Clifford Tindall v. First Solar Inc. , 892 F.3d 1043 ( 2018 )


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  •                 FOR PUBLICATION
    UNITED STATES COURT OF APPEALS
    FOR THE NINTH CIRCUIT
    CLIFFORD TINDALL; BRITT                 No. 17-15185
    NEDERHOOD; ENG KWANG TAN;
    ERIC FEIGIN,                               D.C. No.
    Plaintiffs-Appellants,    2:12-cv-00769-
    DGC
    v.
    FIRST SOLAR INCORPORATED;                 OPINION
    MICHAEL J. AHEARN; ROBERT J.
    GILLETTE; MARK R. WIDMAR; JENS
    MEYERHOFF; JAMES ZHU; BRUCE
    SOHN; DAVID EAGLESHAM; CRAIG
    KENNEDY; JAMES F. NOLAN;
    WILLIAM J. POST; J. THOMAS
    PRESBY; PAUL H. STEBBINS;
    MICHAEL SWEENEY; JOSE H.
    VILLAREAL,
    Defendants-Appellees.
    Appeal from the United States District Court
    for the District of Arizona
    David G. Campbell, District Judge, Presiding
    Argued and Submitted January 12, 2018
    San Francisco, California
    Filed June 13, 2018
    2                TINDALL V. FIRST SOLAR INC.
    Before: J. Clifford Wallace, Johnnie B. Rawlinson,
    and Paul J. Watford, Circuit Judges.
    Opinion by Judge Wallace
    SUMMARY *
    Demand Futility
    The panel affirmed the district court’s dismissal of a
    shareholder derivative action under Fed. R. Civ. P. 23.1 for
    failure to show demand futility.
    Shareholders of First Solar, Inc., alleged that officers and
    directors of the company breached their fiduciary duties by
    failing to disclose in financial statements and press releases
    the existence of manufacturing and design defects in First
    Solar’s solar panels. The shareholders made no demand to
    the board before bringing the derivative action.
    Reviewing for an abuse of discretion, and applying
    Delaware law, the panel held that the shareholders failed to
    show demand futility. The panel held that the Aronson test
    for demand futility did not apply because it is limited to
    board business decisions. Under the Rales test, demand was
    not excused.
    *
    This summary constitutes no part of the opinion of the court. It
    has been prepared by court staff for the convenience of the reader.
    TINDALL V. FIRST SOLAR INC.                   3
    The panel also held that the district court did not abuse
    its discretion in denying plaintiff’s motion to extend the
    deadline for filing their fourth amended complaint.
    COUNSEL
    George C. Aguilar (argued) and Brian J. Robbins, Robbins
    Arroyo LLP, San Diego, California; Yury A. Kolesnikov,
    Albert Y. Chang, and Francis A. Bottini Jr., Bottini & Bottini
    Inc., La Jolla, California; for Plaintiffs-Appellants.
    Anna Erickson White (argued), Robert L. Corez Webb, and
    Jordan Eth, Morrison & Foerster LLP, San Francisco,
    California; Sophia M. Brill and Brian R. Matsui, Morrison
    & Foerster LLP, Washington, D.C.; for Defendants-
    Appellees.
    OPINION
    WALLACE, Circuit Judge:
    Plaintiffs appeal from the dismissal of their shareholder
    derivative action under Federal Rule of Civil Procedure 23.1
    for failure to show demand futility. We have jurisdiction
    under 28 U.S.C. § 1291, and affirm.
    I.
    First Solar, Inc. is one of the world’s largest producers of
    photovoltaic solar panel modules. Plaintiffs, shareholders of
    First Solar, appeal from the dismissal of their fiduciary duty
    claims against eight directors and five officers of the
    company. Plaintiffs allege that Defendants breached their
    4              TINDALL V. FIRST SOLAR INC.
    fiduciary duties by failing to disclose in financial statements
    and press releases the existence of manufacturing and design
    defects in First Solar’s solar panels. This alleged
    wrongdoing was also an issue in a separate but related
    securities fraud case, Mineworkers’ Pension Scheme v. First
    Solar Inc., 
    881 F.3d 750
    , 752 (9th Cir. 2018). Plaintiffs did
    not make a litigation demand on First Solar’s board of
    directors before filing this action.
    II.
    The parties dispute the applicable standard of review.
    While the parties agree that our court applies abuse of
    discretion review to Rule 23.1 dismissals, Plaintiffs argue
    that such review is inconsistent with the de novo review that
    we apply to Rule 12(b)(6) dismissals. This argument has
    persuaded other courts. See Espinoza ex rel. JPMorgan
    Chase & Co. v. Dimon, 
    797 F.3d 229
    , 234–35 (2d Cir. 2015)
    (collecting cases). We, however, do not consider its merits
    because binding authority compels us, as a three-judge
    panel, to apply abuse of discretion review. Potter v. Hughes,
    
    546 F.3d 1051
    , 1056 (9th Cir. 2008).
    III.
    A derivative action is an action brought by a shareholder
    on behalf of a corporation. See Rosenbloom v. Pyott,
    
    765 F.3d 1137
    , 1147 (9th Cir. 2014). Before bringing the
    action, the shareholder must “demand action from the
    corporation’s directors or plead with particularity the
    reasons why such demand would have been futile.” La. Mun.
    Police Emps.’ Ret. Sys. v. Wynn, 
    829 F.3d 1048
    , 1057 (9th
    Cir. 2016), quoting 
    Rosenbloom, 765 F.3d at 1148
    . Where,
    as here, the shareholders made no demand to the board
    before bringing the derivative action, they must show
    demand futility. 
    Wynn, 829 F.3d at 1057
    . The law of the state
    TINDALL V. FIRST SOLAR INC.                   5
    of incorporation governs whether demand is futile. Arduini
    v. Hart, 
    774 F.3d 622
    , 628 (9th Cir. 2014). First Solar is a
    Delaware corporation and Delaware law, therefore, applies
    to this action.
    Delaware has two tests for demand futility—the Aronson
    test and the Rales test. Wood v. Baum, 
    953 A.2d 136
    , 140
    (Del. 2008). The parties agree that Plaintiffs’ claims can
    survive, if at all, only under the Aronson test. The Aronson
    test “requires that the plaintiff allege particularized facts
    creating a reason to doubt that ‘(1) the directors are
    disinterested and independent or that (2) the challenged
    transaction was otherwise the product of a valid exercise of
    business judgment.’” 
    Id., quoting Aronson
    v. Lewis,
    
    473 A.2d 805
    , 814 (Del. 1984). Aronson’s second
    alternative is the lynchpin of Plaintiffs’ appeal. Plaintiffs
    argue that if the Aronson test applies, a showing of gross
    negligence by the board would excuse demand under the
    second alternative. Plaintiffs concede the same is not true for
    the Rales test. Accordingly, we must first decide whether the
    Aronson or Rales test applies to this action.
    Which test applies depends, in part, on the nature of the
    alleged wrongdoing. See 
    Wood, 953 A.2d at 140
    . Plaintiffs
    argue the Aronson test applies to claims involving any
    affirmative action by the board. They style the alleged
    wrongdoing here as an “approval” of financial statements or
    press releases concealing the product defects. Plaintiffs point
    to authorities showing, they argue, that a director makes a
    “statement” for purposes of the securities laws where, as
    here, they sign financial statements filed with the Securities
    and Exchange Commission. Defendants counter that
    whether the alleged wrongdoing was an affirmative action
    does not matter. The Aronson test, they say, applies not to all
    affirmative actions, but only to board business decisions.
    6               TINDALL V. FIRST SOLAR INC.
    We agree with Defendants. Delaware law appears clear
    that the Aronson test does not apply to all actions, but to
    board business decisions. In Rales v. Blasband, the Delaware
    Supreme Court held that the “essential predicate for the
    Aronson test is the fact that a decision of the board of
    directors is being challenged in the derivative suit.”
    
    634 A.2d 927
    , 933 (Del. 1993) (emphasis in original). The
    court further explained that the Aronson test does not apply
    “where the subject of the derivative suit is not a business
    decision of the board.” 
    Id. at 934.
    More recently, in Wood
    v. Baum, the Delaware Supreme Court stated that “[t]he
    Aronson test applies to claims involving a contested
    transaction i.e., where it is alleged that the directors made a
    conscious business decision in breach of their fiduciary
    
    duties.” 953 A.2d at 140
    (emphasis added); see also In re
    Citigroup Inc. S’holder Derivative Litig., 
    964 A.2d 106
    , 120
    (Del. Ch. 2009) (holding the Rales test applies “to show
    demand futility where the subject of the derivative suit is not
    a business decision of the board”); Guttman v. Huang,
    
    823 A.2d 492
    , 499–500 (Del. Ch. 2003) (holding the Rales
    test applied because the allegations “do not attack a specific
    business judgment of the board”).
    Limiting the Aronson test to board business decisions
    makes sense because only those decisions implicate the
    business judgment rule invoked by Aronson’s second
    alternative. The business judgment rule is “a presumption
    that in making a business decision the directors of a
    corporation acted on an informed basis, in good faith and in
    the honest belief that the action taken was in the best interests
    of the company.” Gantler v. Stephens, 
    965 A.2d 695
    , 705–
    06 (Del. 2009) (citation omitted) (emphasis added). “[T]he
    core rationale of the business judgment rule . . . is that judges
    are poorly positioned to evaluate the wisdom of business
    decisions . . . .” Corwin v. KKR Fin. Holdings LLC,
    TINDALL V. FIRST SOLAR INC.                    7
    
    125 A.3d 304
    , 313 (Del. 2015) (emphasis added). Without a
    business decision, it is “impossible to perform the essential
    inquiry contemplated by Aronson—whether the directors
    have acted in conformity with the business judgment rule in
    approving the challenged transaction.” 
    Rales, 634 A.2d at 933
    .
    Even Plaintiffs seem to recognize that Aronson’s
    application is limited to business decisions by arguing in
    their reply brief that the approval of financial statements and
    press releases is, in fact, a business decision. Plaintiffs argue
    that we should read “business decision” broadly because
    Delaware courts have associated business judgment not only
    with transaction decisions, but also with litigation decisions,
    delegations to experts, compensation decisions, and stock
    buyback decisions. But these types of decisions differ from
    those here because they involve judgments by the board as
    to whether to enter into a course of conduct, generally one
    that creates new rights or obligations on behalf of the
    company. By contrast, financial statements and press
    releases provide a snapshot of past conduct; they reflect
    business judgments already made. Approving financial
    statements and press releases generally does not involve
    weighing the risks and rewards of future conduct, which is
    the type of decision-making process the business judgment
    rule is designed to protect.
    We view this case as more analogous to the board
    oversight claims to which Delaware courts regularly apply
    the Rales test. See, e.g., City of Birmingham Ret. & Relief
    Sys. v. Good, 
    177 A.3d 47
    , 55 (Del. 2017). Tellingly,
    Plaintiffs have cited no Delaware authority applying the
    Aronson test to a failure-to-disclose case, such as this one.
    Defendants have cited authorities that, while not dispositive,
    suggest the Rales test would apply. For example, in Guttman
    8              TINDALL V. FIRST SOLAR INC.
    v. Huang, plaintiffs brought both failure to disclose claims
    and oversight 
    claims. 823 A.2d at 494
    –97. While the
    Delaware Chancery Court in Guttman did not compare the
    tests because the parties had agreed Rales applied, the court
    explained the reason for the parties’ agreement was that “the
    plaintiffs do not challenge any particular business decision
    made by the [corporation’s] board as a whole.” 
    Id. at 499.
    Likewise, Seminaris v. Landa involved claims that the
    “board failed to prevent [the CEO] from misrepresenting the
    corporation’s financial condition” and that “board members
    signed misleading statements on behalf of the corporation.”
    
    662 A.2d 1350
    , 1354 (Del. Ch. 1995). The Delaware
    Chancery Court held that Rales applied because “plaintiff
    [did] not challenge a decision of [the corporation’s] board of
    directors” or “any specific board action that approved or
    ratified these alleged wrongdoings.” 
    Id. In sum,
    we conclude that the approval of financial
    statements and press releases here was not a board business
    decision implicating the Aronson test. The Rales test applies
    to this action. We need go no further in our analysis because
    Plaintiffs concede here that the Rales test does not excuse
    demand. We also need not decide whether gross negligence
    could excuse demand under Aronson’s second alternative,
    since Aronson does not apply. Therefore, the district court
    did not abuse its discretion by dismissing Plaintiffs’
    derivative action for failure to show demand futility.
    IV.
    Plaintiffs also appeal from the denial of their motion to
    extend the deadline for filing their fourth amended
    complaint. Plaintiffs argue the district court abused its
    discretion by failing to cite Federal Rule of Civil Procedure
    6(b)(1)(A), the rule governing requests for extensions of
    time made before the deadline expires. That rule provides
    TINDALL V. FIRST SOLAR INC.                  9
    that a district court may extend a deadline “for good cause.”
    Fed. R. Civ. P. 6(b)(1)(A).
    We reject Plaintiffs’ argument. Rule 6 provides that the
    court may grant the motion for good cause, not that it must
    do so. Fed. R. Civ. P. 6(b)(1)(A). While district courts
    normally grant these requests in the absence of bad faith or
    prejudice to the adverse party, see Ahanchian v. Xenon
    Pictures, Inc., 
    624 F.3d 1253
    , 1259 (9th Cir. 2010), the
    district court properly concluded that Plaintiffs had not
    shown good cause. “That the district court did not recite the
    text of [the rule] or employ a specific phrase . . . is not
    determinative.” United States v. Ogles, 
    440 F.3d 1095
    , 1104
    (9th Cir. 2006) (en banc). What matters is that the district
    court actually considered the proper standard. See 
    id. Here, the
    court viewed the deadline extension, which would have
    prolonged the time to amend until after the resolution of
    Plaintiffs’ motion to intervene in a related action, as an
    attempt to circumvent the district court’s prior rulings
    denying Plaintiffs discovery. The district court’s
    determination that “the Court cannot justify delaying this
    case further while Plaintiffs pursue an appeal of their effort
    to obtain improper discovery” is another way of saying
    Plaintiffs have not shown good cause. Our case of United
    States v. Signed Personal Check No. 730, 
    615 F.3d 1085
    ,
    1091–92 (9th Cir. 2010) is not to the contrary. There, the
    district court erred not because it failed to recite the legal
    standard, but because this failure led it to apply the wrong
    standard. 
    Id. Here, the
    district court applied the right
    standard, simply without reciting it.
    AFFIRMED.