Shearman & Sterling LLP | M&A and Corporate Governance Litigation Blog | Delaware Court Of Chancery Dismisses Pair Of “Demand-Refused” Derivative Suits, Highlighting The Difficulties In Bringing Such Actions <br >  
M&A and Corporate Governance Litigation
This links to the home page
FILTERS
  • Delaware Court Of Chancery Dismisses Pair Of “Demand-Refused” Derivative Suits, Highlighting The Difficulties In Bringing Such Actions 
     

    12/12/2016
    On November 30, 2016, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery dismissed a pair of shareholder derivative suits against nominal defendant The Bank of New York Mellon Corporation (“BNYM”) that sought to hold certain of its current and former directors and officers liable for allegedly causing or permitting certain misconduct to occur in the bank’s foreign exchange business.  Zucker v. Hassell, et al., C.A. No. 11625-VCG (Del. Ch. Ct. Nov. 30, 2016); Kops v. Hassell, et al., C.A. No. 11982-VCG (Del. Ch. Ct. Nov. 30, 2016).  The Court dismissed both complaints for failure to adequately plead that BNYM’s board of directors wrongfully refused the shareholders’ respective litigation demands, further reinforcing the difficulties that would-be plaintiffs face in satisfying the pleading standards required to obtain derivative standing to sue on behalf of a Delaware corporation.  

    The underlying litigation arose from certain allegedly deceptive practices in BNYM’s foreign currency exchange transaction business, which began to come to light in 2011 when several whistleblowers began filing suit against the bank.  From that point forward, the alleged misconduct cost BNYM approximately $1 billion in fines and payments related to lawsuits and regulatory actions, including a March 2015 settlement with the U.S. Department of Justice and New York Attorney General.  The plaintiff in the Zucker action made a litigation demand on the board in March 2011, requesting that the board address alleged breaches of fiduciary duties in connection with BNYM’s foreign exchange practices.  The board formed a special committee of independent directors to evaluate the demand.  The committee then hired outside counsel to perform an investigation on its behalf and advise the committee as it considered the demand.  The special committee ultimately concluded that the claims in plaintiff’s demand lacked a sound legal basis, and that litigation was not in BNYM’s best interest.  The committee and outside counsel then presented to the full BNYM board, recommending that it refuse plaintiff’s litigation demand, which it did, as reflected in a demand refusal letter sent to plaintiff in December 2011.  

    Plaintiff argued that his demand was wrongfully refused because the board’s investigation was deficient.  Specifically, plaintiff argued that a more thorough investigation would have uncovered the conduct that resulted in the 2015 settlements, and that the investigation conducted by outside counsel and the relatively limited materials it presented to the special committee were underwhelming for an inquiry of such scope and importance. 

    In rejecting plaintiff’s claims, the Court emphasized that plaintiff was required to plead particularized facts showing that the board’s investigation and consideration of the demand was grossly negligent or, put differently, that the board’s refusal was based on an investigation so inadequate that it supports an inference of reckless indifference.

    The Court easily concluded that plaintiff’s detailed allegations failed to support a finding that the board was grossly negligent, noting that the board’s decision to delegate the initial evaluation of the demand to the special committee and the committee’s decision to retain and rely upon outside counsel’s investigation and related findings and advice were, to some extent, mutually exclusive with such a finding.  This is because a board’s “informed decision" to engage a competent and unconflicted law firm to conduct an investigation is itself an exercise of business judgment that is entitled to substantial deference under Delaware law.  Moreover, despite questions that plaintiff raised about whether the specific documents uncovered during the investigation and shared with the board actually undercut the board’s conclusion that any claims BNYM might have were baseless, the Court noted that generally criticisms of the particulars of an investigation will not support a finding of gross negligence.

    In the Kops case, plaintiff made her litigation demand in May 2012 after the bank entered into a partial settlement with the U.S. Attorney for the Southern District of New York requiring BNYM to make changes to its foreign exchange disclosures.  The board rejected her demand the following month based on the recommendation of the special committee, which allegedly met for a mere 30 minutes to evaluate the demand.  In dismissing the Kops action, the Court held that the board reasonably relied on the investigation performed in response to the earlier Zucker demand, so long as the board considered the implications of circumstances that had changed since its refusal of the earlier demand.

LINKS & DOWNLOADS