Carmen Di Giovanni v. Andrew Clark , 665 F. App'x 626 ( 2016 )

NOT FOR PUBLICATION FILED
UNITED STATES COURT OF APPEALS DEC 13 2016
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
No. 14-56913
CARMEN DI GIOVANNI, Derivatively
on Behalf of Nominal Defendant
D.C. Nos.
BRIDGEPOINT EDUCATION, INC. and
3:13-cv-2947-JM-JLB
SHARON A. GRAIG-JOHNSTON,
3:13-cv-2950-JM-JLB
Plaintiffs - Appellants,
MEMORANDUM*
v.
ANDREW S. CLARK; et al.,
Defendants - Appellees.
On Appeal from the United States District Court
for the Southern District of California
Jeffrey T. Miller, District Judge, Presiding
Submitted November 9, 2016**
Pasadena, California
Before: BERZON and NGUYEN, Circuit Judges, and ZOUHARY,*** District Judge.
*
This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
**
The panel unanimously concludes that this case is suitable for
decision without oral argument. See Fed. R. App. P. 34(a)(2).
***
The Honorable Jack Zouhary, United States District Judge for the
Northern District of Ohio, sitting by designation.
Appellants challenge the dismissal of their shareholder derivative suit for
failing to first make a demand on the board of directors under Federal Civil Rule
23.1. We affirm.
The sole issue on appeal is whether the directors “[stood] on both sides” of
the proposed self-tender offer and were thus “interested” under Aronson v. Lewis,
473 A.2d 805, 812 (Del. 1984), overruled on other grounds by Brehm v. Eisner,
746 A.2d 244, 253 (Del. 2000), and its progeny. Delaware courts have repeatedly
held that a director participating in a transaction as a shareholder is not “interested”
when the director receives no benefit beyond that conferred on other shareholders.
See, e.g., Pfeffer v. Redstone, 965 A.2d 676, 690 (Del. 2009); Unocal Corp. v.
Mesa Petroleum Co., 493 A.2d 946, 958–59 (Del. 1985); Frank v. Arnelle, 1998
WL 668649, at *10 (Del. Ch. 1998).
Appellants attempt to distinguish this line of authority by noting the cases do
not directly address the “on both sides of the transaction” language of Aronson and
its progeny. But it makes no difference whether the courts directly addressed this
language, because their holdings specifically addressed situations where directors
participated in self-tender transactions on the same terms as other shareholders.
Thus, they are controlling.
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The Delaware Supreme Court’s interpretation of “on both sides of the
transaction” in Nixon v. Blackwell, 626 A.2d 1366 (Del. 1993), further supports
this conclusion. Nixon addressed whether the business-judgment rule protected a
board’s decision to adopt an employee stock-ownership plan (“ESOP”) and
purchase key-man life-insurance policies. Id. at 1375–76. The court held that
because “the defendants benefited from the ESOP and could have benefited from
the key man life insurance beyond that which benefited other stockholders
generally, the defendants [were] on both sides of the transaction.” Id. at 1375(emphasis added).
To the extent the Delaware Court of Chancery’s decision in eBay Domestic
Holdings, Inc. v. Newmark, 16 A.3d 1 (Del. Ch. 2010), is inconsistent with the
Delaware Supreme Court holdings in Redstone, Nixon, and Unocal, it is not
binding authority. Moreover, eBay is distinguishable because the transaction at
issue (not a self-tender offer) disparately affected the shareholder plaintiff and
involved control of the company. See 16 A.3d at 43.
In any event, Aronson’s language about directors “appear[ing] on both sides
of a transaction” is not applicable to self-tender transactions like the one at issue
here. It has been applied in situations where the interests of directors and other
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shareholders are in conflict. These situations often, but not always, involve a
benefit conferred on directors beyond that which flows generally to all
shareholders. Orman v. Cullman, 794 A.2d 5, 25 n.50 (Del. Ch. 2002); see also In
re Freeport-McMoran Sulphur, Inc. S’holders Litig., 2001 WL 50203, at *3 (Del.
Ch. 2001) (holding that a merger between two companies with common directors
presents an inherent standing-on-both-sides conflict of interest).
Where, as here, directors merely participate as shareholders in a transaction,
their interests are aligned with other shareholders. To say the directors
nevertheless are “interested” because they stand “on both sides of the transaction”
is to elevate form over substance.
AFFIRMED.
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