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Delaware Chancery Court Dismisses Derivative Claims For Failure To Allege Wrongful Demand Refusal With Particularity
01/23/2017On January 19, 2017, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery dismissed a derivative suit brought by a shareholder of Mattel, Inc. (“Mattel”), after its board of directors declined to sue management to recover payments made to its former CEO under severance and consulting agreements. Andersen v. Mattel, Inc., C.A. No. 11816-VCMR (Del. Ch. Jan. 19, 2017). Vice Chancellor Montgomery-Reeves found that plaintiff failed to plead sufficiently particularized facts alleging gross negligence or bad faith, where the board made its decision after an investigation of the underlying events and also considered the potential consequences of the contemplated litigation.
Mattel’s former CEO had been entitled to certain severance benefits in the event of a “Covered Termination,” defined as either (i) resignation for good reason or (ii) involuntary termination without cause. In January 2015, the CEO departed Mattel following a substantial decline in stock price and net income. The separation was labeled a “resign[ation]” in a contemporaneous Mattel press release, and a “termination . . . without cause” in its April 2015 proxy statement. The former CEO allegedly was paid $10 million upon separation and $125,000 per month under a twelve-month consulting agreement.
On April 17, 2015, plaintiff sent a demand letter requesting that the board undertake an independent investigation, sue management to recover damages, terminate continuing payments, and “clawback” severance benefits already paid. On September 8, 2015, the board responded with a letter rejecting the demand, noting that it found no evidence to support a claimed breach of fiduciary duties, and adding that “litigation would be a distraction” likely to adversely impact business while “Mattel is trying to navigate a turnaround.” In response to a subsequent request for information from plaintiff, the board disclosed that its investigation entailed interviews by counsel of twenty-four people, including all relevant officers and directors, and the review of approximately 12,400 documents. But the board refused to provide the investigation report. Plaintiff brought suit on December 15, 2015 asserting claims for breaches of fiduciary duty against Mattel’s directors and the former CEO, a claim for unjust enrichment against the former CEO, and a claim for waste against the directors.
Vice Chancellor Montgomery-Reeves dismissed the complaint for failure to allege wrongful demand refusal under Court of Chancery Rule 23.1. The Court emphasized that plaintiff failed to plead “particularized facts” demonstrating that the board’s investigation of the demand was grossly negligent or that it refused the demand in bad faith.
Specifically, the Court explained that plaintiff had “not pled sufficient facts to reasonably infer gross negligence given the amount of effort that went into the board’s investigation.” The Court also discounted plaintiff’s argument that the board’s failure to form a special committee rendered the investigation flawed because plaintiff’s demand on the board amounted to a concession that the board was independent at the time of the demand and plaintiff did not allege any facts suggesting the board later became interested or acted without independence. As to the insufficient allegations of bad faith, the Court found that the complaint did not adequately plead that the board’s determination was “inexplicable” or outside “the bounds of reasonable judgment.”
Notably, the Court also found support for its decision to dismiss in plaintiff’s choice—for “strategic reasons”—to not seek the investigation report prior to filing suit, which plaintiff could have attempted to obtain with a demand pursuant to Section 220 of the Delaware General Corporation Law. According to the Court, “[p]laintiff’s argument that the investigation was inadequate because the report was kept secret might carry more weight if [p]laintiff had made a Section 220 demand.”
