Two institutional investors have hit Facebook with a Chancery Court lawsuit seeking corporate documents related to advertising revenues and executive pay, saying that an earlier attempt to obtain the information was largely rebuffed.
The books-and-records suit, filed March 22 by the Southeastern Pennsylvania Transportation Authority and Boston Retirement System, cited a steep decline in Facebook’s market value after the company said last July that it expected to see a slowdown in revenue growth.
According to the complaint, Facebook relies on ad sales to generate “substantially all” of its revenue. However, the filing alleged that between 2014 and 2017 the company had “vastly overestimated” user engagement with video ads and made other errors, which led major advertisers to significantly cut their spending on the social-media platform.
Meanwhile, the plaintiffs said, Facebook’s regulatory filings made no mention of whether the board considered those errors in approving pay packages for the company’s executives, who reaped “hundreds of millions of dollars” in compensation during that time. The complaint said board minutes and other high-level communications were needed for stockholders to weigh in on Facebook’s pay practices and to vote on a slate of directors at the company’s annual meeting later this Spring.
“The proxy disclosures appear to evidence that executives were credited with advertising growth in the compensation determinations,” plaintiffs’ attorneys from Chimicles Schwartz Kriner & Donaldson-Smith wrote in the filing. “Facebook’s senior executives knew or should have known the facts concerning Facebook’s raw data and expectations regarding revenue growth, as ads were sold and compensation determinations were made with ad revenue as a factor.”
SEPTA, the Philadelphia area mass transit agency, and Boston Retirement System said that they had contacted Facebook in August, demanding that the company produce board-level materials. According to the complaint, however, Facebook provided just nine “highly-redacted” documents, which did not address address pay decision or the company’s advertising issues.
The crux of the filing was a one-day decline of $119 billion in Facebook’s market value, after Facebook reported a substantial “deceleration” in its revenue rate.
Since 2016, the complaint said, Facebook had reported a “growing number of errors” related to its advertising data, including problems with a key metric that skewed information that was given to marketers. According to the filing, the company for two years had overstated the amount of time users spent watching ad videos by as much as 60 to 80 percent.
In response, ad buyers filed class action lawsuits in California and Arkansas, claiming that they had overpaid Facebook based on the information the company provided. Last March, major advertisers Proctor & Gamble, Subway and a global beverage company cut back their ad spending by 20 to 50 percent as a result of the revelations.
Facebook’s press office did not immediately respond Monday to an email seeking comment on the lawsuit, and an attorney for the plaintiffs was not immediately available to comment.
Investors will be asked in the coming months to pass of a non-binding vote in favor of Facebook’s executive compensation plans. The “say on pay” vote, scheduled to take place at Facebook’s annual meeting in May or June, is expected to coincide with director elections, the complaint said.
SEPTA and the Boston Retirement System are represented by Robert J. Kriner Jr., Scott M. Tucker, Tiffany J. Cramer and Vera G. Belger of Chimicles in Wilmington.
An online docket-tracking service did not list counsel for Facebook on Monday.
The case is captioned Southeastern Pennsylvania Transportation Authority v. Facebook.