filed in the state.
What the Lawsuit Was About
In April 2016, Facebook announced a plan to create a new Class C stock that carried no voting rights. Every existing shareholder would receive two Class C shares for each share held. For ordinary investors, the change was largely cosmetic. For Zuckerberg, it was not. He could sell or donate the non-voting Class C shares to fund his philanthropy while retaining every high-vote Class B share he owned. After the reclassification, he could have sold down to as little as 4 percent of Facebook’s economic value while still controlling 50.1 percent of the voting power.1Justia. United Food and Commercial Workers Union v. Zuckerberg
Shareholders challenged the plan in a class action. Facebook spent more than $20 million defending it. In September 2017, Zuckerberg asked the board to withdraw the reclassification, saying the stock had appreciated enough that he no longer needed it to fund his philanthropic goals. By then the class action had already settled, and Facebook paid over $68 million in plaintiffs’ attorneys’ fees as part of that settlement. The total cost of the abandoned plan climbed above $88 million.1Justia. United Food and Commercial Workers Union v. Zuckerberg
Who Sued and What They Wanted
After the reclassification was scrapped, the United Food and Commercial Workers Union and its pension fund, the Participating Food Industry Employers Tri-State Pension Fund, filed a separate lawsuit as Facebook shareholders. They sued Zuckerberg and five other board members, including Marc Andreessen, Peter Thiel, Reed Hastings, Erskine Bowles, and Susan Desmond-Hellmann.2OpenCasebook. UFCWU v. Zuckerberg
The case was a derivative action. That means the pension fund sued on behalf of the corporation itself, and any recovery would go to Facebook’s treasury rather than to the shareholder who filed. The theory is that when a board harms the company and refuses to pursue the claim, a shareholder can step in. The pension fund wanted the six directors to personally repay Facebook the $88-plus million lost on the reclassification.1Justia. United Food and Commercial Workers Union v. Zuckerberg
The complaint alleged that the directors breached both of their core fiduciary duties. On the duty of care, it said the board failed to negotiate meaningful shareholder protections before approving the plan. On the duty of loyalty, it said the directors were so entangled with Zuckerberg through business and personal relationships that they could not exercise independent judgment, and instead approved a deal designed primarily to serve his philanthropic goals.3State of Delaware. The Delaware Way: Deference to the Business Judgment of Directors Who Act Loyally and Carefully
The Demand Futility Barrier
Delaware law requires a shareholder to ask the board to pursue a claim before filing a derivative suit. This is called making a “demand.” Under Court of Chancery Rule 23.1, the complaint must describe what efforts the shareholder made to get the board to act, or explain why those efforts would have been pointless.4OpenCasebook. Delaware Rules of Civil Procedure, Rule 23.1
The pension fund never made a demand. It argued the exercise would have been futile because the directors who would consider the demand were the same people accused of wrongdoing. This is where the case became consequential for corporate law well beyond Facebook.
For nearly four decades, Delaware courts had used two different demand futility tests. The Aronson test applied when a lawsuit challenged a specific decision made by the current board, asking whether there was reasonable doubt that the directors were disinterested or that the decision reflected valid business judgment. The Rales test applied in other situations and asked whether a majority of the board could exercise independent judgment when responding to a demand. Litigants often fought over which test governed, and the two frameworks sometimes pointed in different directions.5OpenCasebook. UFCWU v. Zuckerberg
How the Courts Ruled
In October 2020, the Court of Chancery dismissed the complaint. The trial court found that the duty-of-care claims were exculpated under Facebook’s charter, so they did not create a substantial threat of personal liability that would disqualify the directors from considering a demand. The court also found the complaint did not adequately show that a majority of the board lacked independence from Zuckerberg.2OpenCasebook. UFCWU v. Zuckerberg
Exculpation is a feature of Delaware corporate law that lets companies include charter provisions shielding directors from personal liability for duty-of-care breaches. It is authorized by Section 102(b)(7) of the Delaware General Corporation Law and does not extend to breaches of the duty of loyalty, acts of bad faith, or situations where a director derived an improper personal benefit.6State of Delaware. Delaware Code Title 8, Chapter 1, Subchapter I
The pension fund appealed. The Delaware Supreme Court agreed the case should be dismissed, but used the appeal to overhaul the demand futility framework entirely.1Justia. United Food and Commercial Workers Union v. Zuckerberg
The New Three-Part Demand Futility Test
The Supreme Court replaced the old two-track system with a single, unified test. The court emphasized it was not overruling Aronson or Rales. It blended both into one standard because, in the court’s words, “both address the same question of whether the board can exercise its business judgment on the corporation’s behalf” when considering a demand.
Under the new framework, courts evaluate each director individually by asking three questions:
- Did the director receive a material personal benefit from the misconduct at issue?
- Does the director face a substantial likelihood of liability on the claims the shareholder wants the company to pursue?
- Does the director lack independence from someone who received a material personal benefit or who faces a substantial likelihood of liability?
If the answer to any of those questions is “yes” for at least half the board, demand is excused as futile and the shareholder can proceed without first asking the board.5OpenCasebook. UFCWU v. Zuckerberg
Applying the test director by director, the Supreme Court found no director other than Zuckerberg received a material personal benefit from the reclassification. Facebook’s exculpation provision shielded most directors from personal liability on the duty-of-care claims, so they did not face a substantial likelihood of liability. And the complaint’s allegations of personal and business ties to Zuckerberg did not show that a majority of the board could not act independently. The dismissal was affirmed.1Justia. United Food and Commercial Workers Union v. Zuckerberg
Why the Case Matters Going Forward
The pension fund lost, but the ruling changed how every future derivative suit in Delaware gets evaluated at the threshold stage. Litigants no longer argue about which test applies. One checklist governs, applied director by director, with a clear numerical threshold: half the board must be compromised for demand to be excused.
The decision also confirmed how powerful exculpation provisions are for corporate defendants. When a charter shields directors from personal liability for duty-of-care failures, those claims become far less useful for clearing the demand futility hurdle. Shareholders who want to survive a motion to dismiss generally need to frame allegations around the duty of loyalty or bad faith, neither of which can be exculpated.6State of Delaware. Delaware Code Title 8, Chapter 1, Subchapter I
For shareholders of companies with a dominant founder or controlling stockholder, the case shows both the possibilities and the limits of derivative litigation. The pension fund pointed to a real loss: nearly $90 million spent on a plan that benefited only the CEO and was ultimately abandoned. But proving a board cannot impartially evaluate a demand is a high bar, particularly when the complaint rests on general allegations of social and business ties rather than specific evidence of financial dependence or entanglement.