Stein v. Immelt

11-2236-cv
Stein v. Immelt
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.
At a stated Term of the United States Court of Appeals for the Second Circuit, held at the
Daniel Patrick Moynihan United States Courthouse, 500 Pearl Street, in the City of New York,
on the 9th day of July, two thousand twelve,
Present: PIERRE N. LEVAL,
ROSEMARY S. POOLER,
Circuit Judges.1
_____________________________________________________
ALBERT STEIN, DERIVATIVELY O/B/O NOMINAL
DEFENDANT GENERAL ELECTRIC,
Plaintiff-Appellant,
v. 11-2236-cv
JEFFREY R. IMMELT, KEITH S. SHERIN, JAMES I. CASH, JR.,
WILLIAM M. CASTELL, ANN M. FUDGE, CLAUDIO X. GONZALEZ,
SUSAN HOCKFIELD, ANDREA JUNG, ALAN G. LAFLEY, ROBERT
W. LANE, RALPH S. LARSEN, ROCHELLE B. LAZARUS, JAMES
MULVA, ARMED SERVES COMM. SAM NUNN, ROGER S. PENSKE,
ROBERT J. SWIERINGA, ROBERT C. WRIGHT, CHAIRMAN CEO, DOUGLAS A
WARNER, III,
Respondent-Defendant-Appellee,
1
The Honorable Reena Raggi, a member of the original panel recused herself. Therefore,
this case is decided by the two remaining members of the panel pursuant to Second Circuit
Internal Operating Procedure E(b), formerly Section 0.14(b) of the Local Rules of the United
States Court of Appeals for the Second Circuit.
GENERAL ELECTRIC COMPANY, NOMINAL DEFENDANT,
Nominal-Defendant-Appellee.2
_____________________________________________________
Appearing for Appellant: William B. Federman, Federman & Sherwood, Oklahoma City,
O.K.
Appearing for Appellee: Greg A. Danilow, Stephen A. Radin, Evert J. Christensen, Jr.,
Weil, Gotshal & Manges LLP, New York, N.Y.
Appeal from a judgment of the United States District Court for the Southern District of
New York (Holwell, J.).
ON CONSIDERATION WHEREOF, IT IS HEREBY ORDERED, ADJUDGED,
AND DECREED that the judgment of said District Court be and it hereby is AFFIRMED.
Plaintiff-Appellant Albert Stein, a shareholder in General Electric (“GE”), brought a
derivative action charging GE’s board of directors and other company officials with breach of
fiduciary duty, contribution and indemnification, abuse of control, gross mismanagement, waste,
unjust enrichment and misappropriation of information. Defendants-Appellees moved to dismiss
for failure to adequately allege demand futility. After considering both the original complaint
and appellant’s proposed amendments, the district court granted appellees’ motion to dismiss.
We assume the parties’ familiarity with the underlying facts, procedural history, and
specification of issues for review.
“In addition to meeting the generally applicable rules for pleading under the Federal
Rules of Civil Procedure, the pleading of derivative actions must satisfy the requirements set
forth in Rule 23.1” of the Federal Rules of Civil Procedure. Halebian v. Berv, 590 F.3d 195, 204
(2d Cir. 2009). Under Rule 23.1, a derivative complaint must “state with particularity . . . any
effort by the plaintiff to obtain the desired action from the directors or comparable authority and,
if necessary, from the shareholders or members; and . . . the reasons for not obtaining the action
or not making the effort.” Fed.R.Civ.P. 23.1(b)(3).
Where “determination of the sufficiency of allegations of futility depends on the
circumstances of the individual case, the standard of review for dismissals based on
Fed.R.Civ.P. 23.1 is abuse of discretion.” Scalisi v. Fund Asset Mgmt., L.P., 380 F.3d
133, 137 (2d Cir.2004) (internal quotation marks omitted). Where, however, “a challenge
is made to the legal precepts applied by the district court in making a discretionary
determination, plenary review of the district court's choice and interpretation of those
legal precepts is appropriate.” Id.Halebian, 590 F.3d at 203.
2
We direct the Clerk of Court to amend the official caption of this case to reflect the parties’
designations herewith.
2
New York is the state of GE’s incorporation, and so New York law governs this case. See
Scalisi, 380 F.3d at 138. In New York, demand is required before bringing a derivative suit. If
demand is not made, demand futility must be established. Business and Corporation Law §
626(c) sets forth this requirement, stating that in any derivative “action, the complaint shall set
forth with particularity the efforts of the plaintiff to secure the initiation of such action by the
board or the reasons for not making such effort.” In analyzing this provision, the New York
Court of Appeals has held that demand is excused because of futility when
(1) . . . a complaint alleges with particularity that a majority of the board of directors is
interested in the challenged transaction. Director interest may either be self-interest in
the transaction at issue, or a loss of independence because a director with no direct
interest in a transaction is “controlled” by a self-interested director.
(2) . . . a complaint alleges with particularity that the board of directors did not fully
inform themselves about the challenged transaction to the extent reasonably appropriate
under the circumstances . . . .
(3) . . . a complaint alleges with particularity that the challenged transaction was so
egregious on its face that it could not have been the product of sound business judgment
of the directors.
Marx v. Akers, 88 N.Y.2d 189, 200-01 (1996) (internal citations omitted).
Stein has failed to make any allegations at all supporting the inference that a majority of
the directors were self-interested within the meaning of New York law in the challenged
transaction. The test for self-interestedness is not whether a director or someone who controls
him has engaged in or is liable for some sort of misconduct, but whether he will “receive a direct
financial benefit from the transaction which is different from the benefit to shareholders
generally.” Marx, 88 N.Y.2d at 202. Stein has pleaded no connection between the press releases
and other challenged actions and any self-interest by any director, much less a majority of them.
This prong of Marx accordingly does not avail him.
As to the second prong, Stein has failed to make any more availing allegations. The
complaint does not even contain a pro forma attempt to meet this part of Marx. Indeed, if Stein’s
complaint suggests anything, it is that the directors were too informed of the challenged
transactions, i.e., that they were intentional. Stein pleads no facts with particularity supporting
the charge that the board did not fully inform itself as reasonably appropriate under the
circumstances.
Finally, as to whether the “complaint alleges with particularity that the challenged
transaction was so egregious on its face that it could not have been the product of sound business
judgment of the directors,” Stein fares no better. On appeal, he conflates the second and third
prongs and argues that the egregious transaction was the failure to remain reasonably informed
about the press releases. But Marx does not contemplate such a conflation. For purposes of the
third prong, the challenged transaction can only be the complained of press releases and other
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statements. And as to those, Stein has again failed to plead with any particularity that the
challenged transactions were so egregious on their face that they could not have been the product
of sound business judgment. We are mindful in making this determination that New York courts
have suggested it is the “‘rare case[] [in which] a transaction may be so egregious on its face that
board approval cannot meet the test of business judgment.’” Wandel v. Eisenberg, 60 A.D.3d
77, 82 (1st Dep’t 2009).
We have examined the remainder of appellant’s arguments and found them to be without
merit. Accordingly, the judgment of the district court hereby is AFFIRMED.
FOR THE COURT:
Catherine O’Hagan Wolfe, Clerk
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