United States: Delaware Court Of Chancery Dismisses Derivative Suits Alleging Directors Wrongfully Refused Litigation Demands

Last Updated: December 13 2016
Article by Gregory A. Markel and Heather E. Murray

Seyfarth Synopsis: On November 30, 2016, The Delaware Court of Chancery dismissed two derivative suits filed on behalf of the Bank of New York Mellon ("BNYM"). The companion memorandum and letter opinions reaffirm the heavy burden a plaintiff faces to successfully plead that directors wrongfully refused its litigation demand.

Background

Plaintiff stockholders Murray Zucker and Carole Kops made separate litigation demands on BNYM's board of directors on March 9, 2011 and May 24, 2012, respectively, requesting an investigation of alleged breaches of fiduciary duty stemming from BNYM's foreign exchange practices.  Shortly after receiving the Zucker demand, a Special Committee of independent directors hired counsel Cravath, Swain and Moore LLP to assist it in its investigation of the Zucker demand.  On December 14, 2011, the Company issued its demand refusal letter to Zucker after the Special Committee recommended demand refusal and non-management directors adopted the Special Committee's recommendations.  Plaintiff Zucker first filed suit in New York state court in late 2011 alleging improper demand refusal and breach of fiduciary duties, which was dismissed without prejudice on October 1, 2013.  Zucker then made a books and records demand pursuant to Section 220 seeking documents related to Cravath's investigation and the Special Committee process, which was administratively consolidated with a similar action filed by Plaintiff Kops.  Aided by information provided in the Section 220 actions, Zucker filed his derivative complaint in this action on October 20, 2015, and Kops ultimately filed her complaint on February 10, 2016.  Both plaintiffs sought to recover from certain current and former directors, officers, and employees for losses arising from Bank of New York Mellon's foreign exchange practices, which has resulted in fines and payments from lawsuits and regulatory actions of upwards of one billion dollars.  The Court dismissed both actions for failure to adequately plead that the litigation demands were wrongfully refused on the basis of gross negligence or bad faith.

Takeaways

1. The Existence of and Size of Settlements with Government Agencies Standing Alone Does Not Raise an Inference of Directors' Gross Negligence in Refusing a Demand.  Plaintiff Zucker argued that BNYM's 2015 foreign exchange settlements with government agencies are irreconcilable with the Special Committee's 2011 conclusion that there was no actionable wrongdoing.  Thus, plaintiff claimed it could only be explained by gross negligence on the part of the Special Committee in relying on Cravath's investigation.  The Court emphasized in rejecting this argument that "the applicable question here is not whether the conclusion of Cravath, the Special Committee or the Board was 'wrong'; 'the question is whether the Board was grossly negligent in failing to inform itself, or intentionally acted in disregard of the Company's best interests in deciding not to pursue the litigation the Plaintiff demanded.'"  Here, the Special Committee adequately informed itself in hiring Cravath to conduct an investigation that involved the review of over 10,000 documents, 13 interviews with current and former company officials, and several Special Committee meetings wherein the Committee reviewed Cravath's work before presenting its ultimate conclusions to the board.

2. The Type or Number of Documents Reviewed by the Special Committee Does Not by Itself Support a Finding of Gross Negligence.  Plaintiff Zucker complained that the Special Committee could not absent gross negligence have concluded there was no wrongdoing at BNYM because it reviewed only 28 documents, some of which Plaintiff alleged showed certain defendants knew that BNYM reaped benefits through the foreign exchange practices at issue.  It further argued that no documents supported the conclusion that even assuming actionable wrongdoing it was nonetheless not in BNYM's interests to pursue the demand.  Plaintiff Kops likewise asserted that the Special Committee was not adequately informed.  The Court reaffirmed that complaints about the types of documents reviewed or the choice of persons to be interviewed will not generally support a finding of gross negligence.  Here, the existence of one or a few troubling documents was insufficient for the Court to infer bad faith or gross negligence on the part of the Special Committee in determining not to proceed with legal action.  The Court noted that it is the Special Committee's prerogative to evaluate all other work it and Cravath performed in addition to the troubling documents to reach its conclusion.  The Court in rejecting a related argument that Plaintiff Zucker should receive an inference in his favor due to the fact that Cravath gave an oral presentation and not a written report reaffirmed that a written report is not required by Delaware law.

3. No Requirement that the Special Committee Revisit its Conclusions.  Plaintiffs Zucker and Kops argued that even if the Special Committee's decision to refuse the demand was reasonable when made, subsequent developments rendered it unreasonable and therefore require the Special Committee to revisit its conclusions.  The Court found no general duty for a board to revisit prior demands in perpetuity.

4. Brevity of Special Committee Deliberations or Inconsistencies in Record Alone Do Not Establish Special Committee Failed to Act in Good Faith.  Plaintiff Kops asserted that demand was wrongfully refused because the Special Committee relied wholly on the previous Zucker investigation and that there was no evidence that intervening developments were given consideration.  However, the June 12, 2012 full-board meeting talking points and the June 21, 2012 demand refusal letter indicate that Cravath and the Special Committee discussed developments that have occurred since finishing the prior investigation.  Plaintiff in response argued that there was an inconsistency in the record, since May Special Committee meeting minutes and talking points failed to include this description.  Plaintiff additionally asserted that due consideration by the Special Committee was impossible because the meeting evaluating the demand lasted only around 30 minutes.  The Court in rejecting Plaintiff's argument found that the omissions in the May documentation did not create a reasonable inference that intervening events were not considered in light of affirmative language in contemporaneous documents.  The Court likewise reaffirmed that brevity in directors' deliberations alone does not imply gross negligence.  At the time the decision was reached, the Special Committee had been constituted for over a year and had already become closely familiar with Cravath's investigation.

For a full copy of the Zucker opinion, click here.  For a full copy of the Kops opinion, click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Gregory A. Markel
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.