In re Lubrizol Shareholders Litigation , 2017 Ohio 622 ( 2017 )

[Cite as In re Lubrizol Shareholders Litigation, 2017-Ohio-622.]
IN THE COURT OF APPEALS
ELEVENTH APPELLATE DISTRICT
LAKE COUNTY, OHIO
IN RE: LUBRIZOL : OPINION
SHAREHOLDERS LITIGATION
:
CASE NO. 2016-L-026
:
Civil Appeal from the Lake County Court of Common Pleas, Case No. 2011 CV
000684.
Judgment: Affirmed.
Jack Landskroner, Landskroner Grieco Merriman LLC, 1360 West Ninth Street, Suite
200, Cleveland, OH 44113, Phillip A. Ciano, Andrew S. Goldwasser, and Robert A.
West, Jr., Ciano & Goldwasser, LLP, 1610 Midland Building, 101 West Prospect
Avenue, Cleveland, OH 44115, Juan E. Monteverde, Monteverde & Associates PC,
350 Fifth Avenue, 59th Floor, New York, NY 10118, Stephen J. Oddo, Robbins Arroyo
LLP, 60 B Street, Suite 1900, San Diego, CA 92101, and David A. Knotts and David T.
Wissbroecker, Robbins Geller Rudman & Down, LLP, 655 West Broadway, Suite 1900,
San Diego, CA 32101 (For Appellants).
Geoffrey J. Ritts and Marjorie P. Duffy, Jones Day, 901 Lakeside Avenue, Cleveland,
OH 44114 (For Appellees).
DIANE V. GRENDELL, J.
{¶1} Plaintiff-appellant, Emilie J. Sair, derivatively on behalf of nominal
defendant, The Lubrizol Corporation, appeals the Judgment of the Lake County Court of
Common Pleas dismissing the Second Amended Consolidated Derivative and Class
Action Complaint for lack of standing. The issues before this court are whether a
plaintiff bringing a shareholder derivative action loses standing to maintain the action if
he ceases to hold corporate stock during the pendency of the litigation and whether a
plaintiff satisfies the futility exception to Civil Rule 23.1 by claiming that the corporate
directors would not take legal action against themselves. For the following reasons, we
affirm the decision of the court below.
{¶2} On March 16, 2011, Henry Mandel, on Behalf of Himself and All Others
Similarly Situated, and Derivatively on Behalf of The Lubrizol Corporation, filed a Class
and Derivative Action in the Lake County Court of Common Pleas against members of
Lubrizol’s Board of Directors1, Berkshire Hathaway Inc., Ohio Merger Sub, Inc., and The
Lubrizol Corporation as a nominal defendant. The action sought “to enjoin defendants
from further breaching their fiduciary duties in pursuit of a sale of the Company at an
unfair price through an unfair and self-serving process to Berkshire.”
{¶3} On May 10, 2011, the trial court issued a Judgment Entry consolidating
Mandel v. Hambrick, Case No. 11CV000684, with Spletter v. Lubrizol, Case No.
11CV000825, Sair v. Hambrick, Case No. 11CV000807, Jaroslawicz v. Hambrick, Case
No. 11CV000886, and State-Boston Retirement System v. Hambrick, Case No.
11CV001006.
{¶4} On October 31, 2011, Plaintiffs Mandel and Sair filed a Second Amended
Consolidated Derivative and Class Action Complaint, captioned In re Lubrizol
Shareholder Litigation.2 It was alleged that on March 14, 2011, Lubrizol and Berkshire
Hathaway announced a Merger Agreement to sell Lubrizol to Berkshire wherein
1. Individually identified as James L. Hambrick (Chairman of the Board and Lubrizol’s CEO and
President), Gordon D. Harnett, Forest J. Farmer, Sr., Dominic J. Pileggi, Robert E. Abernathy, Harriett
Tee Taggart, James E. Sweetnam, Phillip C. Wildman, Michael J. Graff, Edward P. Campbell, and N.
Mohan Reddy.
2. An initial Consolidated Derivative and Class Action Complaint had been filed on May 27, 2011. The
Second Consolidated Complaint did not include Berkshire Hathaway or Ohio Merger Sub as defendants,
but added David L. Sokol, an executive at Berkshire Hathaway, as a defendant. On January 30, 2013,
Sokol was dismissed as a defendant without prejudice by stipulation of the parties.
2
“Berkshire would acquire all of the outstanding shares of Lubrizol for $9.7 billion, or
$135 per share.” On June 9, 2011, Lubrizol shareholders formally approved the
acquisition.
{¶5} The Consolidated Complaint raised two causes of action, one a class or
direct claim and the other a derivative claim. Both causes of action were for breach of
fiduciary duties: the defendants, Lubrizol’s Board of Directors, “have violated their
fiduciary duties of due care, loyalty, candor, good faith, and independence owed to the
public shareholders of the Company and have acted to put their personal interests
ahead of the interests of the Company * * * by entering into and completing the
Acquisition [of Lubrizol by Berkshire Hathaway] without regard to the fairness of the
transaction to Lubrizol shareholders, particularly considering the positive outlook for the
Company as a standalone entity.”
{¶6} The Consolidated Complaint did not “challenge the specific price of the
Acquisition,” but sought “monetary damages on behalf of Lubrizol shareholders” based
on the defendants’ failure “to ensure a fair process and maximization of shareholder
value.” The Complaint further sought a declaration that the Merger Agreement was
unlawful and unenforceable and the rescission thereof.
{¶7} On February 27, 2012, the Lubrizol defendants filed a Motion to Dismiss
the Second Amended Consolidated Derivative and Class Action Complaint.
Supplemental memoranda and authority were filed on April 27, 2012, September 18,
2013, and June 2, 2014. The defendants sought the dismissal of the first cause of
action (the direct claims) on the grounds that the plaintiffs failed to allege any injury
“separate and distinct” from that of other shareholders so as to create standing to assert
direct or class claims. The defendants similarly sought the dismissal of the second
3
cause of action (the derivative claims) on the grounds that the plaintiffs lacked standing
as they no longer owned Lubrizol stock. Further, the defendants claimed the plaintiffs
failed to make a pre-suit demand as required by Civil Rule 23.1. Finally, the defendants
asserted that all the plaintiffs’ claims are barred by the application of the business
judgment rule.
{¶8} On March 30, 2012, the plaintiffs filed their Memorandum of Law in
Opposition to the Lubrizol Defendants’ Motion to Dismiss. Supplemental authority was
filed on September 5, 2013.
{¶9} On December 10, 2015, the plaintiffs filed a Suggestion of Death of Henry
Mandel.
{¶10} On February 18, 2016, the trial court issued a Judgment Entry, granting
the Lubrizol defendants’ Motion to Dismiss. With respect to the first cause of action, the
court held that “Plaintiffs do not have standing to bring a direct class action claim for
breach of fiduciary duty” since they “have brought no allegations which are not common
to all of Lubrizol’s former shareholders.” With respect to the second cause of action, the
court held that “Plaintiffs do not have standing to bring a derivative claim because they
are not shareholders of the corporation” and because they failed to “make a pre-suit
demand and did not show that a pre-suit demand would be futile as is required pursuant
to Civ.R. 23.1.” With respect to the Lubrizol defendants’ argument that the plaintiffs’
claims were barred by the business judgment rule, the court declined to rule as such
“claims have been rendered moot” on account of “lack [of] standing to bring both a
direct action and a derivative action on behalf of the corporation.”
{¶11} On March 18, 2016, Sair filed a Notice of Appeal. On appeal, she raises
the following assignments of error:
4
{¶12} “[1.] The trial court erred in granting Defendants-Appellees’ motion to
dismiss Plaintiff’s Second Cause of Action by determining that Ohio Civ.R. 23.1
imposes a ‘continuous ownership’ requirement, which would make it impossible for
target shareholders in Ohio to prosecute post-close breach of fiduciary duty claims
challenging a corporate acquisition.”
{¶13} “[2.] The trial court erred by granting Defendants-Appellees’ motion to
dismiss Plaintiff’s Second Cause of Action without addressing and sustaining the
viability of the substantive claim for breach of fiduciary duty.”
{¶14} “[3.] The trial court erred in granting Defendants-Appellees’ motion to
dismiss Plaintiff’s Second Cause of Action by holding that Plaintiff did not sufficiently
plead derivative demand futility.”
{¶15} Dismissal of a complaint based on the plaintiff’s lack of standing to bring
the action is commonly construed as a dismissal for “failure to state a claim upon which
relief can be granted.” Civ.R. 12(B)(6); Wilkins v. Harrisburg, 2015-Ohio-5472, 56
N.E.3d 320, ¶ 39 (10th Dist.). “In order for a court to dismiss a complaint for failure to
state a claim upon which relief can be granted (Civ.R. 12(B)(6)), it must appear beyond
doubt from the complaint that the plaintiff can prove no set of facts entitling him to
recovery.” O’Brien v. Univ. Community Tenants Union, Inc., 42 Ohio St.2d 242, 327
N.E.2d 753 (1975), syllabus.
{¶16} The standard of review typically applied to dismissals for failure to state a
claim is de novo. Corrado v. Lowe, 11th Dist. Geauga No. 2014-G-3239, 2015-Ohio-
1993, ¶ 22; also State ex rel. Butler Twp. Bd. of Trustees v. Montgomery Cty. Bd. of Cty.
Commrs., 2d Dist. Montgomery No. 22664, 2008-Ohio-6542, ¶ 11 (“[w]hen an appellate
5
court is presented with a standing issue, it is generally a question of law, and we
therefore apply a de novo standard of review”).
{¶17} The assignments of error will be considered out of order.
{¶18} In the first assignment of error, Sair argues the trial court erred in holding
that, “in order for the Plaintiffs to bring a derivative claim on behalf of all shareholders of
Lubrizol, Plaintiffs must be shareholders.” Sair cites the Ohio Civil Rule governing
derivative actions by shareholders, which provides: “In a derivative action brought by
one or more legal or equitable owners of shares to enforce a right of a corporation, the
corporation having failed to enforce a right which may properly be asserted by it, the
complaint shall be verified and shall allege that the plaintiff was a shareholder at the
time of the transaction of which he complains or that his share thereafter devolved on
him by operation of law.” Civ.R. 23.1. Sair notes that “the rule contains no requirement
that a stockholder own shares throughout the duration of the litigation.” Appellant’s brief
at 11.
{¶19} Sair also cites two Eleventh District cases in support of her position. In
Cantagallo v. Ashtabula Cty. S. & L. Co., 11th Dist. Ashtabula No. 1023, 1981 WL 4400(June 29, 1981), a shareholder filed a derivative suit alleging mismanagement against
the board of directors in conducting a merger. The complaint was filed prior to the
merger, which occurred during the pendency of the suit. Id. at 1. The directors argued
on appeal that “[a] shareholder-plaintiff in a derivative case loses his standing to
maintain the action if the corporation on whose behalf the claim was made ceases to
exist as a result of a merger with another corporation.” Id. at 6. This court rejected the
argument relying on statutory law that, following a corporate merger, “the surviving or
new entity is liable for all the obligations of each constituent entity, including liability to
6
dissenting shareholders.” R.C. 1701.82(A)(4). This court held that “[a] derivative suit by
Cantagallo is a suit on behalf of the corporation and, thus, is a ‘claim existing, or action
or proceeding pending, by or against’ a constituent corporation.” Cantagallo at 7, citing
R.C. 1701.82(A)(4).
{¶20} Although factually similar, Cantagallo is not dispositive. The argument
considered therein was focused on the fact that the constituent or subsidiary
corporation, on whose behalf a derivative claim is brought, ceased to exist following the
merger. That question is directly addressed by recourse to R.C. 1701.82, which
provides that a corporation’s obligations, as well as claims, survive the merger or
consolidation. The question of what effect the fact that Cantagallo was no longer a
shareholder had on his standing to assert claims on behalf of the subsidiary corporation
was neither asked nor addressed.
{¶21} In Convenient Food Mart Franchising Co. v. Region 3 Advertising Corp.,
11th Dist. Lake No. 99-L-008, 2000 WL 655441 (May 19, 2000), this court applied Civil
Rule 23.1 to a situation where one corporation (Convenient) brought suit against
another non-profit corporation (Region 3) of which it was a member, and its officers,
inter alia, for breach of fiduciary duties. Id. at 1-2. Prior to filing suit, Convenient
withdrew as a member of Region 3. The trial court granted summary judgment in favor
of Region 3, noting that Convenient “did not have the necessary legal or equitable
ownership in Region 3 to maintain its action; that it had withdrawn as a member of
Region 3 four months prior to filing suit; and, had not alleged an independent cause of
action other than injuries as a member of the corporation.” Id. at 3.
{¶22} Relying on Civil Rule 23.1, this court reversed. We held that the Rule only
requires that a derivative action plaintiff be a shareholder “at the time of the transaction
7
of which he complains,” not when the complaint was filed. Id. Thus, Convenient “ha[d]
standing to bring a derivative complaint against Region 3” and its officers. Id.3
{¶23} As with Cantagallo, Convenient Food Mart is not dispositive. Convenient
was not a shareholder in a merged corporation, but a member of another corporation,
both of which continued to exist as independent entities after Convenient’s withdrawal.
These distinctions are material as to whether Sair’s standing to bring a derivative action
was forfeited by virtue of her ceasing to be a shareholder.
{¶24} Although not expressly stated by the trial court, the rule that plaintiffs
bringing derivative claims lose their standing to prosecute those claims if they cease to
be shareholders of the corporation on whose behalf suit is brought derives from
Delaware corporate law. Parfi Holding AB v. Mirror Image Internet, Inc., 954 A.2d 911,
940 (Del.Ch.2008) (“the rule is a bedrock tenet of Delaware law and is adhered to
closely”); Quadrant Structured Prods. Co., Ltd. v. Vertin, 115 A.3d 535, 552
(Del.Ch.2015) (“[w]hen a stockholder wishes to sue derivatively, Delaware common law
requires that the stockholder beneficially own an interest in common stock at the time of
filing and continuously throughout the litigation”).
{¶25} As stated by the Delaware Supreme Court: “To have standing to maintain
a shareholder derivative suit, a plaintiff must be a shareholder at the time of the filing of
the suit and must remain a shareholder throughout the litigation.” Kramer v. W. Pacific
Industries, Inc., 546 A.2d 348, 354 (Del.1988).
3. The Lubrizol defendants would distinguish Convenient Food Mart on the grounds that, despite
withdrawing from Region 3, Convenient continued to assert that it “still had membership rights in the
corporation.” Id. at 3. This claim, whether accurate or not, was immaterial to this court’s holding which
was wholly based on the fact that Convenient was a member at the time of the alleged misconduct by the
defendants.
8
{¶26} The purpose of the rule, commonly known as the “continuous ownership
rule” is “to eliminate abuses associated with a derivative suit.” Lewis v. Anderson, 477
A.2d 1040, 1046 (Del.1984). The logic behind the rule depends on the nature of the
derivative suit, wherein the plaintiff sues not on his own behalf, but on behalf of the
corporation.
A shareholder’s derivative action is brought by a shareholder in the
name of the corporation to enforce a corporate claim. Such a suit
is an exception to the usual rule that a corporation’s board of
directors manages or supervises the management of a corporation.
A derivative action allows a shareholder to circumvent a board’s
refusal to bring a suit on a claim. On the other hand, if the
complaining shareholder is injured in a way that is separate and
distinct from an injury to the corporation, then the complaining
shareholder has a direct action.
(Footnote omitted.) Crosby v. Beam, 47 Ohio St.3d 105, 107, 548 N.E.2d 217 (1989).
Since “the shareholders sue in a representative capacity only, any damages recovered
in the derivative suit inure directly to the corporation,” and “a plaintiff’s derivative claim is
regarded as a property right belonging to the corporation instead of the shareholder.”
Alabama By-Prods. Corp. v. Cede & Co. ex rel. Shearson Lehman Bros., Inc., 657 A.2d
254, 265 (Del.1995).
{¶27} Standing, then, for the derivative action plaintiff, is not so much a matter of
the plaintiff having a personal stake in the outcome of the controversy as a matter of the
plaintiff having an interest in the corporation which justifies the plaintiff’s bringing suit on
9
its behalf. When that interest is extinguished, so is the plaintiff’s justification for
maintaining a derivative action.
{¶28} We are aware of no Ohio decision either expressly adopting or rejecting
the continuous ownership rule. We decline to adopt it in the present case.
{¶29} Bearing in mind the equitable nature of derivative actions, Sair notes a
significant distinction between Ohio and Delaware law rendering the adoption of the rule
in Ohio inequitable. Under Delaware law, claims for breach of fiduciary duty as are
raised here are cognizable as direct action claims: “direct attacks against a given
corporate transaction (attacks involving fair dealing or fair price) give complaining
shareholders standing to pursue individual actions even after they are cashed-out
through the effectuation of a merger.” Kramer, 546 A.2d at 354.
{¶30} Under Ohio law, in contrast, “a director’s breach of a fiduciary duty is
understood to harm the corporation and, as a result, any resulting damages inure to the
corporation” so that “a plaintiff-shareholder is generally required to bring a derivative
action, i.e., a lawsuit on behalf of the corporation.” Heaton v. Rohl, 193 Ohio App.3d
770, 2011-Ohio-2090, 954 N.E.2d 165, ¶ 55 (11th Dist.); Weston v. Weston Paper &
Mfg. Co., 74 Ohio St.3d 377, 379, 658 N.E.2d 1058 (1996) (rejecting the plaintiffs’
argument that breach of fiduciary duty claims against corporate directors should be
allowed as a direct action in the absence of injury separate and distinct from the
corporation: “[i]f any injuries occurred, they occurred to all the other shareholders alike”
and “[t]hat is precisely the situation in which derivative actions are required”). In fact,
this was the basis on which the trial court dismissed the first cause of action in the
Second Consolidated Complaint.
10
{¶31} Thus, under Delaware law, former shareholders who are precluded from
maintaining a derivative action due to lack of standing retain their right to bring fiduciary
claims in direct actions, unlike their counterparts in Ohio. Kramer at 354 (“no one would
assert that a former owner suing for loss of property through deception or fraud has lost
standing to right the wrong that arguably caused the owner to relinquish ownership or
possession of the property”) (citation omitted). Given these circumstances, the trial
court erred in imposing a continuous ownership requirement on Sair.
{¶32} The first assignment of error is with merit.
{¶33} In the third assignment of error, Sair contends the trial court erroneously
concluded that she did not meet the demand requirement of Civil Rule 23.1. According
to the Rule, “[t]he complaint shall * * * allege with particularity the efforts, if any, made
by the plaintiff to obtain the action he desires from the directors * * * and the reasons for
his failure to obtain the action or for not making the effort.” “The demand requirement is
essentially a requirement that a shareholder exhaust his intracorporate remedies before
going to court with a derivative suit.” (Citation omitted.) Grand Council v. Owens, 86
Ohio App.3d 215, 221, 620 N.E.2d 234 (10th Dist.1993).
{¶34} As noted above, the boards of directors are “charged with the
responsibility of making decisions on behalf of the corporation and are the proper
parties to bring a suit on behalf of the corporation or, in their business judgment, to
forego a lawsuit.” Drage v. Procter & Gamble, 119 Ohio App.3d 19, 24, 694 N.E.2d 479(1st Dist.1997). “The shareholders may make a demand on the directors to bring a suit
on behalf of the corporation, but no shareholder has an independent right to bring suit
unless the board refuses to do so and that refusal is wrongful, fraudulent or arbitrary, or
is the result of bad faith or bias on the part of the directors.” Id.11
{¶35} An exception to the Rule has been created which “permits a shareholder
to proceed with an independent suit without making a demand when the shareholder
can demonstrate that the demand would have been futile.” Id. at 25. In this context,
“[f]utility means that the directors’ minds are closed to argument and that they cannot
properly exercise their business judgment in determining whether the suit should be
filed.” Id. “[C]ourts have consistently rejected the idea that demand is always futile
when the directors are targeted as the wrongdoers in the suit the shareholders wish the
corporation to bring; that is, a bare allegation that the directors would not want to sue
themselves or each other does not show that demand would be futile.” Id.; compare
Carlson v. Rabkin, 152 Ohio App.3d 672, 2003-Ohio-2071, 789 N.E.2d 1122, ¶ 18 (1st
Dist.) (“[e]xamples of when a demand would be excused as futile include when all
directors are named as wrongdoers and defendants in a suit, when there is self-dealing
by the directors such that the directors gain directly from the challenged transactions, or
when there is domination of the nondefendant directors by the defendant directors”).
{¶36} “Demand futility is difficult to establish and is not just a procedural
technicality.” Monday v. Meyer, N.D.Ohio No. 1:10CV1838, 2011 WL 5974664, 4 (Nov.
29, 2011); In re Ferro Corp. Derivative Litigation, N.D.Ohio No. 1:04CV1626, 2006 WL
2038659, 5 (Mar. 21, 2006) (“establishing demand futility in Ohio is not an easy task”)
(cases cited).
{¶37} In the present case, we agree with the trial court that Sair did not make a
pre-suit demand and failed to demonstrate that such demand would have been futile.
Despite having named all Lubrizol directors as defendants, Sair has not shown with any
particularity that the directors, with the exception of Lubrizol’s President and CEO,
12
James L. Hambrick, were conflicted or otherwise incapable of exercising reasonable
business judgment.
{¶38} The Second Consolidated Complaint offers the following in support of its
claim of futility: the directors benefited from the wrongdoing; were interested and/or
involved in the merger; would be forced to sue themselves; would expose themselves to
“further civil actions” if they attempted to remedy the wrongs; are incapable of exercising
“independent objective judgment” on account of being, “directly or indirectly, the
recipient[s] of remuneration paid by the Company”; and are “dominated and controlled”
on account of “their association as directors of the Company and their positions as
present or former employees.”
{¶39} There is nothing in the Second Consolidated Complaint to substantiate
these claims. As noted above, the idea that demand is futile merely because the
directors have been identified as wrongdoers has been consistently rejected by the
courts. Similarly, the notions that the directors cannot exercise independent business
judgment because they receive remuneration from the corporation or because they are
directors or employees of the corporation must be rejected as falling far short of
demonstrating demand futility.
{¶40} Sair’s claims against the directors (Hambrick excepted) is that they
violated their fiduciary duties during the merger process by failing to take a more active
part in the negotiations and by deferring to Hambrick who, according to the Complaint,
did benefit substantially from the terms of the Merger Agreement. It is not sufficient to
claim that the directors were “dominated and controlled” without providing some detail
as to why this was so. It is not sufficient to claim that the directors “directly benefitted”
from their breach of fiduciary duties without explaining what this benefit was. It is not
13
sufficient to claim that the directors would be subject to further civil liability if they
attempted to remedy their failure to fulfill their duties without specifying what this liability
would be.
{¶41} Broad and vague allegations of futility have consistently been held not to
satisfy the demand requirement of Civil Rule 23.1. See Monday, 2011 WL 5974664, at
3-7; Ferro Corp., 2006 WL 2038659, at 4-8; Carlson, 152 Ohio App.3d 672, 2003-Ohio-
2071, 789 N.E.2d 1122, at ¶ 19-22; Drage, 119 Ohio App.3d at 26-32, 694 N.E.2d 479;
Doe v. Malkov, 10th Dist. Franklin No. 02AP-90, 2002-Ohio-7358, ¶ 29-30.
{¶42} The third assignment of error is without merit.
{¶43} We decline to consider Sair’s second assignment of error, which faults the
trial court for not considering the substance of her claims for breach of fiduciary duty.
Our conclusion under the third assignment of error that Sair lacked standing renders
this assignment of error moot.
{¶44} Although the trial court erred in concluding Sair lacked standing due to no
longer holding shares of corporate stock, it properly concluded that she lacked standing
by failing to comply with Civil Rule 23.1. Accordingly, the Judgment of the Lake County
Court of Common Pleas, dismissing the Second Consolidated Complaint, is affirmed.
Costs to be taxed against the parties equally.
THOMAS R. WRIGHT, J., concurs,
COLLEEN MARY O’TOOLE, J., concurs in part and dissents in part with a
Concurring/Dissenting Opinion.
________________________________________
14
COLLEEN MARY O’TOOLE, J., concurs in part and dissents in part with a
Concurring/Dissenting Opinion.
{¶45} I concur with the majority’s well-reasoned disposition of Sair’s first
assignment of error. I respectfully dissent regarding its denial of her third assignment of
error. I believe the Second Consolidated Complaint contains sufficient factual
allegations to establish demand futility for purposes of Civ.R. 12(B)(6).
{¶46} Demand futility can be demonstrated for purposes of Civ.R. 23.1 if the
plaintiff pleads facts showing a corporate board of directors was dominated in its
decision making by one or more members who opposed the actions desired by the
plaintiff. Drage, supra, at 26; accord Carlson, supra, at ¶18. The Second Consolidated
Complaint contains sufficient factual allegations that the Lubrizol Board was dominated
by the company CEO, James L. Hambrick, for purposes of showing demand futility.
{¶47} The Second Consolidated Complaint alleges the Lubrizol board believed
the company’s stock was undervalued, and that performance evaluations indicated that
sustained growth would change this. (Second Consolidated Complaint at ¶44-45.) It
alleges the Board was considering other options than a merger with Berkshire
Hathaway, such as continuing the company on a standalone basis, or even acquiring
competitors. (Id. at ¶50, 66.) It alleges the Board was unsatisfied with the offer of $135
per share made by Berkshire Hathaway, and believed that $145 should be offered, but
that Mr. Hambrick argued the Board out of this. (Id. at ¶71.) It alleges that Mr.
Hambrick discouraged the Board from seeking alternative offers for Lubrizol. (Id. at
¶82-83.)
{¶48} Fundamentally, the Second Consolidated complaint alleges facts
indicating the entire process of deciding whether Lubrizol should continue on its own, or
15
sell itself to another company, was dominated by Mr. Hambrick, and that when the
Board disagreed, he would argue the Board into accepting his positions.
{¶49} Self-dealing by a corporate board can demonstrate demand futility under
Civ.R. 23.1. Drage, supra, at 26; accord Carlson at ¶18. The Second Consolidated
Complaint alleges sufficient facts, which, if accepted as true, indicate potential self-
dealing by Mr. Hambrick. It alleges that Berkshire Hathaway promised he would
continue as CEO of Lubrizol, at double the salary; that he would have autonomy in
running the company; that $15,000,000 in unvested stock options he held would vest as
a result of the merger; and that he would receive bonus “performance shares.”
(Second Consolidated Complaint at ¶79-83.)
{¶50} Thus, accepting as true the allegations that Mr. Hambrick dominated the
board, as well as those regarding the benefits he would reap from the merger with
Berkshire Hathaway, Sair sufficiently pleaded demand futility in the context of Civ.R.
23.1 and Civ.R. 12(B)(6).
{¶51} I would find merit in Sair’s third assignment of error, and analyze her
second assignment of error – i.e., whether the trial court should have considered her
argument the Board breached its fiduciary duties to the shareholders.
{¶52} I respectfully concur and dissent.
16