Opinion
Index No. 650654/2014
05-06-2015
STEPHEN BLAU MD MONEY PURCHASE PENSION PLAN TRUST, derivatively on behalf o JPMORGAN CHASE & CO., Plaintiff, v. JAMES DIMON, LINDA B. BAMMANN, JAMES A. BELL, CRANDALL C. BOWLES, STEPHEN B. BURKE, JAMES C. CROWN, TIMOTHY P. FLYNN, LABAN P. JACKSON, JR., MICHAEL A. NEAL, LEE R. RAYMOND and WILLIAM C. WELDON, Defendants, -and- JPMORGAN CHASE & CO., Nominal Defendant.
DECISION AND ORDER Motion Sequence No. 001 ANIL C. SINGH, J. :
Background
On December 12, 2013, plaintiff sent to the Board of Directors of JPMorgan a written demand that the Board cause JPMorgan to sue 30 of its former and current officers and directors for breaches of fiduciary duty spanning a nine-year period from 2005 to the present in connection with a dozen different business activities of the company. The demand expressly did not include a demand to sue five members of the Board (Messrs. Raymond, Weldon, Burke, and Flynn and Ms. Bammann), and the 127-page draft complaint attached to the demand did not include these directors as defendants but instead referred to them as "non-party directors." The demand also included a long list of corporate governance reforms that plaintiff wanted the Board to implement.
The complaint does not allege that the Board ever informed plaintiff that the demand was rejected. To the contrary, the complaint alleges that by letter dated December 19, 2013, defendants acknowledged receipt of the demand and requested that plaintiff provide evidence of its continuous stock ownership through the date of its demand, which plaintiff did on December 23, 2013. On January 7, 2014, the defendants informed plaintiff that the company or the Board would contact plaintiff in due course regarding the demand. In response to a further inquiry from plaintiff on January 13, 2014, the company advised plaintiff by letter dated January 28, 2014 that the Board would review the demand in a careful and diligent manner, that the company could not yet provide a date by which the Board's deliberations would be completed, but that the Board would update plaintiff within the next 60 days. On February 12, 2014, plaintiff sent the Board a letter attaching an updated draft complaint and stating that the Board's recent decision on Mr. Dimon's compensation called into question whether the Board will be able to fairly and independently evaluate the demand, but neither the letter nor the draft complaint alleged that the demand had been refused or asserted by claims against six of the Directors. Plaintiff's February 12 letter also requested the identity of the individuals who would be conducting the investigation of the demand. The company responded by letter dated February 25, 2014, advising that the identity of the Board members who would be conducting the review would be determined at the next scheduled Board meeting, during the week of March 17, 2014, and that the Board or its counsel would update plaintiff after that meeting.
On March 28, 2014, counsel for the Board, sent plaintiff a letter advising of the Board's action at its March 18, 2014 meeting. That letter stated:
The Board, by a resolution of the non-management Directors adopted March 18, 2014, has established an independent committee of the Board (the "Demand Committee") to review and investigate, among other things, the matters and proposed actions referred to in the Demand. The members of the Demand Committee are Lee R. Raymond (who serves as its chairman), Laban P. Jackson, Jr., Linda B. Bammann, and Michael A. Neal. The Demand Committee has retained me and my firm, Shearman & Sterling LLP, to assist in its review and investigation.Two of the members of the Demand Review Committee, Linda B. Bammann and Michael A. Neal, joined the Board in September 2013 and January 2014, respectively, after the alleged misconduct described in the demand and were not named in the demand. The Chairman of the Committee, Lee R. Raymond, also was not named in the demand.
The Demand Committee is proceeding with its work. Because of the number and complexity of the issues raised in the Demand, the Board is currently unable to provide you with a date by which the Demand Committee's review and investigation will be completed and the Board will be in a position to provide a response to your Demand. The Demand Committee, however, undertakes to update you on the progress of the investigation and review in the next 60 days. The Board also invites you to submit any additional analysis, documentation, or other information at your disposal that might facilitate investigation of the matters raised in the Demand.
While the Board was taking these actions to address plaintiff's demand, plaintiff, on February 27, 2014, brought this action against Mr. Dimon, purportedly on behalf of the company. It alleged that the Board had "refused" the demand insofar as it demanded that the Board cause the company to sue Mr. Dimon. Because there was no actual refusal, plaintiff claims that the Board rejected the demand to sue Mr. Dimon by virtue of its decision announced on January 24, 2014 with respect to his 2013 compensation.
In support of its theory of demand refusal, plaintiff alleges that the decision to award Mr. Dimon $20 million in compensation "represent[ed] a 74% raise from his $11.5 million salary in 2012" and was not justified. According to the complaint, the members of the Board thereby "made the determination that they will not take any legal or remedial action as to Dimon in response to the Litigation Demand and have therefore effectively rejected the Litigation Demand as to Dimon."
Plaintiff seeks limited discovery, as expressly permitted under New York law, including New York Civil Practice Law and Rule (CPLR) 3211 (d), to explore the circumstances surrounding the increase in Dimon's compensation, including whether a "clawback" of that compensation is a real possibility as defendants claim on their motion to dismiss. Such discovery will supposedly allow plaintiff an opportunity to respond to the motion to dismiss and allow the court to decide defendants' motion on a complete record.
The complaint alleges four causes of action against Mr. Dimon on behalf of the corporation, for breach of the fiduciary duty of loyalty, "abuse of control," "gross mismanagement," and waste of corporate assets. The complaint also alleges one cause of action against Mr. Dimon and the 10 non-management members of the Board (the Director Defendants) for breach of fiduciary duty based on their alleged "refusal" of the demand to sue Mr. Dimon.
Discussion
On a motion to dismiss for failure to state a cause of action, the court accepts all factual allegations pleaded in plaintiff's complaint as true, and gives plaintiff the benefit of every favorable inference. CPLR 3211 (a) (7); Sheila C. v Povich, 11 AD3d 120 (1st Dept 2004). The court must determine whether "from the [complaint's] four corners[,] 'factual allegations are discerned which taken together manifest any cause of action cognizable at law." Gorelik v Mount Sinai Hosp. Ctr., 19 AD3d 319 (1st Dept 2005) (quoting Guggenheimer v Ginzburg, 43 NY2d 268, 275 (1977)). Vague and conclusory allegations are not sufficient to sustain a cause of action. Fowler v American Lawyer Media, Inc., 306 AD2d 113 (1st Dept 2003).
In order to maintain a derivative action, a plaintiff who has made a demand on the board of directors must plead with particularity that the demand was wrongfully refused. The rule is the same under Delaware and New York law. Kenney v Immelt, 41 Misc 3d 1225(A), 2013 N.Y. Slip Op. 5183(U), at *8 (Sup Ct NY Cnty Nov. 7, 2013); Lerner ex rel. Gen. Elec Co. v Immelt, 523 F. App'x 824, 826 (2d Cir. 2013). The complaint fails to meet this pleading standard because it does not sufficiently allege that the Board refused the demand. Plaintiff contends that the Board has "effectively" refused the demand, but the demand has not been refused, either expressly or implicitly.
In December 2013, plaintiff made a demand upon the Board to bring suit against 30-named current and former officers and directors of the company concerning approximately a dozen topics spanning a period of nearly ten years. After the demand was made, the Board commenced a process to investigate and consider the demand, while keeping plaintiff informed of the status and progress of these efforts, including the appointment of the Demand Review Committee and the Committee's anticipated timetable for conducting its review and making recommendations to the full Board.
Plaintiff does not contend that this process or timetable is unreasonable. Plaintiff's sole argument is that the Board's ordinary course decision regarding Mr. Dimon's annual compensation for 2013, constituted a de facto rejection of the demand as to Mr. Dimon.
Plaintiff cites no authority holding that a demand can be considered refused based on a board's ordinary course of business decision in managing the affairs of the company while the board was also engaged in a process to consider the demand. Under plaintiff's reasoning, once a letter is mailed to a corporation's board demanding that it sue any of the corporation's current officers or directors, the board would have to suspend or stop compensating those officers and directors, lest the board be deemed to have "effectively" refused the demand. The disruption to a company's ongoing business resulting from plaintiff's extraordinarily broad view of "de facto" demand rejection is contrary to the law.
Because the demand has not been rejected, plaintiff cannot maintain this derivative action, including by pursuing discovery.
Plaintiff cannot pursue discovery for the following reasons. Plaintiff's theory that the demand was somehow "effectively" refused does not open the door to discovery under Delaware law. "The law in Delaware is settled that plaintiffs in a derivative suit are not entitled to discovery to assist their compliance with the particularized pleading requirement of Rule 23.1 in a case of demand refusal." Scattered Corp., 701 A2d at 77. Instead, whether a shareholder can assert a corporation's claim is a threshold issue of standing to be decided before a shareholder can take other action. Charal Inv. Co., 1995 WL 684869, at *2.
In Lerner v Prince, the First Department applied Delaware law in denying discovery in a demand-refused derivative action involving Citigroup. The First Department held that: (1) Delaware law governs the question whether plaintiffs seeking to pursue a derivative action on behalf of a Delaware corporation may take discovery; and (2) under Delaware law, "plaintiffs in a derivative suit are not entitled to discovery to assist their compliance with the particularized pleading requirement of [Delaware Court of Chancery] Rule 23.1 in the case of demand refusal." 987 NYS2d at 24 (quotation omitted). The First Department explained the rationale behind this rule:
Were Delaware law to permit discovery in a demand-refused derivative action, it would essentially obviate the directors' authority to decide, under the business judgment rule, whether litigation was in the corporation's best interests - the very reason underlying the demand requirement. . . . Allowing plaintiff to proceed with discovery would thwart the purposes underlying Delaware's law on demand refusal - specifically, its recognition that deciding whether to pursue litigation is a decision entitled to deference under the business judgment rule.Id. at 24-25. Thus, as plaintiff has acknowledged, Delaware law bars discovery at this stage.
Relying on BCL §§ 1319 and 626, plaintiff argues that New York law should govern this derivative action brought on behalf of a Delaware corporation. Plaintiff's argument is contrary to decades of controlling appellate precedent, as well as numerous decisions of the court.
In Lerner, the First Department held as follows:
The court finds nothing in Culligan Soft Water Co. v Clayton Dubelier & Rice, LLC, 118 AD3d 422 (1st Dept 2013) that would suggest the court not follow Lerner. If the court in Culligan wanted to change the clear precedents from Hart to Lerner, it most assuredly would have said just that, and why.
New York choice-of-law rules provide that substantive issues such as issues of corporate governance, including the threshold demand issue, are governed by the law of the state in which the corporation is chartered - here, Delaware (Hart v. General Motors Corp, 129 A.D.2d 179, 182 (1st Dep't 1987), lv. denied, 70 N.Y.2d 608 (1987)). We find that plaintiff's right to discovery in this demand-refused case is a substantive question, rather than a procedural one, and therefore is governed by Delaware law.987 NYS2d at 23-24. The court went on to explain that "the Delaware law on discovery is an integral part of the legal framework governing derivative proceedings; indeed, it is inextricably intertwined with the decision to act or decline to act on a shareholder demand . . . [and] [t]he decision whether to permit discovery once directors have refused a demand is therefore a substantive question, going directly to the basis of the purported derivative suit." Id. at 24.
Lerner is the most recent in a long line of cases applying these principles. In the First Department's seminal decision in Hart v General Motors Corp., the court explained that the internal affairs doctrine is an "abiding" principle of corporate law that satisfies "the need for uniform application of one body of law to corporations and their directors on issues involving the regulation of a corporation's internal affairs." 129 AD2d 179, 184 (1st Dept 1987), lv. denied, 70 NY2d 608 (1987). Hart noted that New York courts have consistently followed the internal affairs doctrine because they recognize that corporations, their shareholders, and their directors "rightfully expect" that the law of the state where they chose to incorporate will govern their decisions - including the decision of whether to pursue litigation. Id. Hart warned that setting aside this doctrine and applying New York law would "ignore[] the risk that every State might seek to judge the same board of directors' decision under different public policy standards. . . ." Id. In so reasoning, Hart relied on decisions of the New York Court of Appeals holding that, in addressing the duties and obligation of directors and officers, "'[t]he primary source of the law in this area ever remains that the of the State which created the corporation.'" Id. at 182-83 (quoting Diamond v Oreamuno, 24 NY2d 494, 503-504 (1969)). Hart also relied on a decision from the United States Supreme Court, which concluded that the law of the state of incorporation must govern a corporation's "internal affairs - matters peculiar to the relationships among or between the corporation and its current officers, directors." Id. at 184 (quoting Edgar v Mite Corp., 457 U.S. 624, 645 (1982)). Under these "well-settled principles," Hart concluded that "derivative claims should be resolved under the law of Delaware, the State of GM's incorporation." Id. at 183.
In the almost thirty years since Hart was decided, the First Department has repeatedly applied the internal affairs doctrine, applying the law of the state of incorporation in many derivative actions involving JPMorgan and other financial institutions. See e.g. CPF Acquisition Co. v CPF Acquisition Co., 255 AD2d 200, 200 (1st Dept 1998); Simon v Becherer, 7 AD2d 66, 71 (1st Dept 2004); Levin v Kozlowski, 846 NYS2d 37, 38-39 (1st Dept 2007); Central Laborers' Pension Fund v Blankfein, 97 NYS2d 282, 286 n. 8 (1st Dept 2013); Siegel v J.P. Morgan Chase & Co., 960 NYS2d 104, 104 (1st Dept 2013); Sec. Police and Fire Prof'ls of Am. Ret. Fund v Mack, 93 AD3d 562, 563 (1st Dept 2012); Venturetek, L.P. v Rand Publ'g Co., 39 AD3d 317, 317 (1st Dept 2007); Teachers Ret. Sys. of La. v Welch, 244 AD2d 231, 231 (1st Dept 1997); David Shaev Profit Sharing Account v Cayne, 24 AD3d 154, 154 (1st Dept 2005).
The court has likewise repeatedly applied the internal affairs doctrine in derivative suits. Most recently, in David Shaev Profit Sharing Account v Riggio, 2014 NY Misc LEXIS 3054 (Sup Ct NY Co July 3, 2014), the court considered a putative derivative action brought by a shareholder of Barnes & Noble, a Delaware corporation. Id. at *2. The court explained:
New York courts follow the 'internal affairs doctrine' to decide which state's substantive law governs matters of director liability. . . . Under New York's choice of law rules, the substantive law of the state of incorporation governs compliance with the demand requirement. Lerner v. Prince, 36 Misc. 3d 297, 305 (Sup. Ct. 2012). . . . As Barnes & Noble is incorporated in Delaware, Plaintiff's claims will be analyzed under Delaware substantive law and, most importantly, Delaware Chancery Court Rule 23.1.Id. at *5-6. The court then granted defendants' motion to dismiss for failure to meet Delaware's demand requirement.
The court applied the same principles in its decision dismissing City of Roseville Employees v Dimon, another derivative action involving JPMorgan. No. 650294/2012 (Sup Ct NY Co July 11, 2012) (Dkt. No. 11). There, the court held: "'One of the abiding principles of the law of corporations is that the issue of corporate governance, including the threshold demand issue, is governed by the law of the State in which the corporation is chartered.' Here, Delaware law applies." Id. at 8.
Beyond Riggio and City of Roseville, the court has applied the same controlling principles in an array of other cases, including Shaev v Pandit, 2014 NY Misc LEXIS 1418 (Sup Ct NY Co Jan. 24, 2014); Nat'l Austl. Bank Ltd. v J.E. Robert Co., 2013 NY Misc LEXIS 2919 (Sup Ct NY Co July 1, 2013); and Bodner v Grunstein, 2011 NY Misc LEXIS 6904 (Sup Ct NY Co July 5, 2011).
Section 1319 is a mere statutory predicate to jurisdiction - i.e. it simply confers jurisdiction upon New York courts over derivative suits on behalf of out-of-state corporations; it does not require application of New York law in such suits.
For example, in Potter v Arrington, the Supreme Court addressed the exact question of how to reconcile BCL 1319, which makes BCL 626 applicable to foreign corporations that do business in New York, with the internal affairs doctrine. 810 NYS2d 312, 316 (Sup Ct Monroe Co. 2006). Potter explained:
[E]ven though under BCL § 1319 a foreign corporation operating within New York is subject to provisions of the state's substantive law, this statute is not a conflict of laws rule and does not compel the application of New York law, rather it must be viewed as the statutory predicate allowing New York to follow its conflict rules in determining the applicable law. Accordingly, the cause of action brought as a derivative action under BCL § 626, while allowed under BCL
§ 1319 for jurisdictional purposes, must still be adjudicated herein by application of Delaware law.
Beyond this, to hold otherwise would raise significant constitutional problems. In VantagePoint Venture Partners 1996 v Examen, Inc., 871 A2d 1108 (Del 2005), the Delaware Supreme Court explained that, "[p]ursuant to the Fourteenth Amendment Due Process Clause, directors and officers of corporations 'have a significant right . . . to know what law will be applied to their actions' and 'stockholders . . . have a right to know by what standards of accountability they may hold those managing the corporation's business and affairs.' Under the Commerce Clause, a state 'has no interest in regulating the internal affairs of foreign corporations.'" Id. at 1113 (quoting McDermott Inc. v Lewis, 531 A2d 206, 216-17 (Del 1987)). Consequently, the "'application of the internal affairs doctrine is mandated by constitutional principles, except in the rarest situations, e.g. when the law of the state of incorporation is inconsistent with a national policy on foreign or interstate commerce.'" Id. (quoting McDermott Inc., 531 A2d at 217)) (quotation marks omitted). In reaching this conclusion, the Delaware high court relied heavily on the U.S. Supreme Court's decision in CTS Corp. v Dynamics Corp. of Am., 481 U.S. 69 (1987), where that Court explained that the "free market system depends at its core upon the fact that a corporation - except in the rarest of situations - is organized under, and governed by, the law of a single jurisdiction, traditionally the corporate law of the State of its incorporation." Id. at 90.
BCL 1319 and 626 do not require the court to disregard the overwhelming precedent, both from New York and elsewhere, holding that Delaware law governs in derivative actions brought on behalf of Delaware corporations.
Plaintiff also argues that this court should ignore the internal affairs doctrine in favor of an "interests" analysis. Yet apart from decisions that arise outside the context of shareholder derivative actions, plaintiff cites only one decision in support of this argument - a 1975 Court of Appeals decision, Greenspun v Lindley, 36 NY2d 473 (1975). In Greenspun, the Court of Appeals applied an interests analysis and held that Massachusetts law would govern claims by shareholders of a Massachusetts business trust against its trustees. But the Court of Appeals was explicit that its decision was applicable only to business trusts, and not to corporations and, in particular, not to disputes between corporations and their shareholders. Id. at 477-78. for corporations like JPMorgan, the Court of Appeals recognized expressly that "the relationship between shareholders and directors of a business corporation would be governed by the law of the State in which the business entity was formed." Id. Thus, contrary to plaintiff's argument, Greenspun supports the conclusion that the internal affairs doctrine applies to the internal affairs of a corporation, consistent with the overwhelming body of precedent discussed above.
Plaintiff seeks "limited discovery" under CPLR 3211 (d) and 3214 "to explore the circumstances surrounding the increase in [CEO James] Dimon's compensation, including whether a 'clawback' of that compensation is a real possibility as defendants claim on their motion to dismiss." Plaintiff requests that the court compel discovery, arguing that "[f]acts essential to justify opposition to the motion to dismiss clearly may exist, in particular whether the Board considered the Demand in connection with decision to raise Dimon's compensation."
Even if New York law governed the issue of discovery here, discovery would still be barred. In Lerner, after finding that Delaware law applied and barred discovery, the First Department nonetheless went on to explain that, even if New York law governed the issue of discovery, discovery in a demand-refused derivative action would still be barred pending a decision on defendants' motion to dismiss. Lerner explained that, under New York law it is presumed that "a board of directors' decision was the exercise of valid business judgement," and therefore, unless a complaint "set[s] forth allegations overcoming the presumption that the board's decision resulted from . . . valid judgment," courts applying New York law "will properly deny a plaintiff's discovery request." Lerner, 987 NYS2d at 25. In other words, unless and until a court finds that plaintiff has sufficiently pleaded wrongful refusal of demand, plaintiff may not seek discovery.
In response to Lerner's clear statement of the law plaintiff cites no New York decision in which a court allowed discovery in a situation like this — where a plaintiff argued that a company's board somehow "de facto" refused a demand that the company sue senior managers by awarding them annual compensation. This lack of support is unsurprising: if plaintiff's position were accepted, a board of directors faced with a demand would effectively have to stop compensating its management to avoid being accused of "de facto" demand refusal and opening the door to discovery.
Plaintiff argues that Lerner's description of New York law on discovery in derivative actions is wrong, and cites a handful of non-New York and older New York cases. But those cases do not support plaintiff's position. For example, plaintiff cites Auerbach v Bennett, 47 NY2d 619 (1979), but in Auerbach the Court of Appeals rejected the discovery plaintiff had requested into "the disinterestedness of the members of the special litigation committee" or "the procedures followed by that committee," finding that plaintiff's discovery requests represented an unnecessary "fishing expedition." Id. at 636. In addition, plaintiff cites Stoner v Walsh, 772 F Supp 790 (SDNY 1991), but again, the court there held that discovery into board matters would "not be permitted" due to plaintiff's failure to plead facts to overcome the "presumption that a board's decision was the exercise of valid business judgment." Id. at 800.
Plaintiff argues as well that it is entitled to discovery under CPLR 3211 (d), but that rule does not apply here. New York courts have made clear that CPLR 3211 (d) is primarily a tool to address jurisdictional issues, not demand refusal in derivative cases. The Court of Appeals has explained that CPLR 3211 (d) is "analogous" to federal court procedure, where courts may "hold in abeyance a motion to dismiss for lack of personal jurisdiction . . . to enable the parties to employ discovery on the jurisdictional issue." Peterson v Spartan Indus., Inc., 33 NY2d 463, 466 (NY 1974) (emphasis added).
In any event, plaintiff has not identified any "facts essential to justify opposition" to defendants' motion. The only documents defendants submitted along with their motion to dismiss were letters and public filings of the type courts routinely rely upon in deciding motions to dismiss derivative actions, not affidavits attesting to facts in the unique possession of JPMorgan. See Scattered Corp., 701 A2d at 74; Levine v Smith, 591 A2d 194, 214 (Del 1991). Indeed, the letters were all previously sent to plaintiff in response to its inquiries. Although plaintiff now argues that defendants have somehow raised "a factual question" as to whether demand has been refused, all defendants have done is to explain why plaintiff has failed to meet its "heightened" burden of pleading wrongful refusal.
While the derivative claims against Mr. Dimon are the focus of this action, the complaint tacks on an additional derivative claim for damages against the current members of the Board for breach of fiduciary duty resulting from their alleged wrongful "refusal" of the demand with respect to Mr. Dimon. As shown above, however, there has been no refusal and thus there is no basis for a wrongful refusal claim. the claim against the Director defendants fails for that simple reason. Moreover, the claim fails for the additional reasons discussed below.
A fundamental problem with plaintiff's claim against the Director Defendants for breach of fiduciary duty based on their alleged wrongful refusal of the Demand is that no such cause of action exists. Although wrongful refusal of a demand may provide grounds for a shareholder to assert a derivative claim even when it has been rejected by the board, it is not a basis for a stand-alone claim against the directors. The Delaware Court of chancery, faced with similar allegations, squarely held that "[w]rongful refusal is not an independent cause of action." Baron v Stiff, 1997 WL 666973, at *1 n. 4 (Del Ch. Oct 17, 1997).
Even if such a cause of action did exist, however, the complaint nonetheless fails to state a claim for breach of fiduciary duty based on the alleged wrongful refusal of the demand. Indeed, the definition of breach is so "strict that it imports the concept of recklessness into the gross negligence standard," requiring a showing of the director's "'reckless indifference to or a deliberate disregard of the whole body of stockholders or actions which are without the bounds of reason.'" Id. at 652 n. 45 (citation omitted). Plaintiff's complaint does not allege facts regarding the Director Defendants' conduct that would come close to meeting this high standard under Delaware law.
In any event, JPMorgan's shareholders, pursuant to Delaware law, have adopted a charter provision that exculpates JPMorgan's directors from claims for any breach of the fiduciary duty of care. Delaware law permits shareholders to adopt a charter provision "eliminating or limiting the liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director," with the sole exceptions for liability for: (1) breach of the director's "duty of loyalty to the corporation or its stockholders"; (2) "acts or omissions not in good faith" or that "involve intentional misconduct or a knowing violation of law"; (3) unlawful payments of dividends and unlawful stock purchases and redemptions; or (4) "any transaction from which the director derived an improper personal benefit." 8 Del. C. § 102(b)(7). In accordance with Section 102(b)(7), JPMorgan's shareholders approved a provision in the company's certificate of incorporation which provides, "[t]o the fullest extent that the General Corporation Law of the State of Delaware . . . permits the limitation or elimination of the liability of directors, no director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director."
Where a plaintiff does not plead conduct within one of the four exceptions set forth above, Section 102(b)(7) exculpates the directors from liability. In re Lear Corp. S'holder Litig., 967 A2d 640, 647-48 (Del. Ch. 2008). As the Delaware Supreme Court has held, "even if the plaintiffs had stated a claim for gross negligence" - and Mr. Blau has not - "such a well-pleaded claim is unavailing because defendants have brought forth the Section 102(b)(7) charter provision that bars such claims. This is the end of the case." Malpiede v Townson, 780 A2d 1075, 1094-95 (Del 2001); accord Stone, 911 A2d at 369-70; In re Walt Disney Co. Deriv. Litig., 906 A2d 27, 64-65 (Del 2006).
The First Department has recognized the importance of a Section 102(b)(7) exculpatory provision. As that court held, "the likelihood of liability is significantly less [where] the corporate charter provides that directors are exculpated from liability to the extent authorized by [8 Del C] § 102(b)(7), i.e. except for claims based on fraudulent, illegal, or bad faith conduct." Sec. Police & Fire Prof'ls of Am. Ret. Fund v Mack, 93 AD3d 562, 565 (1st Dept 2012); see also e.g. Emerald Partners v Berlin, 787 A2d 85, 92 (Del 2001) ("[I]n actions against the directors of Delaware corporations with a Section 102(b)(7) charter provision, a shareholder's complaint must allege well-pled facts that, if true, implicate breaches of loyalty or good faith."); In re NYMEX S'holder Litig., 2009 WL 3206051, at *7 (Del Ch Sept 30, 2009); Liberty Prop. L.P. v 25 Mass. Ave. Prop. LLC, 2009 WL 224904, at *5 n. 21 (Del Ch Jan 22, 2009). To state a non-exculpated claim, a complaint must allege well-pled facts that the directors acted with "scienter; i.e. there was an 'intentional dereliction of duty' or a 'conscious disregard' for their responsibilities, amounting to bad faith." In re Goldman Sachs Grp., Inc. S'holder Litig., 2011 WL 4826104, at *12 (Del Ch Oct 12, 2011) (quoting Walt Disney, 906 A2d at 755).
The complaint makes no effort to meet this standard. The Board, with the overwhelming approval of JPMorgan's stockholders, granted the company's CEO a stock award that vests over several years and is subject to clawback, including if the Demand Review Committee in the course of its review and investigation determines that clawback is appropriate and the Board concurs. That cannot qualify under the tests above.
Count V of the complaint asserts a derivative claim for damages on behalf of JPMorgan against the Director Defendants based on their alleged wrongful refusal of the demand to sue Mr. Dimon. As shown above, the demand has not been refused, and in any event plaintiff fails to state a claim with respect to this cause of action. See Lerner v Prince, 36 Misc 3d at 311 (dismissing claim that was not the subject of a pre-suit demand where plaintiff "fail[ed] to expressly plead in his amended complaint that a demand on these new claims would have been futile").
Because no demand was made with respect to Count V, plaintiff bears an "onerous" burden in alleging that a pre-suit demand would be futile and is thus excused. Levine v Smith, 591 A2d 194, 207 (Del 1991) (overruled on other grounds by Brehm v Eisner, 746 A2d 244 (Del 2000)). To plead demand futility, plaintiff would have to allege with particularity facts raising a reasonable doubt that (1) a majority of the directors are not independent and disinterested, or (2) the challenged board action was a valid exercise of the directors' business judgment, such that a majority of the directors face not simply a "mere threat" but a "substantial likelihood of director liability." Aronson v Lewis, 473 A2d 805, 815 (Del 1984), overruled on other grounds by Brehm v Eisner, 746 A2d 244 (Del 2000).
As noted above, however, the complaint does not even attempt to plead demand futility with respect to Count V. It does not allege particularized facts demonstrating that the 10 non-management directors are not independent, or that they had any financial interests in the transaction at issue. To show a lack of independence for demand excusal purposes, a complaint must plead particularized facts "demonstrating that through personal or other relationships the directors are beholden to the controlling person or so under their influence that their discretion would be sterilized." Zimmerman v Crothall, 2012 WL 707238, at *12 n. 65 (Del Ch Mar 5, 2012) (citation and internal quotation marks omitted), dismissed in part, 2013 WL 5630992 (Del Ch Oct 14, 2013). The facts pleaded must "support the inference that because of the nature of a relationship or additional circumstances . . . the non-interested director would be more willing to risk his or her reputation than risk the relationship with the interested director." Beam ex rel. Martha Stewart Living Omnimedia, Inc. v Stewart, 845 A2d 1040, 1052 (Del 2004). The complaint alleges no such facts.
Nor is this one of the "rare" cases in which the complaint alleges with particularity facts showing that a majority of directors engaged in such "egregious" misconduct that they face not simply a "mere threat" but a "substantial likelihood of director liability." Aronson, 473 A2d at 815; Stone ex rel. AmSouth Bancorp v Ritter, 911 A2d362, 367 (Del 2006). Plaintiff does not state a claim for breach of fiduciary duty. Much less does the complaint plead with particularity facts to show a substantial likelihood of liability on that claim. See e.g. Stone, 911 A2d at 367; Sec. Police, 93 AD3d at 565 (1st Dept 2012). Count V is dismissed on the grounds that the complaint does not allege that demand was made or excused with respect to that claim. Accordingly, it is
ORDERED that defendants' motion to dismiss is granted; and it is further
ORDERED that plaintiff's cross-motion for discovery is denied. Dated: May 6, 2015
ENTER:
/s/_________
J.S.C.