Defeating Derivative Fiduciary Duty Claims at the Pleading Stage
Plaintiffs must allege particularized facts impugning the disinterestedness or independence of at least half of the directors in order to survive a motion to dismiss.
This article was published in the August 5, 2015 edition of the Delaware Business Court Insider. © 2015 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. (ALMReprints.com, 877.257.3382). Reprinted here with permission.
On July 13, in Teamsters Union 25 Health Services & Insurance Plan v. Baiera, C.A. No. 9503-CB (Del. Ch. July 13, 2015), the Delaware Court of Chancery confirmed that, under Delaware law, members of corporate boards of directors may defeat, at the pleading stage, derivative breach of fiduciary duty claims even where the challenged transaction is between the corporation and its controlling stockholder, and is subject to entire fairness review.
Background
In Baiera, Orbitz Worldwide Inc. entered into a multiyear services agreement (referred to in the opinion as the "new agreement") with Travelport, Orbitz's alleged controlling stockholder, under which Travelport was to provide Orbitz with global distribution systems services. Because the new agreement was entered into between Orbitz and its alleged controlling stockholder, Travelport, the transaction constituted a "related party" transaction and was subject to review and approval by Orbitz's audit committee. Orbitz's audit committee approved the new agreement Jan. 29, 2014, and Orbitz entered into the new agreement with Travelport on Feb. 4, 2014.
On April 3, 2014, rather than making a pre-suit demand on the board of directors to bring a suit on behalf of Orbitz challenging the approval of the new agreement, Teamsters Union 25 Health Services & Insurance Plan, a stockholder of Orbitz, brought derivative breach of fiduciary duty claims against Orbitz's board of directors challenging the fairness of the new agreement. The plaintiff stockholder alleged, among other things, that Orbitz's directors breached their fiduciary duties to the company by causing Orbitz to enter into the new agreement with Travelport because the new agreement favored Travelport's unique needs to the detriment of Orbitz. Orbitz's board of directors moved to dismiss the complaint, pursuant to Court of Chancery Rule 23.1, for failure to make a pre-suit demand on the board or to plead facts excusing such a demand.
In opposition to the directors' motion to dismiss, the plaintiff argued, among other things, that its derivative fiduciary duty claims should survive dismissal, as a matter of law, because the new agreement was a conflicted transaction between Orbitz and its controlling stockholder, Travelport, implicating entire fairness review. Stated differently, the plaintiff argued that derivative breach of fiduciary duty claims must always survive a motion to dismiss anytime such claims challenge a controlling stockholder transaction subject to entire fairness review.
The Court's Analysis
The Court of Chancery, while noting the "superficial appeal" of the plaintiff's argument, disagreed. The court explained that Section 141(a) gives directors the managerial power to manage the business and affairs of the corporation, including the power to decide whether to initiate litigation on the corporation's behalf. The court reiterated that because a stockholder derivative action impinges on the directors' managerial authority to institute or refrain from instituting litigation on behalf of the corporation, to survive a motion to dismiss, the plaintiff stockholder must allege particularized facts that "create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand." Thus, in analyzing whether derivative fiduciary duty claims may survive a motion to dismiss, "Delaware law focuses exclusively on whether there is a reasonable doubt that directors could impartially" decide whether to institute or refrain from instituting litigation on behalf of the corporation. The Court of Chancery made clear that simply alleging that a controlling stockholder appeared on both sides of the challenged transaction, thereby triggering entire fairness review, is not enough.
Because the court in Baiera found that at least five of the nine directors in office at the time the stockholder plaintiff initiated its action were disinterested and independent, and therefore able to impartially decide whether to initiate litigation on Orbitz's behalf, the court dismissed the plaintiff's derivative fiduciary duty claims for failure to plead demand futility.
Pleading Sufficient Facts
The Court of Chancery's decision in Baiera reinforces corporate directors' authority to manage the business and affairs of the corporation, including directors' authority to decide whether to bring litigation on the corporation's behalf. Indeed, because stockholder derivative claims impinge upon the board's authority to manage the business and affairs of the corporation, plaintiff stockholders must plead facts sufficient to raise a reasonable doubt as to the board's ability to impartially consider a stockholder demand to bring suit on behalf of the corporation. Thus, for derivative fiduciary duty claims to survive dismissal, it is not enough to simply allege that a controlling stockholder appeared on both sides of the challenged transaction, thereby implicating entire fairness review. Instead, plaintiffs must allege particularized facts impugning the disinterestedness or independence of at least half of the directors in office at the time plaintiffs bring their action. If plaintiffs cannot make that showing, their derivative fiduciary duty claims will be dismissed for failure to plead demand futility.