SWANSON v. WEIL
United States District Court, D. Colorado.
September 26, 2012.
I also note that the result of the advisory say on pay vote cannot rebut the business judgment presumption because it occurred after the Board approved the 2010 executive compensation. Delaware law forbids using events subsequent to the challenged action to second guess a board's business judgment. See In Re Cox Radio S'holders Litig., No. CIV. A 4461, 2010 WL 1806616, at *14 (Del. Ch. May 6, 2010), aff'd, 9 A.2d 475 (2010); Litt v. Wycoff, No. Civ.A. 19083, 2003 WL 1794734, at *9 (Del. Ch. March 28, 2003). As noted in McCarthy, the outcome of a say on pay vote, "which was not known when the challenged decisions were made, does not suggest that in making those decisions, the directors failed to act on an informed basis, in good faith, and in the honest belief that the decisions were in [the company's] best interests." 2011 WL 4386238, at § III.B.2.a.
Delaware law also makes clear that shareholder disagreement with a board's business judgment does not suffice to state a breach of fiduciary duty. Directors "may take good faith actions they believe will benefit stockholders, even if they realize that the stockholders do not agree with them." In re Lear Corp. S'holder Litig., 967 A.2d 640, 655 (Del. Ch. 2008). This is true even where "many, presumably most, shareholders would prefer the board to do otherwise than it has done." Paramount Commc'ns Inc. v. Time Inc., Civ. A. Nos. 10866, 10670, 10935, 1989 WL 79880, at *30 (Del. Ch. July 14, 1989), aff'd, 571 A.2d 1140 (Del. 1989); see also Am. Int'l Rent A Car, Inc. v. Cross, No. 7583, 1984 WL 8204, at *3 (Del. Ch. May 9, 1984) (no per se breach of fiduciary duty "for the Board to act in a manner which it may believe is contrary to the wishes of a majority of the company's stockholders"). This is because "directors, rather than shareholders, manage the business and affairs of the corporation." Aronson, 473 A.2d at 811.
Plaintiff further alleges that demand on the Board should be excused "as each of the directors has been named as a defendant in this action. ..." (Compl. ¶ 87), and that "a majority of the Board either was at fault for the misconduct described herein and/or is liable for the misconduct described herein." (Id. ¶ 93.) As such, Plaintiff claims that "the Board members are disabled as a matter of law from objectively considering any pre-suit demand, rendering demand futile and excused." (Id.) I find that these allegations are conclusory and are insufficient to meet the demand requirement.
"In Delaware mere directorial control of a transaction, absent particularized facts supporting a breach of fiduciary duty claim, or otherwise establishing the lack of independence or disinterestedness of a majority of directors, is insufficient to excuse demand." Aronson, 473 A.2d at 817. The Aronson court noted that demand requirements "would be rendered meaningless if "any board approval of a challenged transaction automatically connotes `hostile interest' and `guilty participation' by directors. Id. at 814. Further, the "mere threat" of personal liability by a director in the derivative action does not render a director interested. Seminaris, 662 A.2d at 1354.
Again I find the Davis case persuasive on this issue. "The implicit premise of the plaintiffs' argument in Davis was "that the self-interest sufficient to trigger demand futility is present whenever board members face the possibility of a lawsuit filed against them in response to a decision or other board action." Davis, 2012 WL 104776 at *5. The court noted that under the plaintiff's reasoning "the fact that presuit demand is itself suggestive of impending liability is sufficient to create the type of self-interest that triggers the demand futility exception." Id. Davis rejected that argument, stating:
This would permit every derivative action plaintiff to argue that demand is futile and need not be made because no board would be able to act objectively in evaluating a presuit demand. Such a result would effectively erase the demand requirement and negate its purpose.