Jones v. Martinez (Deckers Outdoor Corp.) ( 2014 )

Filed 10/2/14 Certified for Publication 10/27/14 (order attached)
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION SIX
DANNY JONES, 2d Civil No. B249146
(Super. Ct. Nos. 1402853, 1403016)
Plaintiff and Appellant, (Santa Barbara County)
v.
ANGEL MARTINEZ et al.,
Defendants and Respondents,
DECKERS OUTDOOR CORPORATION,
Nominal Defendant and Respondent.
Danny Jones filed this shareholder derivative action on behalf of Deckers
Outdoor Corporation to recover damages he contends it suffered as a result of misconduct
by Deckers' officers and directors. The trial court sustained Respondents' demurrer with
leave to amend but Jones elected not to file an amended complaint. Jones appeals from
the resulting judgment of dismissal. Jones asserts the trial court erred by concluding
Delaware law applies to bar discovery requests he served on Deckers shortly after his
complaint was filed. We affirm.
1
FACTUAL AND PROCEDURAL HISTORY
Jones owns 1,900 shares of Deckers common stock. Respondents are
current or former officers or members of Deckers' board of directors. Deckers is a
Delaware corporation based in Goleta, California that manufactures sheepskin footwear
and other apparel. Its shares are traded on the NASDAQ exchange.
On July 26, 2012, Jones commenced this shareholder derivative action
against Deckers' board of directors and officers. Jones's complaint asserts "claims for
insider trading . . ., breach of fiduciary duty, breach of the duty of honest services, and
unjust enrichment" based upon allegedly false and misleading public statements to
investors by Deckers' officers and board members. Jones claims statements about
Deckers' financial condition and future business prospects drove its shares to "artificially
inflated prices." Jones's complaint also accused Respondents of concealing unspecified
facts about Deckers' inability to mitigate the effect of a large increase in the cost of
sheepskin and a decrease in demand for UGG products that, when revealed, drove the
price of Deckers' shares down.
On August 27, 2012, Jones sent a "First Request for Production of
Documents" to Deckers. On October 1, 2012, Deckers served its objections to the
discovery requests, citing Delaware, California law and other authority to support its
position that Jones lacked standing to bring this shareholders derivative action because
1) he had not made a demand on Deckers' board of directors for the relief he contended
was appropriate to meet specific assertions of mismanagement or malfeasance; 2) he had
not demonstrated in his complaint that such a demand would be futile; and 3) because
derivative plaintiffs are not entitled under Delaware law to discovery that would enable
them to demonstrate demand futility. Jones's motion to compel Deckers to respond to the
requests followed on November 13, 2012.
1
We have granted Jones's motion for judicial notice filed November 12, 2013; as well as
Respondents' and Deckers' motion and supplemental motion for judicial notice filed on
October 21 and 22, respectively. (Evid. Code §§ 452 & 459.)
2
A separate shareholder derivative action filed by Edward and Joanne
Poshkus and the action filed by Jones were consolidated and Jones was designated "lead
plaintiff." On November 20, 2012, Jones filed and served a "Consolidated Shareholder
Derivative Complaint" seeking damages and other relief from Deckers' officers and board
members for 1) breaching a fiduciary duty by issuing misleading statements about
Deckers' financial status and prospects; 2) breaching a fiduciary duty by approving a plan
to repurchase Deckers' stock; 3) selling or influencing other directors to sell Deckers'
stock based upon information available only to "insiders"; 4) breaching a duty to provide
honest services to Deckers; and 5) receiving unjust enrichment through the sale of
Deckers' stock and excessive compensation.
Deckers and Respondents demurred to the consolidated complaint. The
trial court granted the parties' requests that it take judicial notice of voluminous public
reports to regulators and others about Deckers' financial status and prospects and about
the trading by Deckers' principals in the stock of the corporation. The trial court found
that the consolidated complaint was internally inconsistent and that its allegations of false
or misleading statements were disproved by required regulatory filings and that the
complaint failed to allege particularized facts showing that a pre-filing demand on the
board for action would have been futile.
On March 21, 2013, the court sustained the demurrer but granted Jones
leave to amend the complaint on or before April 24, 2013. Jones does not challenge this
ruling on appeal. The trial court ruled that Corporations Code section 25403 does not
provide a private right of action for insider trading and sustained the demurrer to that
cause of action without leave to amend.
On April 4, 2013, the court denied Jones's motion to compel Decker to
respond to his discovery requests. It concluded that under Delaware law discovery
requests cannot be made until the plaintiff's right to sue derivatively is established. The
court ruled that Delaware law requires a shareholder who is dissatisfied to serve a written
pre-filing demand on the board that details the shareholder's concerns and the actions he
or she proposes to address them. Service of the demand is excused only if the
3
shareholder shows it would have been futile to do so. (Del. Chancery Court Rules, rule
23.1 (a) (Rule 23.1).) The trial court observed that the demand requirement "is a
substantive right, 'not simply a technical rule of pleading'" that exists "'to preserve the
primacy of board decisionmaking regarding legal claims belonging to the corporation. . . .
More specifically, it is designed to insure that shareholders exhaust their intracorporate
remedies and to filter out suits motivated by the hope of creating settlement leverage
through the prospect of expensive and time-consuming litigation . . . .'"
Thus, as a substantive matter, the trial court said "plaintiffs are not entitled
to any discovery under Delaware law unless . . . they establish their right to bring a
derivative action on behalf of the corporation (i.e., unless . . . they establish demand
futility). . . . Further, 'derivative plaintiffs are not entitled to discovery in order to
demonstrate demand futility.' . . . '[A] stockholder may not plead in general terms,
hoping that, by discovery or otherwise, he can later establish a case.'"
Jones elected not to file an amended complaint and on April 25, 2013, the
court entered an Order Sustaining the Demurrers to the Consolidated Shareholder
Derivative Complaint. The court entered a Final Judgment and Order of Dismissal on
May 6, 2013.
DISCUSSION
1. Discovery is not available to a person seeking to qualify as a plaintiff
in a shareholder derivative action involving a Delaware corporation.
Jones does not challenge the trial court's findings and conclusions in the
ruling sustaining Respondents' demurrer. He thus concedes the point that the allegations
in the consolidated complaint were either disproved by judicially noticed undisputed
accounts of what Deckers' officers and board members actually said to investors and the
public record of their trading in Deckers' stock or that the consolidated complaint fails to
establish that making a sufficiently specific demand on the board for action was excused
because it would have been futile to do so.
Jones instead limits his appeal to "two straight-forward questions," 1) Did
the trial court err by applying the law of Delaware to a purely procedural matter
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concerning the timing of discovery? 2) Did the trial court fail to apply California's policy
favoring broad access to discovery and the mandate to liberally construe the applicable
discovery statutes? At its core, Jones's argument is that in shareholder derivative actions
pending in California, the officers and directors of a Delaware corporation can be
compelled to divert their attention from the internal affairs of the corporation to help a
putative derivative plaintiff collect the materials he or she needs to meet the stringent
requirements of factual particularity that is required to attain the status of a person
eligible to maintain an action against the officers and directors of the company. We
disagree.
It is undisputed that Delaware law applies generally to this shareholder
derivative action and specifically to the principles governing the question of whether
Jones is a proper person to assert claims on behalf of Deckers' and against its officers
and board members. (Corps. Code, § 2116; Pratt v. Robert S. Odell & Co. (1942) 49
Cal. App. 2d 550, 560; Vaughn v. L.J. International, Inc. (2009) 174 Cal. App. 4th 213,
224.)
Delaware law requires Jones to file a complaint that articulates a reasonable
basis for him to be entrusted with a claim that belongs to Deckers. Jones is required to
"allege with particularity the efforts, if any, made by [him] to obtain the action [he]
desires from [Deckers'] directors . . . and the reasons for [his] failure to obtain the action
or for not making the effort." (Rule 23.1 (a).)
This well-settled principle of both Delaware and California corporate law
is a substantive matter, not a procedural issue that may vary from jurisdiction to
jurisdiction. The United States Supreme Court recognized that the demand requirements
for a derivative suit are determined by the law of the state of incorporation. In Kamen v.
Kemper Financial Services, Inc. (1991) 500 U.S. 90, 96-97, the Court observed: "In our
view, the function of the demand doctrine in delimiting the respective powers of the
individual shareholder and of the directors to control corporate litigation clearly is a
matter of 'substance,' not 'procedure.' [Citations.]"
5
A fundamental principle of Delaware law is that directors, not shareholders,
manage the business and affairs of the corporation. (Del. Code, tit. 8, § 141 (a).)
Directors are presumed to act in a manner that is faithful to their fiduciary duties. A
plaintiff who seeks to overcome that presumption must do so at the pleading stage before
the company or its officers and directors are asked to respond to discovery requests.
(Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart (Del. 2004) 845 A.2d
1040, 1048-1049.)
In Brehm v. Eisner (Del. 2000) 746 A.2d 244, 255, the Delaware Supreme
Court said "[t]he rationale of Rule 23.1 is two-fold. On the one hand, it would allow a
plaintiff to proceed with discovery and trial if the plaintiff complies with this rule and can
articulate a reasonable basis to be entrusted with a claim that belongs to the corporation.
On the other hand, the rule does not permit a stockholder to cause the corporation to
expend money and resources in discovery and trial in the stockholder's quixotic pursuit of
a purported corporate claim based solely on conclusions, opinions or speculation." (See
also In re Kaufman Mutual Fund Actions (1st Cir. 1973) 479 F.2d 257, 263-264.)
Jones argues that whether or not his complaint sufficiently articulates his
right to act on behalf of Deckers in pursuing his claims, he was entitled to propound
discovery request to Deckers' officers and board members to help him fashion a sufficient
complaint. We disagree. The proper purpose of discovery in a shareholder derivative
action is to find out additional facts about a well-pleaded claim, not to find out whether
such a claim exists.
California Corporations Code section 800, subdivision (b)(2) provides that
no action may be instituted or maintained by a shareholder unless "the plaintiff alleges in
the complaint with particularity plaintiff's efforts to secure from the board such action as
plaintiff desires, or the reasons for not making such effort . . . ."
Jones is not entitled to discovery to assist his compliance with the
particularized pleading requirement of Rule 23.1. Said another way, Jones must comply
with the particularized pleading requirement of Rule 23.1 without the assistance of
Deckers, its officers or board of directors. Instead, he should consult and use the "tools at
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hand," such as an inspection demand or taking the steps necessary to obtain the facts
from publically available SEC filings, corporate reports or minutes available to
shareholders that reflect statements made about Deckers' finances to determine whether
or not there is a basis for a claim against its officers and directors.
The judgment of dismissal is affirmed. Costs on appeal are awarded to
Respondents.
NOT TO BE PUBLISHED.
BURKE, J.*
We concur:
YEGAN, Acting P. J.
PERREN, J.
*
(Judge of the Superior Court of San Luis Obispo County, assigned by the Chief Justice
pursuant to art. 6, § 6 of the Cal. Const.)
7
James E. Herman, Judge
Superior Court County of Santa Barbara
______________________________
Bottini & Bottini, Inc., Francis A. Bottini, Jr., Yury A. Kolesnikov for
Plaintiff and Appellant.
Orrick, Herrington & Sutcliffe LLP, William F. Alderman, Alexander K.
Talarides for Defendants and Respondents and Deckers Outdoor Corporation, Nominal
Defendant and Respondent.
Filed 10/27/14
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION SIX
DANNY JONES, 2d Civil No. B249146
(Super. Ct. Nos. 1402853, 1403016)
Plaintiff and Appellant, (Santa Barbara County)
v. ORDER CERTIFYING
OPINION FOR PUBLICATION
ANGEL MARTINEZ et al.,
Defendants and Respondents,
DECKERS OUTDOOR CORPORATION,
Nominal Defendant and Respondent.
THE COURT:
The opinion in the above-entitled matter filed on October 2, 2014, was not
certified for publication in the Official Reports. For good cause it now appears that the
opinion should be published in the Official Reports and it is so ordered.