Canty Ex Rel. Lululemon Athletica, Inc. v. Day

14-1631
Canty v. Day
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED
ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE
PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A
DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN
ELECTRONIC DATABASE (WITH THE NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY ORDER MUST
SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.
1 At a stated term of the United States Court of Appeals
2 for the Second Circuit, held at the Thurgood Marshall United
3 States Courthouse, 40 Foley Square, in the City of New York,
4 on the 3rd day of April, two thousand fifteen.
5
6 PRESENT: DENNIS JACOBS,
7 DEBRA ANN LIVINGSTON,
8 Circuit Judges,
9 GREGORY H. WOODS,*
10 District Judge.
11
12 - - - - - - - - - - - - - - - - - - - -X
13 THOMAS CANTY, derivatively on behalf
14 of Lululemon Athletica, Inc.,
15 Plaintiff-Appellant,
16
17 -v.- 14-1631
18
19 CHRISTINE McCORMICK DAY, DENNIS J.
20 WILSON, JOHN E. CURRIE, SHEREE
21 WATERSON, MARTHA A.M. MORFITT, MICHAEL
22 CASEY, ROBERT BENSOUSSAN, ROANN
23 COSTIN, WILLIAM GLENN, RHODA M.
*
Judge Gregory H. Woods, of the United States District
Court for the Southern District of New York, sitting by
designation.
1
1 PITCHER, THOMAS G. STEMBERG, JERRY
2 STRITZKE, EMILY WHITE,
3 Defendants-Appellees,
4
5 LULULEMON ATHLETICA, INC.,
6 Nominal Defendant-Appellee.
7 - - - - - - - - - - - - - - - - - - - -X
8
9 FOR APPELLANT: BRETT D. STECKER (with Jeffrey
10 J. Ciarlanto, Christopher L.
11 Nelson, on the brief), The
12 Weiser Law Firm, P.C., Berwyn,
13 Pennsylvania.
14
15 FOR APPELLEES DAY, CURRIE, STEPHEN A. RADIN (with Joseph S.
16 WATERSON, MORFITT, CASEY, Allerhand, Layne S.R. Behrens,
17 BOUNSOUSSAN, COSTIN, Robert S. Ruff III, on the
18 GLENN, PITCHER, STEMBERG, brief), Weil, Gotshal & Manges
19 STRITZKE, and WHITE, and LLP, New York, New York.
20 NOMINAL DEFENDANT-
21 APPELLEE:
22
23 FOR APPELLEE WILSON: Audra Soloway, Paul, Weiss,
24 Rifkind, Wharton & Garrison LLP,
25 New York, New York.
26 Appeal from a judgment of the United States District
27 Court for the Southern District of New York (Forrest, J.).
28
29 UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED
30 AND DECREED that the judgment of the district court be
31 AFFIRMED.
32
33 Thomas Canty appeals from the judgment of the United
34 States District Court for the Southern District of New York
35 (Forrest, J.), dismissing his complaint for failure to
36 satisfy the requirements of Federal Rule of Civil Procedure
37 23.1(b)(3). We assume the parties’ familiarity with the
38 underlying facts, the procedural history, and the issues
39 presented for review.
40
41 Canty filed a derivative action nominally on behalf of
42 Lululemon Athletica, Inc. (“Lululemon”), against several of
43 its officers and directors. The complaint, inter alia,
44 alleged that the directors learned before the public did
45 that Christine McCormick Day was resigning as CEO, and that
2
1 in the interval of one business day, while the resignation
2 was inside information, then-Chairman Dennis J. Wilson sold
3 a large bloc of his stake in the company. The district
4 court granted the defendants’ motion to dismiss for failure
5 to adequately plead either that Canty had made a demand on
6 the Board of Directors or that demand was excused. Fed. R.
7 Civ. P. 23.1. On appeal, Canty contends that his complaint
8 adequately alleged that demand was excused by reason of
9 futility.
10
11 We have stated that “[w]here ‘determination of the
12 sufficiency of allegations of futility depends on the
13 circumstances of the individual case, the standard of review
14 for dismissals based on Fed. R. Civ. P. 23.1 is abuse of
15 discretion.’” Halebian v. Berv, 590 F.3d 195, 203 (2d Cir.
16 2009) (quoting Scalisi v. Fund Asset Mgmt., L.P., 380 F.3d
17 133, 137 (2d Cir. 2004)). However, in review of legal
18 conclusions and the application of legal precepts to the
19 allegations of futility, “plenary review of the district
20 court’s choice and interpretation of those legal precepts is
21 appropriate.” Scalisi, 380 F.3d at 137. We need not, and
22 do not, address whether an abuse of discretion standard is
23 appropriate for dismissals based on the sufficiency of the
24 allegations of futility, because our decision would be the
25 same under de novo review. See id. at 137 n.6.
26
27 Rule 23.1 bars a derivative suit against a corporation
28 without a prior demand that the Board of Directors take
29 remedial action. Fed. R. Civ. P. 23.1(b)(3)(A). The
30 plaintiff can avoid this prerequisite only by pleading “with
31 particularity” his “reasons for . . . not making the
32 effort.” Id. R. 23.1(b)(3)(B); see Kamen v. Kemper Fin.
33 Servs., Inc., 500 U.S. 90, 101-02 (1991). When a plaintiff
34 opts to plead demand futility instead of making a demand,
35 “[t]he substantive law which determines whether demand is,
36 in fact, futile is provided by the state of incorporation of
37 the entity on whose behalf the plaintiff is seeking relief.”
38 Scalisi, 380 F.3d at 138. The relevant law is that of
39 Delaware, the state in which Lululemon is incorporated.
40
41 Under Delaware law, demand futility requires a
42 plaintiff to “allege with particularity that a majority of
43 the board lacks independence or is otherwise incapable of
44 validly exercising its business judgment.” Blaustein v.
45 Lord Baltimore Capital Corp., 84 A.3d 954, 958 (Del. 2014).
46 Those allegations must include “facts specific to each
47 director” to show that the director “could not have
3
1 exercised disinterested business judgment in responding to a
2 demand.” Desimone v. Barrows, 924 A.2d 908, 943 (Del. Ch.
3 2007) (emphasis omitted). Satisfaction of these “stringent
4 requirements of factual particularity” is intended to be “a
5 difficult feat.” Ryan v. Gifford, 918 A.2d 341, 352 n.23
6 (Del. Ch. 2007).
7
8 A plaintiff can plead such futility “by alleging that
9 the Board was disabled because of a substantial risk of
10 personal liability.” Wood v. Baum, 953 A.2d 136, 141 (Del.
11 2008). However, “the mere threat of personal liability
12 . . . is insufficient”; rather, “a reasonable doubt that a
13 majority of shareholders is incapable of considering demand
14 should only be found where ‘a substantial likelihood of
15 personal liability exists.’” Id. at 141 n.11 (quoting
16 Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984), overruled
17 on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del.
18 2000)).
19
20 Canty’s allegations of demand futility fall short of
21 Delaware’s stringent requirements. Some of the futility
22 allegations take aim at the directors of the Audit
23 Committee, which generally oversees related-party
24 transactions and public disclosures. Canty argues that his
25 litigation exposes those directors to personal liability
26 because they intentionally facilitated Wilson’s alleged
27 insider trading. However, Canty does not allege any
28 specific actions or omissions by the Audit Committee members
29 that give rise to a reasonable inference that the Audit
30 Committee did so. Nor has Canty made any other specific
31 allegations that demonstrate a substantial likelihood of
32 personal liability as to the Audit Committee. Accordingly,
33 demand cannot be excused on the basis of his allegations
34 regarding the Audit Committee.
35
36 Another allegation of demand futility is that the Board
37 is beholden to Wilson and thus cannot act independently.
38 The complaint cites Lululemon’s 2012 10-K, which concedes
39 that Wilson owns a large amount of stock and therefore “is
40 able to exercise significant influence.” Although this
41 allegation demonstrates that Wilson has an outsize role at
42 Lululemon, it does not justify an inference that the Board
43 is incapable of exercising its independent business
44 judgment.
45
4
1 The other principal arguments that Canty makes on
2 appeal are specific to Wilson1 or Day, as to whom futility
3 is immaterial in light of the capacity of the rest of the
4 eleven-member Board to independently consider a demand.
5
6 For the foregoing reasons, and finding no merit in
7 Canty’s other arguments, we hereby AFFIRM the judgment of
8 the district court.
9
10 FOR THE COURT:
11 CATHERINE O’HAGAN WOLFE, CLERK
12
1
Since the commencement of Canty’s suit, Wilson has
left his position on the Board of Directors. This change
does not affect our analysis, because a change in board
composition after the filing of the complaint “does not
require a derivative plaintiff to present a demand to the
new board, or to allege facts that would excuse demand as of
the time a plaintiff elects to amend his pleadings.” Harris
v. Carter, 582 A.2d 222, 231 (Del. Ch. 1990).
5