Inter-Marketing Group USA, Inc. v. Gregory Armstrong ( 2019 )

THE COURT OF CHANCERY OF THE STATE OF DELAWARE
INTER-MARKETING GROUP USA, INC., )
Derivatively on Behalf of PLAINS ALL )
AMERICAN PIPELINE, L.P., )
)
Plaintiff, )
)
v. ) C.A. No. 2017-0030-TMR
)
GREGORY L. ARMSTRONG, HARRY N. )
PEFANIS, AL SWANSON, CHRIS )
HERBOLD, BERNARD FIGLOCK, )
EVERARDO GOYANES, GARY R. )
PETERSON, JOHN T. RAYMOND, ROBERT )
V. SINNOTT, J. TAFT SYMONDS, )
CHRISTOPHER M. TEMPLE, PLAINS ALL )
AMERICAN GP LLC, PLAINS AAP, L.P., )
AND PAA GP LLC, )
)
Defendants, )
)
and )
)
PLAINS ALL AMERICAN PIPELINE, L.P., )
)
Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: November 2, 2019
Date Decided: January 31, 2019
Theodore A. Kittila, HALLORAN FARKAS & KITTILA LLP, Wilmington,
Delaware; Gregory M. Nespole and Correy A. Kamin, WOLF HALDENSTEIN
ADLER FREEMAN & HERZ LLP, New York, New York; Attorneys for Plaintiff.
Srinivas M. Raju and Matthew W. Murphy, RICHARDS, LAYTON & FINGER,
P.A., Wilmington, Delaware; Michael C. Holmes, Craig E. Zieminski, Kimberly R.
McCoy, and Jeffrey Crough, VINSON & ELKINS LLP, Dallas, Texas; Attorneys
for Defendants and Nominal Defendant.
MONTGOMERY-REEVES, Vice Chancellor.
Nominal defendant is a Houston-headquartered Delaware master limited
partnership that owns thousands of miles of pipelines in North America. In 2015,
one of nominal defendant’s pipelines leaked, resulting in an oil spill in a picturesque,
environmentally sensitive part of the California coast.
The consequences of the spill for nominal defendant have been substantial.
Nominal defendant faced fines, criminal convictions, a federal securities lawsuit,
and clean-up costs in the hundreds of millions of dollars, only some of which was
insured. Nominal defendant also lost revenue while the pipeline was out of service,
suffered reputational harm, and saw a decline in its stock market price.
Plaintiff, a unitholder in nominal defendant, now brings a derivative suit for
breaches of fiduciary duty, waste of corporate assets, entitlement to contribution,
breach of contract, and breach of the implied covenant of good faith and fair dealing
against various entities and individuals that plaintiff claims managed nominal
defendant. Plaintiff alleges that defendants did not properly oversee nominal
defendant, missed numerous warning signs indicating the risk of a spill, caused
nominal defendant to violate the law, and cost nominal defendant huge sums of
money. Defendants move to dismiss, arguing that they operated nominal defendant
in accordance with the terms of the partnership agreement and that under the terms
of that agreement, plaintiff may not bring this case. As further explained herein, I
1
grant defendants’ motion to dismiss because plaintiff failed to make demand or to
show that demand is excused as futile.
I. BACKGROUND
I draw all facts from the Verified Unitholder Derivative Complaint (the
“Complaint”), the documents attached to it, and the documents incorporated by
reference into the Complaint. 1 At this stage of the proceedings, I must take all of
Plaintiff’s well-pled facts as true and draw all reasonable inferences in its favor.
A. Pertinent Parties and Non-Parties
Plaintiff Inter-Marketing Group USA, Inc., is and at all relevant times has
been a unitholder of nominal defendant Plains All American Pipeline, L.P. (“Plains”
or the “Company”). 2
Plains is a publicly traded Delaware master limited partnership headquartered
in Houston, Texas, whose units trade on the New York Stock Exchange.3 Plains’s
general partner is Defendant PAA GP LLC (“General Partner”), a Delaware limited
liability company. 4 The sole member of General Partner is Defendant Plains AAP,
1
In re Morton’s Rest. Gp., Inc. S’holders Litig., 74 A.3d 656, 659 n.3 (Del. Ch. 2013)
(“To be incorporated by reference, the complaint must make a clear, definite and
substantial reference to the documents.” (quoting DeLuca v. AccessIT Gp., Inc., 695
F. Supp. 2d 54, 60 (S.D.N.Y. 2010))).
2
Compl. 13.
3
Id.4
Id.2
L.P., (“AAP”), a Delaware limited partnership. 5 The general partner of AAP is
Defendant Plains All American GP LLC (“Plains GP”).6 EMG Investment, LLC,
KAFU Holdings & KA First Reserve, and Oxy Holding Company hold limited
partnership interests in AAP. 7
The same officers and directors manage Plains GP and Plains.8 All relevant
officers and directors held office from the alleged injury through the filing of the
Complaint.9 The Plains GP and Plains boards had the same ten members, eight of
whom are named in the Complaint (the “Director Defendants”). Defendant Gregory
L. Armstrong was the Chairman of the Board of Directors and the Chief Executive
Officer of Plains GP. 10 Three of the Director Defendants—Bernard Figlock, John
T. Raymond, and Robert V. Sinnott—were employees of, major customers of, or
5
Id.6
Id. at 14.
7
Id.
8
Plains GP and Plains always had the same board members. Compl. 26. The
formalities, however, have changed over time. On November 15, 2016, before
Plaintiff filed its Complaint, the Plains Entities (including Plains, General Partner,
AAP, Plains GP, and other affiliates) simplified their structure, consolidating their
boards into one board with oversight for both Plains GP and Plains. Defs.’ Opening
Br. Ex. 2, at 5.
9
See Defs.’ Opening Br. Ex. 2, at 8 (explaining that the board of directors consisted
of ten members as of December 31, 2016, prior to the Complaint, and expanded to
twelve in February 2017, after the Complaint).
10
Compl. 15.
3
investors in, the various Plains entities. Figlock served as Vice President and
Treasurer of Occidental Petroleum Corporation, a major customer and vendor of
Plains GP 11 and a subsidiary of Oxy Holding Company, a large beneficial owner of
AAP. 12 Raymond served as CEO and Managing Partner of EMG Investment, LLC,
which owned approximately twenty percent of AAP. 13 Sinnott served as President
and CEO of Kayne Anderson Capital Advisors, an investment firm whose portfolio
firms included customers of Plains.14 Nominal Defendant did not report these four
directors as independent under the New York Stock Exchange rules on the Form
10-K Plains filed with the SEC for the fiscal year ending December 31, 2014 (the
“2014 10-K”).15
Three of the Director Defendants served on the Audit Committee—Everardo
Goyanes, J. Taft Symonds, and Christopher M. Temple. All three were independent
directors under the rules of the New York Stock Exchange, and the Company
reported them as such on its 2014 10-K. 16 One Director Defendant, Gary R.
11
Id. at 17-18.
12
Id. at 14.
13
Id. at 18-19.
14
Id. at 19.
15
Id. at 81; Defs.’ Opening Br. Ex. 2, at 108.
16
Defs.’ Opening Br. Ex. 2, at 108.
4
Petersen, served on the Compensation and Governance Committees.17 The
Complaint does not name the two remaining directors, Victor Burk and Bobby
Shackouls.18
B. Facts
The Complaint alleges facts related to an oil spill in Santa Barbara, California,
on May 19, 2015, in which Line 90119 spilled approximately 3,400 barrels of oil onto
environmentally sensitive coastal areas and into the Pacific Ocean (the “Spill”).20
The Company reported that the total cost of cleaning up the Spill was $257 million,
partially offset by a $192 million insurance payout. 21 In the aftermath of the Spill,
on August 7, 2015, Plains reported that its revenues had fallen by approximately
40.5% year over year, although this coincided with a decline in oil prices and likely
was not entirely driven by the Spill.22 Plains’s stock price also dropped by
17
Compl. 18. The Governance Committee consists of Symonds as Chair and Petersen.
The Compensation Committee consists of Sinnott as Chair, Petersen, and Raymond.
18
Defs.’ Opening Br. 20.
19
Line 901 is a 24-inch diameter pipeline that reaches approximately 10.6 miles from
Exxon’s onshore oil facilities at Las Flores, California, to Chevron’s onshore oil
facilities at Gaviota, California, where it meets and joins Line 903, another pipeline.
20
See generally Compl. 4-8.
21
Id. at 48.
22
Id. at 12.
5
approximately 40% in the aftermath of the Spill and had not recovered as of the time
Plaintiff filed the Complaint. 23
In May 2016, authorities in California indicted Plains on forty-six criminal
charges in Santa Barbara County related to the Spill (the “California Action”).24 On
September 7, 2018, a jury found Plains guilty of eight misdemeanors and one felony
(the “California Conviction”).25 The felony conviction was for “the crime of
KNOWINGLY DISCHARGING OIL, OR REASONABLY SHOULD HAVE
KNOWN THAT ITS ACTIONS WOULD CAUSE THE DISCHARGE OF OIL,
INTO THE WATERS OF THE STATE.” 26 One misdemeanor was for “the crime
of KNOWINGLY FAILING TO FOLLOW A MATERIAL PROVISION OF AN
23
Id.
24
Id. at 72.
25
Plaintiff requests that this Court take judicial notice of the convictions under
Delaware Uniform Rules of Evidence 201(b)(2) and 201(d) and attaches press
releases about the convictions to this request. Defendants do not dispute this Court’s
power to take judicial notice of the convictions but argue that the convictions are
irrelevant. Defendants also argue that if this Court does take judicial notice, it
should take notice of the jury verdict forms, which they attached, not press releases.
Plaintiff agrees that the jury verdict forms are informative but argues that the press
releases are as well. Because I find that the convictions are “not subject to
reasonable dispute” and they “can be accurately and readily determined from
sources whose accuracy cannot reasonably be questioned” under Delaware Uniform
Rule of Evidence 201(b) and the jury forms are more informative, I grant
Defendants’ request, deny Plaintiff’s request, and will consider the jury forms.
26
Defs.’ Resp. to Pl.’s Mot. Requesting Judicial Notice of Criminal Conviction Ex.
A, at 1.
6
APPLICABLE OIL CONTINGENCY PLAN” (the “Knowing Misdemeanor”).27
The rest were for misdemeanors related to unlawful taking of animals and
discharging oil with no expression of intent. 28
C. Procedural History
Plaintiff filed its Complaint on January 17, 2017.29 On February 6, 2017,
Roger Kirby, Linda Greenberg, and the Firemen’s Retirement System of St. Louis
moved to intervene in and stay the action, arguing that the outcome of this case might
prejudice their related and prior-filed books and records action.30 On March 3, 2017,
Defendants filed their motion to dismiss. 31 On April 7, 2017, Plaintiff filed its
Answering Brief in Opposition to Defendants’ Motion to Dismiss. 32 On April 17,
2017, I granted the motion to stay. 33 On August 8, 2017, I ordered the production of
27
Id. at 3.
28
Id. at 3-9.
29
Compl. 1.
30
Mot. of Roger Kirby, Linda Greenberg, and the Firemen’s Retirement System of St.
Louis to Intervene In and Stay Deriv. Action 2-3.
31
See Defs.’ Mot. to Dismiss.
32
See Pl.’s Answering Br.
33
Order Granting Mot. of Roger Kirby, Linda Greenberg, and the Firemen’s
Retirement System of St. Louis to Intervene In and to Stay Deriv. Action.
7
certain books and records in the related books and records action. 34 On March 16,
2018, the parties to the books and records action agreed that no outstanding issues
remained in that litigation. 35 On July 31, 2018, I lifted the stay in this case.36 On
September 24, 2018, Plaintiff filed a motion requesting judicial notice of the
Company’s criminal conviction in California related to the Spill. 37 On October 12,
2018, Defendants filed their Reply in Support of their Motion to Dismiss, completing
briefing on that motion.38 On November 2, 2018, the Court held oral argument on
the motion to dismiss, which is now before me. 39
II. ANALYSIS
Plaintiff brings this action derivatively on behalf of Nominal Defendant
alleging breaches of fiduciary duty, waste of corporate assets, entitlement to
contribution, breach of contract, and breach of the implied covenant of good faith
and fair dealing. Defendants move to dismiss for failure to make demand or plead
demand futility under Court of Chancery Rule 23.1 and for failure to state a claim
34
Order Lifting Stay and Governing Briefing and Arg. on Defs.’ Mot. to Dismiss the
Deriv. Compl. 3.
35
Id.
36
Id.
37
Pl.’s Mot. Requesting Judicial Notice of Criminal Conviction.
38
Defs.’ Reply Br.
39
Oral Arg. Tr. 1.
8
under Court of Chancery Rule 12(b)(6). For the reasons that follow, I dismiss the
action for failure to make demand or to show that demand is excused as futile.
“As a general matter, much of the well-developed corporate law that exists
with respect to the demand requirement has been applied by analogy in the limited
partnership context.”40 “[T]he issues in determining demand futility for partnership
law appear identical to those in corporation law.” 41 Thus, I rely heavily on the well-
developed law in the corporate context.
Court of Chancery Rule 23.1 requires a plaintiff to “allege with particularity
the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from
the directors or comparable authority and the reasons for the plaintiff’s failure to
obtain the action or for not making the effort.”42 Stated differently, a plaintiff
40
Martin I. Lubaroff & Paul M. Altman, Lubaroff & Altman on Delaware Limited
Partnerships § 10.3 (2018); see Litman v. Prudential-Bache Props., Inc., 1993 WL
5922, at *2-3 (Del. Ch. Jan. 4, 1993) (“The defendants assert that none of plaintiffs’
arguments allege with particularity facts establishing demand futility . . . . The
statutory test for determining derivative actions in the partnership context is almost
identical to case law language in the corporations context. . . . Therefore, the issues
in determining demand futility for partnership law appear identical to those in
corporation law.”).
41
Litman, 1993 WL 5922, at *3; see also Ishimaru v. Fung, 2005 WL 2899680, at *12
(Del. Ch. Oct. 26, 2005) (“This court has recognized, despite the statutory basis for
demand in the limited partnership context, that ‘the issues in determining demand
futility for partnership law appear identical to those in corporation law’ and,
therefore, has applied the familiar test for corporate demand futility.” (quoting
Litman, 1993 WL 5922, at *3)).
42
Ct. Ch. R. 23.1.
9
seeking to assert claims on behalf of a corporation must (1) make pre-suit demand
on the company or (2) show demand futility. 43 The demand requirement serves to
“insure that a stockholder exhausts his intracorporate remedies,” 44 “provide a
safeguard against strike suits,” 45 and “assure that the stockholder affords the
corporation the opportunity to address an alleged wrong without litigation and to
control any litigation which does occur.”46 Where, as here, the plaintiff has failed to
make a pre-suit demand on the board, 47 the Court must dismiss the complaint “unless
it alleges particularized facts showing that demand would have been futile.”48
Two Delaware Supreme Court cases articulate the tests for demand futility.
Rales v. Blasband 49 applies when the plaintiff challenges an action not taken by the
board that would consider the demand; Aronson v. Lewis50 applies when the plaintiff
43
Ct. Ch. R. 23.1(a); Kaplan v. Peat, Marwick, Mitchell & Co., 540 A.2d 726, 730
(Del. 1988).
44
Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984).
45
Id. at 812.
46
Kaplan, 540 A.2d at 730 (citing Aronson, 473 A.2d at 811-12).
47
Compl. 79.
48
Ryan v. Gursahaney, 2015 1915911, at *5 (Del. Ch. Apr. 28, 2015), aff’d, 128 A.3d
991 (Del. 2015).
49
634 A.2d 927, 934 (Del. 1993).
50
473 A.2d 805.
10
challenges an action taken by the board that would consider the demand. Under
Rales, to successfully plead demand futility, a plaintiff must allege particularized
facts raising a reasonable doubt that “the board of directors could have properly
exercised its independent and disinterested business judgment” in response to the
demand. 51 Under Aronson, to successfully plead demand futility a plaintiff must
allege particularized facts sufficient to raise a reasonable doubt that “(1) the directors
are disinterested and independent [or] (2) the challenged transaction was otherwise
the product of a valid exercise of business judgment.” 52 Fundamentally, Aronson
and Rales both “address the same question of whether the board can exercise its
business judgment on the corporate behalf” in considering demand. 53 The
“[d]emand futility analysis ‘is conducted on a claim-by-claim basis.’” 54
Here, the parties agree that Rales applies. Under Rales, “a court must
determine whether or not the particularized factual allegations of a derivative
stockholder complaint create a reasonable doubt that, as of the time the complaint is
51
634 A.2d at 934.
52
473 A.2d at 814.
53
In re Duke Energy Corp. Deriv. Litig., 2016 WL 4543788, at *14 (Del. Ch. Aug.
31, 2016).
54
Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera, 119 A.3d 44, 58 n.71
(quoting Cambridge Ret. Sys. v. Bosnjak, 2014 WL 2930869, at *4 (Del. Ch. June
26, 2014)).
11
filed, the board of directors could have properly exercised its independent and
disinterested business judgment in responding to the demand.” 55 “Independence
means that a director’s decision is based on the corporate merits of the subject before
the board rather than extraneous considerations or influences.” 56 A plaintiff may
prove a lack of independence by alleging facts that create “a reasonable doubt that a
director is so beholden to an interested director that his or her discretion would be
sterilized.”57
“A director is considered interested where he or she will receive a personal
financial benefit from a transaction that is not equally shared by the stockholders.
Directorial interest also exists where a corporate decision will have a materially
detrimental impact on a director, but not on the corporation and the stockholders.”58
Further, “[u]nder Rales, defendant directors who face a substantial likelihood of
personal liability are deemed interested in the transaction and thus cannot make an
impartial decision.”59 Under that theory, “a stockholder plaintiff must plead facts
55
Rales, 634 A.2d at 934.
56
Id. at 936 (quoting Aronson, 473 A.2d at 816).
57
Highland Legacy Ltd. v. Singer, 2006 WL 741939, at *5 (Del. Ch. Mar. 17, 2006).
58
Rales, 634 A.2d at 936 (citing Aronson, 473 A.2d at 812; Pogostin v. Rice, 480 A.2d
619, 624 (Del. 1984)).
59
In re Dow Chem. Co. Deriv. Litig., 2010 WL 66769, at *12.
12
establishing a sufficient connection between the corporate trauma and the board such
that at least half of the directors face ‘a substantial likelihood of personal liability.’” 60
A. Plaintiff Fails To Adequately Allege That a Majority of the
Directors Are Interested
Plaintiff argues that the Director Defendants cannot impartially consider
demand because they are interested due to a substantial likelihood of personal
liability. 61 Defendants counter that the limited partnership agreement eliminates
common law fiduciary duties, which form the basis for the substantial risk of
personal liability that Plaintiff identifies; thus, Defendants argue, no possibility of
personal liability exists.62 Plaintiff’s argument fails.
“A partnership agreement may provide for the limitation or elimination of any
and all liabilities for breach of contract and breach of duties (including fiduciary
duties) of a partner or other person to a limited partnership . . . .” 63 The operative
Fourth Amended and Restated Agreement of Limited Partnership of Plains All
American Pipeline (the “LP Agreement”) addresses the application of fiduciary
duties as follows:
60
South v. Baker, 62 A.3d 1, 14 (Del. Ch. 2012) (quoting Desimone v. Barrows, 924
A.2d 908 (Del. Ch. 2007)).
61
Pl.’s Answering Br. 9.
62
Defs.’ Opening Br. 3.
63
6 Del. C. § 17-1101(f).
13
Any standard of care and duty imposed by this Agreement
or under the Delaware Act or any applicable law, rule or
regulation shall be modified, waived or limited, to the
extent permitted by law, as required to permit the General
Partner to act under this Agreement or any other
agreement contemplated by this Agreement and to make
any decision pursuant to the Authority prescribed in this
Agreement, so long as such action is reasonably believed
by the General Partner to be in, or not inconsistent with,
the best interests of the Partnership.64
The Delaware Supreme Court addressed functionally identical language in
Norton v. K-Sea Transportation Partners L.P. 65 The relevant portion of the
agreement in Norton reads:
Any standard of care and duty imposed by [the LPA] or
[DRULPA] . . . shall be modified, waived or limited, to the
extent permitted by law, as required to permit [K-Sea GP]
to act under [the LPA] . . . and to make any decision
pursuant to the authority prescribed in [the LPA], so long
as such action is reasonably believed by [K-Sea GP] to be
in, or not inconsistent with, the best interests of the
Partnership. 66
The only difference between the language in this case and the language in Norton is
the defined terms. The Supreme Court held in Norton that “Section 7.10(d)
eliminates any duties that otherwise exist and replaces them with a contractual
fiduciary duty—namely, that K-Sea GP must reasonably believe that its action is in
64
Defs.’ Opening Br. Ex. 1 § 7.10 (d).
65
67 A.3d 354 (Del. 2013).
66
Id. at 361 (alterations in original).
14
the best interest of, or not inconsistent with, the best interests of the Partnership.”67
Here, as in Norton, the partnership agreement eliminates common law fiduciary
duties.
Plaintiff argues that the LP Agreement modifies (instead of eliminates)
fiduciary duties, leaving room for its common law fiduciary duty claims. 68 Plaintiff
cites In re Kinder Morgan, Inc. Corporate Reorganization Litigation 69 for the
proposition that “this contractual language [in Section 7.10(d)] does not
unconditionally eliminate common law fiduciary duties. Rather, it imposes ‘a
condition precedent to the effectiveness of the provisions of the [Partnership]
Agreement that purport to modify, waive, or limit standards of care or duties
otherwise imposed by law.’” 70 In Kinder Morgan, Vice Chancellor Laster
interpreted language in a limited partnership agreement that was also functionally
identical to the language before me now.71 Vice Chancellor Laster stated that “[a]s
interpreted by Norton, [the language] eliminates all common law fiduciary duties
67
Id. at 362.
68
Pl.’s Answering Br. 21.
69
2015 WL 4975270 (Del. Ch. Aug. 20, 2015), aff’d sub nom. Haynes Family Tr. v.
Kinder Morgan G.P. Inc., 135 A.3d 76 (TABLE) (Del. Mar. 10, 2016).
70
Pl.’s Answering Br. 21-22 (quoting Kinder Morgan, 2015 WL 4975270, at *5 n.1).
71
Kinder Morgan, 2015 WL 4975270, at *5.
15
and substitutes in their place a contractual duty under which the General Partner
‘must reasonably believe that its action is in the best interest of, or not inconsistent
with, the best interests of the partnership.’” 72 In a footnote, Vice Chancellor Laster
noted that “[a]bsent Norton, I would hold that the plain language of [the agreement]
establishes a condition precedent to the effectiveness of the provisions of the
[agreement] that purport to modify, waive, or limit standards of care or duties
otherwise imposed by law . . . . But Norton is controlling.”73 Plaintiff’s argument
that this footnoted dicta, which explicitly defers to Norton, controls in place of
Norton is unconvincing at best.
Plaintiff also relies on Brinckerhoff v. Enbridge Energy Company, Inc.74
Plaintiff argues that the Delaware Supreme Court in Brinckerhoff held that “[i]f the
general partner failed to act in the best interest of the Partnership, a condition
precedent to the modification of fiduciary duties failed to occur, and arguably
common law fiduciary duties would then apply to the general partner.” 75 Again,
Plaintiff cites dicta taken out of context. As the Supreme Court in Brinckerhoff
carefully explained, “[a]lthough the accuracy of [the] interpretation” of the language
72
Id.73
Id.74
159 A.3d 242 (Del. 2017).
75
Pl.’s Answering Br. 22 (quoting Brinckerhoff, 159 A.3d at 253 n.31).
16
present in Norton, Kinder Morgan, and Brinckerhoff “is the subject of legitimate
debate, we choose in this case not to upset Norton’s settled interpretation of [the
agreement]. Thus, we will not reinterpret [the agreement] . . . .” 76 The Supreme
Court added a footnote explaining the argument Vice Chancellor Laster made in
Kinder Morgan, acknowledging the Vice Chancellor’s logic, but explicitly declining
to adopt it and overturn Norton. 77 Plaintiff now cites Brinckerhoff’s discussion of
Vice Chancellor Laster’s language in Kinder Morgan as if it were the Supreme
Court’s holding; it is not. Thus, contrary to Plaintiff’s contention, the Supreme
Court’s holding in Norton remains controlling law, and I must follow it. Norton
holds that the operative language of the LP Agreement eliminates common law
fiduciary duties in favor of contractual duties.
Based on the LP Agreement and the Delaware Supreme Court’s
jurisprudence, Plaintiff cannot demonstrate demand futility due to the directors’
substantial likelihood of personal liability for breach of fiduciary duty. Put simply,
the directors cannot face a substantial likelihood of personal liability for breaching
76
Id. at 253.
77
Id.
17
duties they do not owe. 78 Because the fiduciary duties claims fail as a matter of law,
the waste 79 and entitlement to contribution80 claims fail as well.81
B. Plaintiff Fails To Adequately Allege That a Majority of the
Directors Are Not Independent
Plaintiff argues that demand is excused as futile because the board members
lack independence to consider demand. At all relevant times there were ten members
of the board. Plaintiff makes no arguments regarding independence of three
directors (Peterson, Shackouls, and Burk). Plaintiff argues that four have disabling
business and pecuniary interests (Armstrong, Figlock, Raymond, and Sinnott).
78
Plaintiff also argues “the modification of fiduciary duties in the [LP] Agreement
only applies to indemnification . . . and therefore protects them only for liability for
monetary damages,” and therefore equitable remedies remain available under the
LP Agreement. Pl.’s Answering Br. 14. Plaintiff seeks no equitable remedies, so I
need not address the issue and decline to do so.
79
Waste derives from common law fiduciary duties; thus, the LP Agreement
forecloses the ability to bring a waste claim. See, e.g., Sample v. Morgan, 914 A.2d
647, 669 (Del. Ch. 2007) (“Claims of waste are sometimes misunderstood as being
founded on something other than a breach of fiduciary duty. Conceived more
realistically, the doctrine of waste is a residual protection for stockholders that
polices the outer boundaries of the broad field of discretion afforded directors by
the business judgment rule.”).
80
The contribution claim depends on an underlying breach of fiduciary duty. Because
there is no such breach, the contribution claim fails.
81
Plaintiff also cites the standard to state a claim for breach of contractual duties under
Brinckerhoff. But Plaintiff fails to argue in a non-conclusory fashion that the
Director Defendants face a substantial likelihood of personal liability for breach of
contractual duties or the implied covenant of good faith and fair dealing. See Pl.’s
Answering Br. 13-16.
18
Plaintiff argues that the remaining three (Goyanes, Symonds, and Temple) lack
independence because they are on the Audit Committee. For the reasons explained
below, I hold that Plaintiff fails to allege particularized facts sufficient to create a
reasonable doubt as to the three Audit Committee members who together with
Peterson, Shackouls, and Burk constitute a majority of the board of directors.
“[T]he independence inquiry requires us to determine whether there is a
reasonable doubt that any one of these . . . directors is capable of objectively making
a business decision to assert or not assert a corporate claim against [defendant].” 82
“Delaware law is clear that directors are presumed to be independent for purposes
of evaluating demand futility.” 83 “Independence means that a director’s decision is
based on the corporate merits of the subject before the board rather than extraneous
considerations or influences.” 84 “Such extraneous considerations or influences may
exist when the challenged director is controlled by another.”85 “Put differently, a
director is not independent if particularized facts support a reasonable inference that
she ‘would be more willing to risk . . . her reputation than risk the relationship with
82
Beam v. Stewart, 845 A.2d 1040, 1049 (Del. 2004).
83
Sciabacucchi v. Liberty Broadband Corp., 2018 WL 3599997, at *11 (Del. Ch. July
26, 2018).
84
Aronson, 473 A.2d at 816.
85
Orman, 794 A.2d at 24.
19
the interested [person].’” 86 This requires an inquiry into “whether a particular
[director] . . . lacks independence because he is controlled by another.” 87
Plaintiff makes no actual independence allegations under the standard I have
articulated. Instead, Plaintiff rehashes its interest arguments. In particular, Plaintiff
claims that the three Audit Committee directors cannot properly consider demand
for two reasons: their membership on the Audit Committee and their cognitive
bias.88 Even if these arguments presented challenges to independence, they would
fail.
Plaintiff argues that Goyanes, Symonds, and Temple “start out as outside
directors who presumably could give impartial consideration to a demand.”89
Plaintiff argues, however, that as members of the Audit Committee they were
“responsible for monitoring the compliance by the Partnership with legal and
regulatory requirements” and because the Company violated legal and regulatory
requirements—which the Audit Committee is responsible for enforcing—“good
reasons exist to doubt the independence of” Goyanes, Symonds, and Temple. 90
86
Sciabacucchi, 2018 WL 3599997, at *11 (quoting Beam, 845 A.2d at 1050).
87
Orman v. Cullman, 794 A.2d 5, 24 (Del. Ch. 2002) (emphasis omitted).
88
See Pl.’s Answering Br. 17-19.
89
Id. at 18.
90
Id. (citation omitted). Plaintiff does not allege particularized facts that the Audit
Committee, the full board, or anyone else at the Company adopted a business
20
It is settled Delaware law that membership on a committee responsible for
decisions subject to challenge does not call into question a director’s impartiality.91
As this Court has held, “the fact that a director previously approved a challenged
transaction is one of many factors that standing alone or without more will not call
strategy to run the Company in a manner violative of the law. But cf. City of
Birmingham Retirement and Relief System v. Good, 177 A.3d 47 (Del. 2017) (Strine,
C.J., dissenting) (“I find that the facts pled raise a pleading stage inference that it
was the business strategy of Duke Energy, accepted and supported by its board of
directors, to run the company in a manner that purposely skirted, and in many ways
consciously violated, important environmental laws . . . . This, fiduciaries of a
Delaware corporation, may not do.” (quoting In re Massey Energy Co., 2011 WL
2176479, at *20 (Del. Ch. May 31, 2011) (gathering sources for the proposition that
“Delaware law does not charter law breakers. Delaware law allows corporations to
pursue diverse means to make a profit, subject to a critical statutory floor, which is
the requirement that Delaware corporations only pursue ‘lawful business’ by ‘lawful
acts.’ As a result, a fiduciary of a Delaware corporation cannot be loyal to a
Delaware corporation by knowingly causing it to seek profit by violating the
law.”))). See also Desimone, 924 A.2d at 934-35 (“[I]t is utterly inconsistent with
one’s duty of fidelity to the corporation to consciously cause the corporation to act
unlawfully. The knowing use of illegal means to pursue profit for the corporation
is director misconduct.”) (citation omitted); Louisiana Mun. Police Empls. Ret. Sys.
v. Pyott, 46 A.3d 313, 352, rev’d on other grounds, 74 A.3d 612 (Del. 2013) (“The
plaintiffs in this case have alleged a direct connection between the Board and a
business plan premised on illegal activity.”).
91
See In re Ezcorp Inc. Consulting Agreement Deriv. Litig., 2016 WL 301245, at *39
n.43 (Del. Ch. Jan. 25, 2016) (quoting Stein v. Orloff, 1985 WL 11561, at *3 (Del.
Ch. May 30, 1985) (“Mere allegations of participation in the approval of the
transaction are similarly insufficient” to establish a lack of independence.); quoting
Kaufman v. Belmont, 479 A.2d 282, 288 (Del. Ch. 1984) (“[T]he mere approval of
a corporate action, absent any allegation of particularized facts supporting a breach
of fiduciary duty or other indications of bias, will not disqualify the director from
subsequently considering a pre-suit demand to rectify the challenged transaction.”)).
21
into question a director’s ability to consider a demand.”92 This “reflects an
expectation that a director can be sufficiently open-minded to reflect on a prior
decision and potentially assess it in a new light.”93 Further, it “has a practical
component: Were the rule otherwise, then absent a change in board composition,
the demand requirements of our law would be meaningless, leaving the clear
mandate of Chancery Rule 23.1 devoid of its purpose and substance.” 94 Thus, the
Director Defendants’ membership on the Audit Committee does not show a lack of
independence.
Relying on In re Ezcorp Inc. Consulting Agreement Derivative Litigation,95
Plaintiff next argues that because the Audit Committee failed in its responsibility to
enforce compliance, “cognitive bias suggest[s] that they would continue to act in a
manner consistent with that course of action as a means of resisting any information
that they had made bad decisions in the past.” 96 This argument misstates Vice
Chancellor Laster’s discussion of cognitive bias in Ezcorp. In Ezcorp, Vice
Chancellor Laster first acknowledges that “[g]enerally speaking, ‘mere directorial
92
Ezcorp, 2016 WL 301245, at *39.
93
Id.94
Id.95
2016 WL 301245 (Del. Ch. Jan. 25, 2016).
96
Pl.’s Answering Br. 18 (citing Ezcorp, 2016 WL 301245, at *40).
22
approval of a transaction, absent particularized facts supporting a breach of fiduciary
duty claim . . . is insufficient to excuse demand.” 97 When the Vice Chancellor
considered demand futility in the context of eight annual agreements for advisory
services between Ezcorp Inc. and Madison Park, an entity owned by Ezcorp Inc.’s
controller, however, he wrote that
for a director to have continued to approve a series of
similar transactions, after an indication that the course of
action might not be in the best interests of the corporation,
deserves some consideration in the Rule 23.1 analysis.
One need not delve deeply into the extensive research on
cognitive bias that has developed since Aronson to learn
that.98
In the case before me, Plaintiff fails to identify an equivalent series of identical or
similar actions (or inactions) that the directors knew or had indications might not be
in the best interest of the corporation. Therefore, Ezcorp is not comparable to this
case.
Plaintiff concedes that it has made no attempt to make demand on the board.99
Because Plaintiff has not adequately pled that demand is futile based on the Director
Defendants’ interestedness or their lack of independence, dismissal is appropriate
under Court of Chancery Rule 23.1.
97
Ezcorp, 2016 WL 301245, at *39.
98
Id. at *40.
99
Compl. 79.
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III. LEAVE TO AMEND IS APPROPRIATE
Because I concluded above that the Complaint should be dismissed for failure
to plead demand futility, the last issue for consideration is whether that dismissal
shall be with or without prejudice as to Plaintiff’s ability to amend its complaint.
Under Rule 15(aaa),
a party that wishes to respond to a motion to dismiss under
Rules 12(b)(6) or 23.1 by amending its pleading must file
an amended complaint, or a motion to amend in
conformity with this Rule, no later than the time such
party’s answering brief in response to either of the
foregoing motions is due to be filed. In the event a party
fails to timely file an amended complaint or motion to
amend under this subsection (aaa) and the Court thereafter
concludes that the complaint should be dismissed under
Rule 12(b)(6) or 23.1, such dismissal shall be with
prejudice (and in the case of complaints brought pursuant
to Rules 23 or 23.1 with prejudice to the named plaintiffs
only) unless the Court, for good cause shown, shall find
that dismissal with prejudice would not be just under all
the circumstances.100
Plaintiff has shown good cause supporting a finding that dismissal with prejudice
would be unjust under these circumstances. Plaintiff argues that approximately two
years have gone by since it filed its complaint and Answering Brief in Opposition to
the Motion to Dismiss. During that time a felony and various misdemeanor criminal
verdicts have come down in California.101 Plaintiff suggests it could use information
100
Ct. Ch. R. 15(aaa).
101
Oral Arg. Tr. 55:4-13.
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from new developments to “make probably a tighter nexus between the [board] and
what’s happened.”102 Plaintiff details some of the new information derived from
testimony in the California Action in its papers. 103 I hold that Plaintiff has shown
good cause that dismissal with prejudice would not be just under all the
circumstances, and Plaintiff may amend its complaint to reflect new developments.
IV. CONCLUSION
For the foregoing reasons, the Complaint is dismissed without prejudice.
IT IS SO ORDERED.
102
Oral Arg. Tr. 54:23-24.
103
Pl.’s Reply in Further Supp. of its Mot. Requesting Judicial Notice of Criminal
Conviction.
25