Opinion
No. 09-0309-cv.
December 14, 2009.
Appeal from a December 18, 2008 order of the District Court for the Eastern District of New York (Sandra L. Townes, Judge).
UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that the judgment of the District Court be AFFIRMED.
Alexander Arnold Gershon, Barrack, Rodos Bacine, New York, NY (Regina M. Calcaterra, Gloria Kui Melwani, Barrack, Rodos Bacine, New York, NY, on the brief, Daniel E. Bacine, Barrack, Rodos Bacine, Philadelphia, PA, of counsel), for Plaintiff-Appellant.
David H. Braff (Gandolfo V. DiBlasi, David M.J. Rein, on the brief) Sullivan Cromwell LLP, New York, NY, for Defendants-Appellees.
SUMMARY ORDER
Plaintiff-appellant Jeffrey W. Bader appeals from an order dismissing his stockholder's derivative action, on behalf of nominal-defendant the Goldman Sachs Group, Inc. ("Goldman Sachs"), a Delaware corporation, against defendants-appellees, the directors of Goldman Sachs, based on a proxy statement that allegedly omitted disclosures that the SEC required and contained materially false statements and omissions. Plaintiffs action arises under section 14(a) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. § 78n(a), and the regulations of the United States Securities and Exchange Commission ("SEC"). The District Court dismissed plaintiffs derivative action for failure to make pre-suit demand on the board of directors. Plaintiff timely appealed. We assume the parties' familiarity with the underlying facts, the procedural history, and the issues on appeal.
As a threshold matter, defendants argue that this appeal is moot. Plaintiff responds that this claim falls under an exception to the mootness doctrine because it seeks relief for a wrong that is "capable of repetition, yet evading review." Heldman on Behalf of T.H. v. Sobol, 962 F.2d 148, 157 n. 9 (2d Cir. 1992); see also Honig v. Doe, 484 U.S. 305, 322-23, 108 S.Ct. 592, 98 L.Ed.2d 686 (1988) (recognizing an exception to the mootness doctrine upon finding a "sufficient likelihood that [plaintiff] will again be wronged in a similar way, and that any resulting claim [plaintiff] may have for relief will surely evade . . . review" (internal quotation marks and citation omitted)); Seibert v. Sperry Rand Corp., 586 F.2d 949, 951 (2d Cir. 1978) (recognizing an exception to the mootness doctrine for a wrong capable of recurrence yet evading review). While we recognize that the particular SEC regulation at issue in plaintiffs claims is no longer in effect, the underlying alleged wrongful conduct — providing misleading calculations in proxy statements under section 14 — is a wrong that is "capable of repetition, yet evading review." Heldman, 962 F.2d at 157 n. 9. Plaintiffs appeal is, therefore, not moot.
On appeal plaintiff argues that (1) there is no pre-suit demand requirement for shareholder derivative suits under section 14 of the 1934 Act because proxy misstatements are not a product of business judgment, and (2) accordingly, demand was excused in the instant case because this proxy misstatement was not a product of the valid exercise of business judgment, and (3) in the alternative, demand was excused in this particular action as futile because the directors were either interested or not independent. Defendants respond that section 14 suits are not generally exempt from a demand requirement, and that plaintiff was not excused on either ground for failing to meet that requirement before bringing his derivative suit so the District Court properly dismissed plaintiffs suit. For the reasons stated below, we affirm the District Court's dismissal of plaintiffs suit.
Plaintiff bases both grounds for excusing demand on Aronson v. Lewis, a Delaware case which provides that demand should be excused when a reasonable doubt is created that (1) the directors are disinterested and independent or (2) the challenged transaction was otherwise the product of a valid exercise of business judgment. 473 A.2d 805, 812 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000).
No clear rule has emerged from the district courts that have addressed this issue, and we do not find the need to set forth a bright-line rule at present, as demand under Aronson is an inquiry specific to the challenged transaction. We therefore decline plaintiffs invitation to create a blanket rule under the second prong of Aronson declaring that demand is generally not required in a shareholder derivative suit alleging violations of section 14 of the 1934 Act.
Plaintiff further contends that because the SEC regulation at issue here required "full disclosure," the proxy statement disclosure was not a matter of business judgment so that demand should be excused. We disagree. The particular disclosure at issue on this appeal was a business judgment. The directors had a legal obligation to disclose either the potential realizable value of stock options granted to officers or the present value of the stock options granted. The regulations further provided that if the proxy statement disclosed the present value, it could be calculated under " any option pricing model." 17 C.F.R § 229.402(c)(2)(vi) (Apr. 1, 2006) (emphasis added). The information required to be disclosed could not have been done automatically or without thought. Rather, determining which figure to disclose and which pricing model to apply required discretion and an exercise of business judgment.
Where, as here, directors must use valid business judgment to meet their obligations under section 14, the demand requirement for a derivative shareholder suit cannot be excused. The demand requirement "affords the directors an opportunity to exercise their reasonable business judgment" by upholding the fundamental concept that directors manage the business and affairs of a corporation. Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 533, 104 S.Ct. 831, 78 L.Ed.2d 645 (1984). Although we can anticipate a situation in which demand would be futile, and thus excused under the second prong of Aronson, in a section 14 derivative suit, that is not the case here. We agree with the District Court that demand was necessary here and was therefore not excused.
Plaintiff also argues that he was excused from the demand requirement under the first prong of Aronson because a majority of the directors were either interested or not independent. As Judge Townes stated in her thoughtful and comprehensive opinion, plaintiffs "complaint[,] [even if amended, would] not create a reasonable doubt that the majority of the directors are disinterested and independent, and therefore fails to establish that it would have been futile to make demand upon Goldman's Board of Directors prior to commencing this action." SPA 17 (Order of Dec. 18, 2008), 2008 WL 5274442.
We have considered plaintiffs other arguments and find them to be without merit.
CONCLUSION
In sum, we hold that demand was no' excused for plaintiffs suit under section 14 of the 1934 Act, and because plaintiff failed to make a demand prior to commencing this action, his claim must be dismissed.
Accordingly, we AFFIRM the judgment of the District Court.