City of Tamarac Firefighters' Pension Trust Fund v. Carolyn Corvi ( 2019 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
CITY OF TAMARAC )
FIREFIGHTERS’ PENSION TRUST )
FUND, )
)
Plaintiff, )
)
v. ) C.A. No. 2017-0341-KSJM
)
CAROLYN CORVI, JANE C. )
GARVEY, BARNEY HARFORD, )
TODD M. INSLER, WALTER )
ISAACSON, JAMES A.C. KENNEDY )
III, OSCAR MUNOZ, ROBERT A. )
MILTON, WILLIAM R. NUTI, SITO )
PANTOJA, EDWARD M. PHILIP, )
EDWARD L. SHAPIRO, LAURENCE )
E. SIMMONS, JEFFERY A. SMISEK, )
DAVID J. VITALE, and JAMES M. )
WHITEHURST, )
)
Defendants, )
)
and )
)
UNITED CONTINENTAL )
HOLDINGS, INC., )
a Delaware Corporation, )
)
Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: November 14, 2018
Date Decided: February 12, 2019
Carmella P. Keener, Jessica Zeldin, ROSENTHAL, MONHAIT & GODDESS, P.A.
Wilmington, Delaware; Gustavo F. Bruckner, POMERANTZ LLP, New York, New
York; Attorneys for Plaintiff City of Tamarac Firefighters’ Pension and Trust Fund.
Gregory P. Williams, Robert L. Burns, Anthony M. Calvano, RICHARDS
LAYTON & FINGER, P.A., Wilmington, Delaware; Craig C. Martin, Matt D. Basil,
Howard S. Suskin, JENNER & BLOCK LLP, Chicago, Illinois; Attorneys for
Defendants Carolyn Corvi, Jane C. Garvey, Barney Harford, Todd M. Insler, Walter
Isaacson, James A.C. Kennedy III, Oscar Munoz, Robert A. Milton, William R. Nuti,
Sito Pantoja, Edward M. Philip, Edward L. Shapiro, Laurence E. Simmons, David
J. Vitale, and James M. Whitehurst.
Arthur G. Connolly, Ryan P. Newell, Kyle Evans Gay, Shaun Michael Kelly,
CONNOLLY GALLAGHER, Wilmington, Delaware; Royal B. Martin, William G.
Sullivan, Giel Stein, CLARK HILL, PLC, Chicago, Illinois; Attorneys for Defendant
Jeffery A. Smisek.
David E. Ross, R. Garrett Rice, ROSS ARONSTAM & MORITZ LLP, Wilmington,
Delaware; Attorney for Nominal Defendant United Continental Holdings, Inc.
McCORMICK, V.C.
In 2011, then-chairman of the Port Authority of New York and New Jersey,
David Samson, wanted to “fly friendly skies” direct from Newark, New Jersey to
Columbia, South Carolina, where he owned a vacation home. Samson proposed to
Jeffery A. Smisek, then-chief executive officer of United Continental Holdings, Inc.
(“United”), that Smisek re-institute a Newark-to-Columbia route, which historically
operated at a loss. Smisek agreed, but in exchange for Samson’s approval of
development projects at United Airline’s regional hub. The flights took off, at least
for a time. In 2014, a federal investigation into an unrelated Port Authority scandal
uncovered facts concerning Samson’s “chairman’s flight.” Multiple federal
investigations of United ensued.
In the midst of the federal investigations, Smisek and United entered into a
separation agreement that provided Smisek with approximately $37 million in
benefits. A special committee of outside directors advised by outside counsel
negotiated and approved the separation agreement.
A stockholder made two litigation demands asking the United board to claw
back the separation compensation or rescind the separation agreement. The board
rejected both demands, and the stockholder filed this derivative suit. The defendants
have moved to dismiss the complaint.
When a plaintiff makes a pre-suit litigation demand, the plaintiff’s complaint
can only survive a motion to dismiss under Court of Chancery Rule 23.1 by pleading
1
that the directors wrongfully refused the demand. In this case, the complaint fails to
plead particularized facts raising a reasonable doubt that the defendants acted with
due care and in good faith in rejecting the demand.
This case presents one twist on the usual demand-refusal analysis. By making
a pre-suit litigation demand, a plaintiff “tacitly concedes” that the board is
disinterested and independent for purposes of responding to the demand.1 In this
case, the board did not consider the demand. The board instead delegated the issue
to a special committee. The plaintiff argues that the board was grossly negligent in
delegating the issue to the special committee because its members were incapable of
acting disinterestedly and independently on the demand. The defendants respond
that the Court may not consider the alleged conflicts because the tacit concession
extends to the members of the special committee.
Extending the tacit concession to the members of the special committee
conflicts with the Delaware Supreme Court’s decision in Scattered Corp. v. Chicago
Stock Exchange, Inc. 2 This decision thus evaluates the plaintiff’s allegations of
1
Spiegel v. Buntrock, 571 A.2d 767, 777 (Del. 1990).
2
Scattered Corp. v. Chi. Stock Exch., Inc., 701 A.2d 70 (Del. 1997) [hereinafter Scattered
III]. In Brehm v. Eisner, 746 A.2d 244, 253–54 (Del. 2000), the Delaware Supreme Court
overruled seven precedents, including Scattered III, to the extent those precedents reviewed
a Rule 23.1 decision by the Court of Chancery under an abuse of discretion standard or
otherwise suggested a deferential appellate review. See id. at 253 & n.13 (overruling in
part on this issue Scattered III, 701 A.2d at 72–73 (Del. 1997); Grimes v. Donald, 673 A.2d
1207, 1217 n.15 (Del. 1996); Heineman v. Datapoint Corp., 611 A.2d 950, 952 (Del.
1992); Levine v. Smith, 591 A.2d 194, 207 (Del. 1991); Grobow v. Perot, 539 A.2d 180,
2
conflicts at the committee level to determine whether the board acted with gross
negligence when delegating the issue to the special committee. The defendants
prevail nevertheless, because the complaint does not allege disabling conflicts with
sufficient particularity.
The plaintiff also asserts a waste claim against the director defendants and an
unjust enrichment claim against Smisek. The act of making a pre-suit litigation
demand bars a plaintiff from pursuing derivative litigation involving subject matter
of the demand, regardless of the legal theory, unless the plaintiff can show wrongful
refusal. Because the plaintiff’s waste and unjust enrichment claims arise from the
subject matter of the demand, they too are subject to the demand refusal analysis.
I. FACTUAL BACKGROUND
The background facts are drawn from the particularized allegations of the
Verified Amended Stockholder Derivative Complaint (the “Amended Complaint”)
186 (Del. 1988); Pogostin v. Rice, 480 A.2d 619, 624–25 (Del. 1984); and Aronson v.
Lewis, 473 A.2d 805, 814 (Del. 1984)). The Brehm Court held that going forward,
appellate review of a Rule 23.1 determination would be de novo and plenary. 746 A.2d at
253-54. The seven partially overruled precedents otherwise remain good law. This
decision does not rely on any of them for the standard of appellate review. Although the
technical rules of legal citation would require noting that each was reversed on other
grounds by Brehm, this decision omits the subsequent history, which creates the
misimpression that Brehm rejected core elements of the Rule 23.1 canon.
3
and documents incorporated therein. The decision also considers the
correspondence refusing the plaintiff’s litigation demands.3
A. The Federal Investigations
Nominal Defendant United is a publicly traded airline holding company that
owns and operates United Airlines. 4
In September 2011, Samson was chairman of the Port Authority of New York
and New Jersey. Smisek was United’s CEO. Over dinner in Manhattan, Samson
asked Smisek to revive United Airlines’ discontinued Newark-to-Columbia route,
which would ease Samson’s commute to his South Carolina vacation home. 5 After
Smisek agreed to reinstate the route, the Port Authority approved United’s projects
at Newark International Airport. 6 United operated the Newark-to-Columbia route
twice a week for nineteen months. It generated losses for United of approximately
$945,000.7
3
See Scattered III, 701 A.2d at 76 n.24; Levine, 591 A.2d at 214; see also 4 Stephen A.
Radin, The Business Judgment Rule 4495 (6th ed. 2009).
4
See C.A. No. 2017-0341-KSJM Docket (“Dkt.”) 30, Amended Complaint (“Am.
Compl.”) ¶ 3.
5
Id. ¶ 42.
6
Id. ¶ 44.
7
Id. ¶ 43.
4
A federal investigation into an unrelated 2013 Port Authority scandal
uncovered the interactions between Smisek and Samson. Multiple federal agencies
responded by commencing investigations.
On January 22, 2015, and February 17, 2015, United received grand jury
subpoenas from the Office of the United States Attorney for the District of New
Jersey (the “U.S. Attorney’s Office”). 8 On September 9, 2015, United received a
subpoena from the Securities Exchange Commission (“SEC”) covering similar
topics. United also received information requests from the General Services
Administration and the Office of Inspector General for the Port Authority.
B. The Special Committee
On March 2, 2015, United’s Board of Directors (the “Board”) established a
special committee of nine independent and disinterested directors (the “Special
Committee”). 9 The Board resolution broadly empowered the Special Committee to
oversee United’s response to the federal subpoenas and manage United’s internal
investigation into any potential misconduct. 10 The resolution “gave the Special
8
Id. ¶ 44 & Ex. A at 1.
9
The initial nine Special Committee members were Defendants Carolyn Corvi, Walter
Isaacson, Oscar Munoz, William R. Nuti, Laurence E. Simmons, David J. Vitale, and non-
parties Henry L. Meyer III, John H. Walker, and Charles A. Yamarone. Am. Compl. ¶ 6
n.7.
10
Id. Ex. A at 1.
5
Committee the authority to act on behalf of the Board and to enter into any agreement
with federal, state, and local authorities.”11
The Special Committee retained Jenner & Block LLP (“Jenner”) to provide
counsel concerning both United’s subpoena responses and the Special Committee’s
investigation.12
C. The Separation Agreements
On September 8, 2015, the Special Committee approved a separation
agreement between United and Smisek.13 Pursuant to the separation agreement,
Smisek received benefits contemplated in his employment agreement, including a
separation payment of $4,875,000, accrued stock and awards, flight benefits, and
lifetime airport parking spots. 14 The Amended Complaint values the benefits
conferred by the separation agreement at approximately $37 million.15 The Special
Committee also approved separation agreements with two other United executives
(with Smisek’s separation agreement, the “Separation Agreements”).16
11
Id. ¶ 6 n.7.
12
Id. Ex. A at 1.
13
Am. Compl. ¶ 47 & Ex. B (“Smisek Separation Agr.”).
14
Smisek Separation Agr. § 3(a), (b)–(f), (h)–(i). Compare id. with United Cont’l Hldgs.,
Inc., Annual Report (Form 10-K), ex. 10.21 (Feb. 22, 2011) (Smisek employment
agreement) §§ 3.7(iii)(2), 4.1(B), 4.2(A), (B).
15
Am. Compl. ¶ 47.
16
Am. Compl. ¶ 50 & Ex. A at 2.
6
The Separation Agreements permit United to claw back separation benefits if
the executive fails to cooperate with the defense or investigation of certain claims,
or if the executive pleads guilty to or is convicted of a felony arising from his tenure
at United (the “Clawback Provisions”).17
D. The Fall-Out from the Federal Investigations
On July 13, 2016, United entered into a non-prosecution agreement with the
U.S. Attorney’s Office. 18 Under the non-prosecution agreement, United agreed to
pay a $2,250,000 fine and take other remedial steps.19
The next day, Samson agreed to plead guilty to bribery for using his official
authority to pressure United into restoring the Newark-to-Columbia route for his
personal benefit. 20 Samson was sentenced to one year of home confinement and
four years of probation. 21 He was also ordered to pay a fine of $100,000.22
On December 2, 2016, the SEC accepted United’s Offer of Settlement, in
which United agreed it had committed books and records and internal controls
17
See, e.g., Smisek Separation Agr. §§ 10, 11.
18
Am. Compl. Ex. A at 2.
19
Id. (“[The] [n]on-prosecution [a]greement with the USAO . . . provided that United pay
a $2,250,000 monetary penalty and comply with certain undertakings, such as making
enhancements to United’s Ethics and Compliance program.”).
20
Id. ¶ 41.
21
Id.
22
Id.
7
violations under SEC regulations. The settlement required United to pay a penalty
of $2,400,000. 23
E. The Initial Demand
Plaintiff City of Tamarac Firefighters’ Pension Trust Fund (“Plaintiff”)
alleges that it held United common stock at all relevant times. 24
With information gathered by using 8 Del. C. § 220,25 Plaintiff sent a litigation
demand to the Board on October 7, 2016 (the “Initial Demand”). 26 The Initial
Demand requested that United claw back compensation from Smisek and the other
two United executives. 27 It further requested that United modify its clawback
policies and future employment agreements to include provisions “granting the
Board discretion to recoup compensation whenever the Board determines
misconduct, willful or otherwise, has occurred.”28
Although Plaintiff addressed its Initial Demand to the Board, the Board
delegated consideration of the Initial Demand to the Special Committee. Before the
Initial Demand, the Board replaced four of the nine original Special Committee
23
Id. ¶ 53.
24
Id. ¶ 13.
25
Id. ¶¶ 55–58.
26
Id. Ex. D.
27
Id. Ex. D at 2–3.
28
Id. Ex. D at 3.
8
members and added a tenth member. 29 Five of the ten committee members
considering the Initial Demand, therefore, had also negotiated and approved the
Separation Agreements. The Special Committee sought advice from its existing
counsel, Jenner, in responding to the Initial Demand.
The Special Committee rejected the Initial Demand in a letter from Jenner
dated March 24, 2017. 30 The letter explained in detail the nature of the Special
Committee’s investigation:
[T]o date, we have collected materials from approximately
50 custodians, and we reviewed approximately 7.5 million
pages of materials. In addition to our substantial
document collection and review, we conducted
approximately 240 witness interviews of both former and
current Company employees. In addition, we have met in
person with the various government agencies on numerous
occasions . . . . 31
The letter reported that the Special Committee met on March 14, 2017, to consider
the Initial Demand and that its members unanimously decided to decline to take
action in response to the demand.32
29
On September 8, 2015, contemporaneous with United’s execution of Smisek’s separation
agreement, Munoz left the Special Committee to replace Smisek as CEO. Am. Compl.
¶ 6 n.7, ¶ 20. On June 8, 2016, Meyer, Walker, and Yamarone retired from the Board, and
the Board appointed Defendants Barney Harford, James A.C. Kennedy III, Robert A.
Milton, Edward L. Shapiro, and James M. Whitehurst to the Special Committee.
Id. ¶ 6 n.7.
30
Id. Ex. A.
31
Id. Ex. A at 2.
32
Id. Ex. A at 3.
9
Because the circumstances under which United could exercise its clawback
rights under the Separation Agreements had not occurred, the letter stated: “Should
any of the circumstances described in the [Clawback Provisions] arise, the Special
Committee may consider suitable action at that time.” 33
The letter also rejected Plaintiff’s demand that United modify its clawback
policies and claw back any compensation paid to any executive involved in certain
actions, explaining that such a modification “is inconsistent with prevailing industry
practice.”34 The letter observed that “[s]imilarly-situated companies do not confer
upon their boards” the level of discretion sought by the Initial Demand, and such a
modification “would make it difficult for United to recruit and retain top talent[.]”35
The letter further explained: “Among the Special Committee’s considerations
were the concern of disruption to or distraction from the business, the efficacy of the
requested action, and the actions United has already taken on its own initiative as a
result of its investigation and in response to these events and government
resolutions.”36
33
Id. Ex. A at 4.
34
Id. Ex. A at 3.
35
Id. Ex. A at 4.
36
Id.
10
F. The Supplemental Demand
Plaintiff commenced this litigation on May 4, 2017. 37 Plaintiff named as
defendants Smisek and each of the fifteen directors who served on the Board at the
time Plaintiff commenced litigation (collectively, the “Director Defendants” and
with Smisek, “Defendants”).38
After Defendants moved to dismiss the initial complaint, Plaintiff sent another
demand letter on September 15, 2017 (the “Supplemental Demand”).39 Like the
Initial Demand, Plaintiff addressed the Supplemental Demand to the Board. The
Supplemental Demand repeated the prior list of demands and added a request that
the Board institute legal action to rescind Smisek’s separation agreement.40
After receiving the Supplemental Demand, the Special Committee formed a
subcommittee comprising five of its members who were not on the Special
Committee (or the Board) when the Separation Agreements were approved. 41 The
37
Dkt. 1.
38
Am. Compl. ¶¶ 14–29. The Director Defendants are Corvi, Garvey, Harford, Insler,
Isaacson, Kennedy, Munoz, Milton, Nuti, Pantoja, Philip, Shapiro, Simmons, Vitale, and
Whitehurst. Id.
39
Id. Ex. E.
40
Id. Ex. E at 1.
41
The Subcommittee members are Harford, Kennedy, Milton, Shapiro, and Whitehurst.
Id. Ex. C at 2.
11
Subcommittee did not retain new counsel; it received advice from Jenner concerning
the Supplemental Demand. 42
The Subcommittee met on December 20, 2017, and unanimously declined to
take any action in response to the Supplemental Demand. 43 Jenner explained in a
letter to Plaintiff dated December 31, 2017, that the Subcommittee considered “the
findings and outcomes of the internal and government investigations, the likelihood
that United could successfully rescind or otherwise reverse the [S]eparation
[A]greements, concern of disruption to or distraction from the business, and the other
actions United took as a result of its investigation and in response to these events
and government resolutions.”44 The letter further stated that if the conditions for
invoking the Clawback Provisions arose, “the Special Committee or Subcommittee,
as appropriate, may consider suitable action.” 45
Plaintiff filed the Amended Complaint on February 12, 2018. 46 Defendants
renewed their motions to dismiss. 47 The parties presented oral arguments to the
Court on November 14, 2018.48
42
See generally id. Ex. C.
43
Id. Ex. C at 2.
44
Id. Ex. C at 2–3.
45
Id. Ex. C at 3.
46
Dkt. 30.
47
Dkt. 36, 39.
48
Dkt. 66, 67.
12
II. LEGAL ANALYSIS
Defendants have moved to dismiss the Amended Complaint, which has three
Counts: Count I for breach of fiduciary duties, Count II for waste, and Count III for
unjust enrichment. Each Count is derivative in nature and thus subject to Court of
Chancery Rule 23.1.49
A. Count I: Wrongful Demand Refusal
Rule 23.1 derives from the bedrock principle that directors, rather than
stockholders, manage the business and affairs of the corporation.50 Their authority
includes decisions to pursue or refrain from pursuing litigation on behalf of the
corporation.51 As part of this board-centric model, Rule 23.1 requires that a
stockholder wishing to bring a derivative action first demand that the board of
directors take action.52 If a plaintiff chooses not to make a demand, the stockholder
must plead with particularity why it would have been futile to present the matter to
the board. 53
49
Ct. Ch. R. 23.1
50
8 Del. C. § 141(a).
51
Spiegel, 571 A.2d at 772–73; Aronson, 473 A.2d at 811–12.
52
Ct. Ch. R. 23.1; see also Spiegel, 571 A.2d at 773.
53
Ct. Ch. R. 23.1; see also Spiegel, 571 A.2d at 774; Klein v. H.I.G. Capital, L.L.C., 2018
WL 6719717, at *5 (Del. Ch. Dec. 19, 2018); Zucker v. Hassell, 2016 WL 7011351, at *1
(Del. Ch. Nov. 30, 2016).
13
Of the two potential routes presented by Rule 23.1—pleading demand excusal
with particularity or making a pre-suit demand—the former is a steep road, but the
latter is “steeper yet.” 54 By making a pre-suit demand, a stockholder “tacitly
concedes” the disinterest and independence of the board to respond.55 The board’s
decision to refuse the demand, therefore, is subject to the business judgment rule.
After making a pre-litigation demand, a stockholder plaintiff may not pursue claims
challenging the subject matter of the demand; the stockholder is limited to a claim
that the board wrongfully refused the demand.56 This limitation applies to all
54
Hassell, 2016 WL 7011351, at *1.
55
Spiegel, 571 A.2d at 777 (“By electing to make a demand, a shareholder plaintiff tacitly
concedes the independence of a majority of the board to respond. Therefore, when a board
refuses a demand, the only issues to be examined are the good faith and reasonableness of
its investigation.”); see also Levine, 591 A.2d at 212 (“[B]y making demand upon a board
before filing suit, [a stockholder plaintiff] tacitly concedes the independence of a majority
of the board to respond.” (alterations added) (citation and internal quotation marks
omitted)); Busch v. Richardson, 2018 WL 5970776, at *8 & n.75 (Del. Ch. Nov. 14, 2018)
(“[A] stockholder plaintiff who makes a demand ‘concedes that the board had the requisite
independence and disinterest to evaluate the demand objectively,’ [and] the ‘decision to
refuse a plaintiff’s demand is afforded the protection of the business judgment rule unless
the plaintiff alleges particularized facts that raise a reasonable doubt as to whether the
board’s decision to refuse the demand was the product of valid business judgment.’”
(quoting Friedman v. Maffei, 2016 WL 1555331, at *8 (Del. Ch. Apr. 13, 2016) (alteration
added)).
56
Spiegel, 571 A.2d at 775 (“A shareholder who makes a demand can no longer argue that
demand is excused.”); Grimes, 673 A.2d at 1218 (“The spent ‘arrow’ is the right to claim
that demand is excused.” (citations omitted)).
14
derivative claims arising from the subject matter of the demand, even legal theories
not expressly identified by the stockholder or considered by the board.57
Having made a pre-suit demand, Plaintiff is on the “steeper road.”
Accordingly, to survive a motion to dismiss, Plaintiff must plead with particularity
facts sufficient to “create a reasonable doubt” that the demand refusal was a valid
exercise of the board’s business judgment.58 In Spiegel, the Delaware Supreme
Court focused the demand-refusal analysis on two issues: “the good faith and
reasonableness of [the board’s] investigation.”59 Under this framework, Plaintiff
“‘must allege particularized facts that raise a reasonable doubt that (1) the board’s
decision to deny the demand was consistent with its duty of care to act on an
informed basis, that is, was not grossly negligent; or (2) the board acted in good
faith, consistent with its duty of loyalty.’” 60 The two prongs of Spiegel—gross
57
Grimes, 673 A.2d at 1219 (“[P]laintiff may not bifurcate his theories relating to the same
claim . . . [Plaintiff’s] demand letter conceded that demand was required for all legal
theories arising out of the set of facts described in the demand letter.”); Deborah A. Demott
& David F. Cavers, Shareholder Derivative Actions: Law And Practice § 5.10, at 725
(2018) (“[A] demand implicitly encompasses all legal theories or remedies arising out of
the same set of circumstances. Under this rule, there is no incentive to bifurcate or hold
back legal theories, in the hope that demand might be excused on the unexpressed claim
arising out of the same set of facts.” (citing Grimes, 673 A2.d at 1219) (footnote omitted)).
58
Levine, 591 A.2d at 210 (quoting Aronson, 473 A.2d at 808, 815).
59
Spiegel, 571 A.2d at 777; see also Levine, 591 A.2d at 212 (quoting Speigel, 571 A.2d
at 777); Richardson, 2018 WL 5970776, at *8 (“[I]f the board refuses the stockholder’s
demand, the only issues to be examined are the good faith and reasonableness of its
investigation.” (citation and internal quotation marks omitted)).
60
Richardson, 2018 WL 5970776, at *8 (quoting Ironworkers Dist. Council of Phil. &
Vicinity Ret. & Pension Plan v. Andreotti, 2015 WL 2270673, at *24 (Del. Ch. May 8,
15
negligence and bad faith—are disjunctive, and Plaintiff can survive dismissal by
meeting the test under either prong.
1. The Amended Complaint fails to plead particularized facts
creating a reasonable doubt that the directors acted with
due care.
As its chief argument under the first prong of Spiegel, Plaintiff contends that
the Special Committee and Subcommittee members were conflicted with respect to
the litigation demands. Thus, they say, the Board acted with gross negligence in
relying on the Special Committee and Subcommittee to respond to the litigation
demands.61 In response, Defendants argue that the tacit concession automatically
extends to board committees, and therefore the Court may not consider whether the
committee members were conflicted with respect to the demand. 62
Defendants rely on Spiegel, in which the board formed a committee to respond
to the plaintiff’s pre-suit litigation demand.63 The stockholder argued that the board
conceded conflicts by forming the committee.64 The Delaware Supreme Court
rejected this argument, stating:
2015)) (citations omitted); see also Andersen v. Mattel, Inc., 2017 WL 218913, at *3 (Del.
Ch. Jan. 19, 2017).
61
Dkt. 47, Pl.’s Omnibus Ans. Br. in Opp’n to Defs.’ Mots. to Dismiss the Verified Am.
S’holder Deriv. Compl. (“Pl.’s Ans. Br.”) at 20.
62
Dkt. 37, Defs.’ Op. Br. at 13–15; Dkt. 51, Defs.’ Reply Br. at 4–6, 8.
63
571 A.2d at 770.
64
Id.16
The same standard of judicial review is applicable when a
board delegates authority to respond to a demand to a
special litigation committee. The issues are solely the
good faith and reasonableness of its investigation.65
Based on the facts of Spiegel and the above-quoted language, Defendants conclude
that Spiegel limits the Court’s demand-refusal analysis to the good faith and
reasonableness of the committee’s investigation. 66 Put differently, Defendants say
that Spiegel precludes the Court from analyzing conflicts at the committee level in a
demand-refusal analysis.
Defendants’ interpretation of Spiegel is reasonable, but it fails to consider two
subsequent Delaware Supreme Court decisions: Grimes67 and Scattered III.68
In Grimes, the Supreme Court explained that a demand-refusal analysis
should consider whether directors acted independently and disinterestedly when
responding to a stockholder demand. 69 The Court observed:
Simply because the composition of the board provides no
basis ex ante for the stockholder to claim with particularity
and consistently with Rule 11 that it is reasonable to doubt
that a majority of the board is either interested or not
independent, it does not necessarily follow ex post that the
board in fact acted independently, disinterestedly or with
65
Id. at 778 (emphasis added).
66
Dkt. 67, Tr. of Oral Arg. on Defs.’ Mots. to Dismiss (“Oral Arg. Tr.”) at 20:14–21:10.
67
673 A.2d 1207.
68
Scattered III, 701 A.2d 70, aff’g on other grounds 1997 WL 187316 (Del. Ch. Apr. 7,
1997) [hereinafter Scattered II], remanded from 1996 WL 417507 (Del. Ch. July 12, 1996)
[hereinafter Scattered I].
69
Grimes, 673 A.2d at 1218.
17
due care in response to the demand. A board or a
committee of the board may appear to be independent, but
may not always act independently. If a demand is made
and rejected, the board rejecting the demand is entitled to
the presumption of the business judgment rule unless the
stockholder can allege facts with particularity creating a
reasonable doubt that the board is entitled to the benefit of
the presumption. If there is reason to doubt that the board
acted independently or with due care in responding to the
demand, the stockholder may have the basis ex post to
claim wrongful refusal. 70
In Scattered III, the Supreme Court applied its holding of Grimes to a board
that had delegated review of a demand to a committee. 71 A member of the Chicago
Stock Exchange (the “Exchange”) demanded that the Exchange board take action to
address “systemic corruption.”72 The Exchange’s constitution vested an executive
committee with the authority to exercise the powers of the full board in between
board meetings.73 The executive committee thus had decision-making power to
respond to the demand.74 A special committee was appointed to investigate the
demand and recommend action to the executive committee.75 After receiving a
70
Id. (emphasis in original) (footnotes omitted).
71
Scattered III, 701 A.2d at 75–76.
72
Id. at 71.
73
Id.74
Scattered I, 1996 WL 417507, at *4.
75
Id. at *2.
18
report from the special committee, the executive committee rejected the demand,
and the stockholder filed a derivative action. 76
At the trial level, the Court of Chancery embraced the defendants’
interpretation of Spiegel.77 The court approached the demand-refusal analysis as if
the making of the demand conceded the independence and disinterestedness of all
the directors at both the board and committee levels. The court stated: “Because
under the Exchange’s Constitution both the full Board and the Executive Committee
were authorized to act on a demand, by virtue of making the Demand, the plaintiffs
conceded the disinterest[] and independence of both the Executive Committee and
the full Board.”78
The plaintiff appealed, and a new fact emerged while the appeal was pending:
“[T]he Special Committee had been created by the full Board, not the Executive
Committee.” 79 The Supreme Court remanded the case so that the Court of Chancery
could consider the new fact. On remand, the Court of Chancery decided that the
new fact was immaterial to its analysis.80
76
Id.
77
Id. at *4.
78
Id.
79
Scattered II, 1997 WL 187316, at *2.
80
Id.19
On appeal again, the plaintiff argued “that the Court of Chancery erred as a
matter of law when it concluded that a demand on an independent board of directors
concedes the independence of an executive committee of the board.” 81 The Supreme
Court agreed. Applying Grimes, the Supreme Court explained that a demand-refusal
analysis must consider allegations of director bias or self-interest when evaluating
whether a board or committee acted independently and in good faith when
responding to a demand.82
In a derivative action involving refusal of a demand, any
alleged bias or self-interest on the part of the board or a
committee authorized to act on that demand should
become part of the court’s inquiry into whether the board
or committee acted independent and in good faith, or
whether it conducted a reasonable investigation. If there
had been particularized allegations that the Special
Committee (as the investigating committee) or the
Executive Committee (as the decisionmaking committee)
was biased, lacked independence, or failed to conduct a
reasonable investigation, such allegations could have
created a reasonable doubt that demand was properly
refused. 83
Despite holding that the Court of Chancery erred, the Supreme Court affirmed
the dismissal, because the complaint failed to plead particularized facts “cast[ing] a
81
Scattered III, 701 A.2d at 73.
82
Id. at 75 (citing Grimes, 673 A.2d at 1218–19).
83
Id.20
reasonable doubt upon the disinterestedness . . . of the [committee] in acting on the
demand.” 84
Grimes and Scattered III demonstrate that the plaintiff’s tacit concession does
not establish for all purposes the disinterest and independence of every member of
the board. Instead, the plaintiff concedes only that the board as a whole would have
been capable of considering a demand. Put differently, the plaintiff accepts that the
number of board members necessary to carry a vote, typically a majority, lacks
conflicts with respect to the demand. Indeed, Spiegel contains language stating
precisely that proposition: “By electing to make a demand, a shareholder plaintiff
tacitly concedes the independence of a majority of the board to respond.” 85
The tacit concession doctrine does not go further and prevent a court from
considering obvious conflicts or bias when evaluating a board’s decision to delegate
the demand-review process to a committee. To take an extreme example, consider
a board comprising nine independent directors and the CEO. A stockholder sends a
84
Id.85
Spiegel, 571 A.2d at 777 (emphasis added). See also Rales v. Blasband, 634 A.2d 927,
935 n.12 (Del. 1993) (citing Spiegel and describing the tacit concession as extending to the
“majority of the board”); Levine, 591 A.2d at 212 (same); Richardson, 2018 WL 5970776,
at *8 (same); Charal Inv. Co. v. Rockefeller, 1995 WL 684869, at *2 (Del. Ch. Nov. 7,
1995) (same); Thorpe v. CERBCO, Inc., 611 A.2d 5, 10 (Del. Ch. 1991) (same); Mount
Moriah Cemetery on Behalf of Dun & Bradstreet Corp. v. Moritz, 1991 WL 50149, at *3
(Del. Ch. Apr. 4, 1991) (same), aff’d, 599 A.2d 413 (Del. 1991); Pl.’s Ans. Br. at 19
(“Plaintiff did not concede[] that each and every individual director [was] capable of
making a disinterested and independent decision with respect to the Demand.”).
21
demand that the board claw back the CEO’s compensation. The board establishes a
one-person special committee consisting of the CEO and empowers the committee
to respond to the demand. The CEO refuses the demand. In this hypothetical, it is
easy to understand why the board’s decision to delegate the litigation demand to the
CEO could be grossly negligent or evidence of bad faith. A court can only reach
this conclusion, however, by analyzing whether the CEO is conflicted.
Under Defendants’ reading of Spiegel, the making of demand would concede
even the disinterestedness and independence of the CEO, such that a reviewing court
would have to blind itself to the obvious conflict that the CEO faced when
considering the demand. But Grimes teaches that when evaluating whether a board
has acted in good faith and with due care when responding to a demand, a court must
consider whether “the board in fact acted independently, disinterestedly or with due
care in response to the demand.” 86 And Scattered III teaches that when a board
delegates the demand-review process to a committee, the court must consider
whether the members of the committee were “biased [or] lacked independence,” in
addition to whether the committee conducted a “reasonable investigation.”87
Accordingly, Spiegel’s tacit concession rule applies only to a majority of the
Board. Under Grimes and Scattered III, the Court may evaluate Plaintiff’s
86
Grimes, 673 A.2d at 1219 (emphasis in original).
87
Scattered III, 701 A.2d at 75 (alteration added).
22
allegations that the Special Committee and the Subcommittee members were
incapable of acting disinterestedly in responding to the demands.
Though appropriate for the Court to consider, Plaintiff’s committee-level
conflicts argument nevertheless fails. As in Scattered III, the Amended Complaint
fails to allege particularized facts to support conflicts at the committee level.
Plaintiff does not allege any facts suggesting a financial or personal benefit to any
of the Director Defendants in approving the Separation Agreements or rejecting the
litigation demands. Instead, Plaintiff’s conflicts argument focuses on the committee
members’ prior involvement in the initial decision to approve the Separation
Agreements. Plaintiff argues that their involvement biased them against the
demands.88
Plaintiff’s prior-involvement theory fails factually. As to the Initial Demand,
no Special Committee member was conflicted concerning the request that the Board
exercise rights under the Clawback Provisions. A person is not conflicted when
88
Pl.’s Ans. Br. at 20–21 (“[T]he Special Committee was unable to adequately consider
Plaintiff’s initial demand to inter alia, ‘[c]lawback compensation paid to Smisek from 2012
through his termination with the Company pursuant to the Separation Agreement’ as there
was not a disinterested majority . . . .” (citations omitted)); id. at 21 (“[H]alf of the Special
Committee itself was implicated in the wrongdoing by Plaintiff’s demand. . . . As
Defendants concede, before Plaintiff issued its initial Demand, the Special Committee had
already approved Smisek’s unconscionable Separation Agreement and had already
approved the non-prosecution agreement with the U.S. Attorney’s office. A Board simply
cannot properly task a Special Committee with investigating its own members’ prior
wrongful conduct.” (citations omitted)).
23
deciding whether to exercise a contractual right for which that person negotiated, at
least not by reason of the fact that the person negotiated for the right. Nor is the
Special Committee conflicted with respect to the Initial Demand’s request to modify
clawback policies by virtue of any prior involvement; Plaintiff does not allege that
the Special Committee members were involved in the creation of the clawback
policies adopted in 2010 and 2008. 89 As to the Supplemental Demand, none of the
five directors on the Subcommittee were involved in the decisions to approve the
Separation Agreements.90 Put simply, for the prior-involvement theory of conflicts
to have legs, at a minimum, Plaintiff must allege some prior involvement.
Plaintiff’s prior-involvement theory of conflicts, therefore, fails to create a
reasonable doubt that the Director Defendants acted with due care in empowering
the Special Committee. Plaintiff makes two additional arguments, which fare no
better.
Plaintiff argues that Jenner’s “dual representation” of the Special Committee
and United gave rise to a conflict tainting the Special Committee’s consideration of
the Initial Demand. 91 Plaintiff, however, does not plead the nature of this “dual
representation” with any particularity, despite having accessed United’s books and
89
Am. Compl. ¶ 71; Pl.’s Ans. Br. at 10.
90
Id.
91
Pl.’s Ans. Br. at 26.
24
records using Section 220. Generally, Delaware law allows board members to rely
on counsel selected with reasonable care, 92 and Plaintiff does not allege
particularized facts impugning the selection of Jenner. Further, the case on which
Plaintiff relies, Stepak v. Addison, 93 is distinguishable. There, the board used the
same counsel that defended an alleged criminal to investigate the stockholder
demand concerning the criminal acts.94 Plaintiff does not allege that Jenner
represented Smisek or either of the other executives who received Separation
Agreements. Stepak, therefore, does not support Plaintiff’s “dual-representation”
argument. 95
Plaintiff also takes issue with the timing of the process. Plaintiff argues that
because the Special Committee approved the Separation Agreements before the
federal investigations concluded, the committee members could not have properly
informed themselves of all material information reasonably available.96 There are
multiple problems with Plaintiff’s timing theory. Most critically, the theory focuses
on the wrong time: the demand-refusal analysis examines whether the Board was
92
8 Del. C. § 141(e).
93
20 F.3d 398 (11th Cir. 1994).
94
Id. at 403-04.
95
See also Levine v. Liveris, 216 F. Supp. 3d 794, 809–10 (E.D. Mich. 2016) (rejecting
argument that demand was wrongfully refused because counsel, which had previously
represented the company and had a reputation for advising boards to reject stockholder
demands, was improperly chosen).
96
Am. Compl. ¶ 46; Oral Arg. Tr. at 81:3–12.
25
well-informed when it considered the litigation demand, not when making the
underlying decision.97 The argument also assumes that the Board could not act in
an informed manner in entering into the Separation Agreements before the
conclusion of an internal or external investigation. It is possible that a plaintiff might
allege facts that would support an inference of gross negligence if directors acted
quite early in a process or before receiving information that they knew to expect.
Such a theory would require particularized facts. All Plaintiff has done here is to
state that the board acted before the investigations were complete. That is not
enough to undercut the presumptions of the business judgment rule.
2. The Amended Complaint fails to plead particularized facts
creating a reasonable doubt that the directors acted in good
faith.
The second inquiry under the Spiegel framework assesses the Board’s good
faith in considering the litigation demands. “To show bad faith, [a plaintiff] must
plead with particularity that the Board ‘intentionally act[ed] in disregard of the
Company’s best interest in deciding not to pursue the litigation the Plaintiff
97
Richardson, 2018 WL 5970776, at *9 (“A board acts with gross negligence by failing to
‘properly inform itself of material information reasonably available to it before refusing
the demand.’” (citing Andersen, 2017 WL 218913, at *4) (emphasis added) (internal
citation omitted)). See also Ironworkers, 2015 WL 2270673, at *26 (emphasizing that the
wrongful demand refusal standard requires reasonable doubt as to the directors’ actions in
refusing the demand, “not doubt about the propriety of the underlying conduct” (emphasis
in original)).
26
demanded.’” 98 “When directors decide to reject a demand, this court ‘takes into
account not only the defendants’ countervailing legal arguments, but also the other
relevant factors considered by the board—e.g., whether the costs of pursuing the
claims outweigh the expected recovery.’” 99 Where “[t]he Board’s justifications for
refusing [Plaintiff’s] demand fall within ‘the bounds of reasonable judgment’ [this]
is fatal to [Plaintiff’s] claim that the refusal was made in bad faith.” 100
To show bad faith, Plaintiff argues only that the terms of the Separation
Agreements were so “egregious” and “irrational” that refusing Plaintiff’s litigation
demands was “inexplicable.” 101 The terms of the Separation Agreements, standing
alone, are not sufficient to support a claim that the Board acted in bad faith in
refusing the litigation demands. This court has recognized many valid business
reasons for entering into separation agreements.102 Plaintiff fails to address other
98
Richardson, 2018 WL 5970776, at *9 (quoting Maffei, 2016 WL 1555331, at *12); see
also id. (“Demonstrating that directors have breached their duty of loyalty by acting in bad
faith goes far beyond showing a questionable or debatable decision on their part.” (quoting
Andersen, 2017 WL 218913, at *5)).
99
Richardson, 2018 WL 5970776, at *9.
100
Maffei, 2016 WL 1555331, at *15 (quoting Crescent/Mach I P’rs, L.P., v. Turner, 846
A.2d 963, 981 (Del. Ch. 2000)); see also Ironworkers, 2015 WL 2270673, at *32 (“[A]
disagreement, however vehement, with the conclusion of an independent and adequately
represented committee is not the same as pleading particularized facts that create a
reasonable doubt that the Board acted in what it perceived as the best interests of the
corporation.” (emphasis omitted)).
101
Am. Compl. ¶ 69; Pl.’s Ans. Br. at 29–30.
102
See, e.g., Seinfeld v. Slager, 2012 WL 2501105, at *6 (Del. Ch. Feb. 29, 2016)
(recognizing a smooth transfer of power and preventing future embarrassment as valid
27
relevant factors considered by Special Committee and Subcommittee when rejecting
the demand, such as “concern of disruption to or distraction from the business; the
efficacy of the requested action, and the actions United [had] already taken on its
own initiative as a result of its investigation and in response to [the] events and
government resolutions.”103 The Special Committee expressed concern that the
modifications to United’s clawback policies requested by Plaintiff “were
inconsistent with prevailing industry practice.” 104 These concerns fall within the
bounds of reasonable judgment.
For these reasons, Plaintiff fails to allege adequately that the Board acted in
bad faith when responding to the litigation demands.
B. Counts II and III: Waste and Unjust Enrichment
In Grimes, the Supreme Court held that “since the making of a pre-suit
demand concedes that demand is required, the concession should apply ‘to all or any
business reasons for entering into a separation agreement; finding that retaining executives
at a time of serious company difficulties was a rational business reason for offering
amended severance agreements); Friedman v. Dolan, 2015 WL 4040806, at *8 (Del. Ch.
June 30, 2015) (recognizing that “[s]everance agreements can be used to ensure
cooperation from executives or to secure other benefits”); Zucker v. Andreessen, 2012 WL
2366448, at *9 (Del. Ch. June 21, 2012) (recognizing that preserving peace amongst
directors and establishing unanimity during CEO’s exit as valid business reasons for
entering agreement); In re Walt Disney Co. Deriv. Litig., 731 A.2d 342, 364 (Del. Ch.
1998), aff’d sub nom. Brehm, 746 A.2d 244 (recognizing that avoiding the risk and expense
of litigation as valid business reasons to pay executive severance benefits bargained for
under the employment agreement).
103
Am. Compl. Ex. A at 3; see also id. Ex. C at 2–3.
104
Id. Ex. A at 3.
28
part of the transaction, or series of connected transactions, out of which the [demand]
arose.’” 105 The policy behind this standard is to prevent an “undue risk of
harassment” whereby a stockholder could reserve theories or remedies and later
argue “that demand is excused as to other legal theories or remedies arising out of
the same set of circumstances as set forth in the demand letter . . . .” 106 If the waste
and unjust enrichment claims arise from the same underlying facts that are the
subject of the litigation demands, then the plaintiff cannot proceed without showing
demand refusal.107
The Amended Complaint reflects that Plaintiff bases its waste and unjust
enrichment claims on the Separation Agreements. Plaintiff’s waste and unjust
105
Grimes, 673 A.2d at 1219–20 (quoting Restatement (Second) of Judgments § 24 (Am.
Law Inst. 1982)).
106
Id. at 1220.
107
See, e.g., Grimes, 673 A.2d at 1219 (“[P]laintiff may not bifurcate his theories relating
to the same claim. Thus, demand having been made as to the propriety of the Agreements,
it cannot be excused as to the claim that the Agreements constituted waste, excessive
compensation or was the product of a lack of due care.”); Andersen, 2017 WL 218913 at
*1 (dismissing claims of fiduciary duty, unjust enrichment, and waste where plaintiff failed
to adequately plead wrongful demand refusal); Maffei, 2016 WL 1555331 at *1 (same);
Liveris, 216 F. Supp. 3d at 799 (E.D. Mich. 2016) (applying Delaware law and dismissing
plaintiff’s waste and unjust enrichment claims for failure to sufficiently plead wrongful
demand refusal). Cf. Calma on Behalf of Citrix Sys., Inc. v. Templeton, 114 A.3d 563, 591
(Del. Ch. 2015) (dismissing claim for unjust enrichment in the demand refusal context
where plaintiff failed to adequately allege a claim for fiduciary breach, observing “[a]t the
pleadings stage, an unjust enrichment claim that is entirely duplicative of a breach of
fiduciary duty claim—i.e., where both claims are premised on the same purported breach
of fiduciary duty—is frequently treated in the same manner when resolving a motion to
dismiss” (internal quotation marks omitted)).
29
enrichment claims merely repackage complaints concerning the Separation
Agreements under different legal theories. 108
For these reasons, Counts II and III of the Amended Complaint are subject to
the demand-refusal analysis, and they fail for the same reasons as Count I.109
III. CONCLUSION
For the foregoing reasons, Defendants’ motions to dismiss Counts I, II, and III
of the Amended Complaint are GRANTED.
108
Count II incorporates by reference all allegations supporting Count I of the Amended
Complaint. Am. Compl. ¶ 78 at p. 38. The factual averments of Count II are: “The
Director Defendants wasted United’s corporate assets by refusing to clawback
compensation paid to the senior executives involved in the bribery scheme despite being
empowered to do so by the Company’s policies, by entering into the Separation Agreement,
and agreements like it, and by subsequently failing to rescind the same. The Board allowed
Smisek who was largely responsible for United’s problems, to receive an unconscionable
sum of $37 million in exchange for breaking the law.” Id. ¶ 80 at p. 39. Count III
incorporates by reference all allegations supporting Counts I and II of the Amended
Complaint. Am. Compl. ¶ 84 at p.39. The factual averments of Count III are: “By his
wrongful acts, Smisek was unjustly enriched of at the expenses and to the detriment of
United, specifically from the severance package awarded on September 8, 2015.” Id. ¶ 85
at p.40.
109
In the Amended Complaint, Plaintiff alleges facts concerning the Board’s
compensation, audit, and governance committees. Am. Compl. ¶¶ 70–86 at pp. 30–37. By
failing to brief the relevance of these facts to any of Plaintiff’s claims, Plaintiff waived the
opportunity to do so. See Emerald P’rs v. Berlin, 726 A.2d 1215, 1224 (Del. 1999) (“Issues
not briefed are deemed waived.”).
30