The U.S. Court of Appeals for the Second Circuit yesterday affirmed the dismissal of a shareholder derivative action against investment company, Neuberger Berman. The original action, brought in 2008, arose out of Neuberger Berman's investment in an internet gaming company and an internet gaming payment processor - businesses that relied heavily on internet gaming action in the United States during a time when the legality of internet gaming operations in the U.S. were questionable. After Congress passed the Unlawful Internet Gambling Enforcement Act of 2006, the Neuberger Berman investments saw significant decrease in value because the companies ceased U.S. operations.
The plaintiff originally asserted direct and derivative civil RICO claims; derivative state-law claims for corporate waste, negligence, and breach of fiduciary duty; and direct state-law claims for breach of fiduciary duty and negligence. The defendants moved to dismiss, claiming the plaintiff failed to comply with the demand requirements of a derivative action of Fed. R. Civ. P. 23.1 and of Delaware law. The District Court dismissed without prejudice.
On appeal, the plaintiff argued that the District Court erred in rejecting the sufficiency of the evidence that the board lacked independence and wrongfully refused his demand – specifically, plaintiff claimed the board should not have retained final decision making over the investigation, refused to provide plaintiff with information requested with respect to the investigation and refused the inspection of certain tolling agreements. The defendants cross-appealed arguing that the District Court abused its discretion in dismissing without prejudice, rather than with prejudice. The Second Circuit agreed with the defendants, affirmed the dismissal and remanded with instruction to dismiss the claims with prejudice.
The Second Circuit panel found that, under Delaware law, the board's retention of final decision making was within the board's scope and the production to plaintiff of a summary of the board's process and reasoning was all that was required under the law. Finally, the Panel held that plaintiff was not entitled to inspection of certain tolling agreements.
The case is Gamoran et al. v. Neuberger Berman LLC et al. in the U.S. Court of Appeals for the Second Circuit.
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