When you talk about the plumbing of corporate law, most people's eyes glaze over. It sounds dry. It sounds like something only guys in expensive suits in Wilmington care about. But back in 2021, a Delaware Supreme Court Justice named Tamika Montgomery-Reeves wrote an opinion that basically rewired how shareholders hold powerful CEOs accountable.
We’re talking about the case of United Food and Commercial Workers Union v. Zuckerberg.
If you've ever wondered why it’s so hard for a regular person owning a few shares of stock to sue a massive company like Meta (formerly Facebook), this is the story. It’s a story about Mark Zuckerberg wanting to keep control of his empire, a bunch of angry pension funds, and a legal test that was so old it didn't even account for modern corporate protections.
The Problem with the "Old Ways"
For nearly forty years, Delaware law was stuck in a bit of a split personality crisis. To figure out if a shareholder could bypass the board of directors and sue on behalf of the company—something called a "derivative suit"—lawyers had to navigate two different tests.
One was called Aronson. The other was Rales.
If the board that made the bad decision was still the board in power when you sued, you used Aronson. If the board had changed, or if they just failed to act on something, you used Rales. It was confusing. Honestly, it was a mess. Lawyers spent more time arguing about which test to use than actually talking about the alleged corporate wrongdoing.
What Actually Happened in the Zuckerberg Case?
The drama started because Mark Zuckerberg wanted to give away most of his wealth but keep his iron grip on Facebook’s voting power. He proposed a "reclassification" of the stock. Basically, he wanted to create a new class of non-voting shares.
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Shareholders weren't happy. They sued. Facebook ended up spending about $21.8 million defending the plan and eventually paid another $68.7 million in legal fees to settle things. Then, a new group of shareholders—the United Food and Commercial Workers Union—sued to get that money back from the board.
They argued that the board shouldn't have spent all that money defending a plan that was just a "land grab" for Zuckerberg’s control. But here’s the kicker: they didn’t ask the board for permission to sue first. They claimed it would be "futile" to ask, because the board was too close to Zuckerberg.
Enter Justice Tamika Montgomery-Reeves
Justice Montgomery-Reeves stepped in to clear the air. In her Tamika Montgomery-Reeves Delaware demand futility shareholder derivative opinion, she didn't just rule on the Facebook case; she threw out the old, clunky dual-test system.
She realized that the Aronson test was a relic of the 1980s. Back then, if a director made a mistake, they could be personally liable for "gross negligence." But since then, Delaware passed a law (Section 102(b)(7)) that lets companies "exculpate" or protect directors from being sued for simple mistakes in judgment.
The old Aronson test didn't account for that protection. It assumed that if a transaction looked bad, the directors must be scared of being sued, and therefore they couldn't be impartial. Montgomery-Reeves called "time out" on that logic.
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The New "Universal" Three-Part Test
She simplified everything. Instead of worrying about which old case applied, she told courts to ask three simple questions about each director on a "head-by-head" basis:
- Did the director get a personal financial benefit from the bad act that the rest of the shareholders didn't get?
- Does the director face a "substantial likelihood of liability" for the claims? (Crucially, if the company charter protects them from "duty of care" violations, that doesn't count as a "substantial likelihood").
- Is the director so beholden to someone else who is interested or liable—like a controlling founder—that they can’t be independent?
If the answer to any of these is "yes" for at least half the board, then the shareholder can go ahead and sue without asking permission. It’s a "count the heads" approach.
Why This Kinda Sucks for Shareholders (But Makes Sense for Boards)
Let’s be real: this made it a lot harder for shareholders to win.
By deciding that "exculpated" claims—basically mistakes that don't involve fraud or bad faith—don't count toward making a director "conflicted," the court gave boards a massive shield. You can’t just say "they did a bad job" anymore. You have to prove they either got rich off the deal, acted in bad faith, or are totally in the pocket of the CEO.
In the Zuckerberg case, the court looked at the Facebook board and decided that most of them could have been impartial, even though they were friends with Mark or worked in the same circles. The suit was dismissed.
Why It Matters to You
If you own stock, or even if you just have a 401(k), you’re a part-owner of these companies. The Tamika Montgomery-Reeves Delaware demand futility shareholder derivative opinion defines the boundary of your power.
It tells us that Delaware values "board centricity." They want the directors to run the show, not the shareholders or the courts. It’s a high bar to clear.
Actionable Insights for Investors and Legal Watchers
If you’re looking at a potential corporate scandal and wondering if a lawsuit will actually stick, here is what you need to look for under the Montgomery-Reeves standard:
- Check the Charter: Does the company have a 102(b)(7) provision? Most do. If it does, a simple "they were lazy/dumb" argument won't get you past the demand futility stage.
- Follow the Money: Look for "non-ratable" benefits. Did one director get a special consulting deal or a side payment that other shareholders didn't? That’s a "yes" on prong one.
- Analyze the Ties: Don't just look at who is friends with whom. Look for deep financial or career dependencies. Being "beholden" is a high bar, but it's the most common way to win these days.
- Focus on Bad Faith: Since "duty of care" (negligence) is often protected, successful suits now focus on "duty of loyalty." You have to show the board intentionally acted against the company's best interests.
The landscape is more streamlined now, but the gates are definitely narrower. Justice Montgomery-Reeves didn't just settle a dispute about Facebook; she gave the entire corporate world a new map. It's up to the shareholders to see if they can still find a way through.