Lewis v. Aronson
| Citation | 466 A.2d 375 |
| Parties | Harry LEWIS, Plaintiff, v. Senior ARONSON, I.W. Burnham, II, Richard E. Deems, Leo R. Fink, Roger A. Gerber, Theodore P. Glueck, IB. J. Goldschmidt, Saul Duff Kronovet, Robert Schlageter, Poul Andreassen and Meyers Parking System, Inc., Defendants. . Motion to Dismiss Submitted: |
| Decision Date | 14 January 1983 |
| Court | Court of Chancery of Delaware |
The plaintiff, Harry Lewis, filed this stockholder's derivative suit on behalf of the stockholders of Meyers Parking System, Inc. ("Meyers Parking"), a Delaware corporation, naming as defendants Meyers Parking and ten individuals who were directors of Meyers Parking. At this stage of the proceedings the facts as alleged in the complaint must be accepted as being true. The complaint focuses on certain transactions which Meyers Parking entered into with Leo Fink, the Chairman of the Board of Directors of the corporation. Meyers Parking was originally a wholly-owned subsidiary of Prudential Building Maintenance Corp. ("Prudential Building"). In 1978 Prudential Building distributed its Meyers Parking shares to Prudential Building's stockholders, and after this distribution, Mr. Fink, who had been the chief executive officer of Prudential Building, became Chairman of the Board of Meyers Parking. Meyers Parking and Prudential Building had a sharing agreement under which Meyers Parking reimbursed Prudential Building for Mr. Fink's services while Mr. Fink remained the chief executive officer of Prudential Building. In April of 1980, Mr. Fink changed his status with Prudential Building from employee to consultant. At this time, pursuant to its sharing agreement, Meyers Parking reimbursed Prudential Building for 25% of the consulting fees which Prudential Building paid to Mr. Fink.
In January of 1981, Meyers Parking and Mr. Fink entered into a five-year employment contract--thereafter automatically renewed for successive one-year periods--under which Mr. Fink was to receive $150,000 per year base salary plus a bonus of 5% of pre-tax profits of Meyers Parking above $2,400,000. Mr. Fink was 75 years old at the time. The contract contained provisions allowing Mr. Fink or Meyers Parking to terminate the agreement upon Mr. Fink being retained as a consultant at a reduced level of compensation. The agreement contained provisions for death benefit payments in the event of Mr. Fink's death and also provided that if Meyers Parking or Mr. Fink chose to terminate Mr. Fink's employment--thus causing Mr. Fink to be retained at reduced compensation as a consultant--Mr. Fink's compensation as consultant was to remain unaffected by an inability to perform any services. At or about the same time, Meyers Parking made non-interest bearing loans to Mr. Fink which totalled $225,000 which have not yet been repaid.
Plaintiff in this suit seeks cancellation of the contract between Mr. Fink and Meyers Parking and an accounting to Meyers Parking from Mr. Fink for all damages it sustained and for all profits made by any of the defendants as a result of the transactions. Plaintiff alleges that the transactions were a waste of corporate assets and had no valid business purpose and that the amounts of compensation were excessive compared to the few services rendered by Mr. Fink due to his advanced age--particularly since Mr. Fink remains a Prudential Building consultant and therefore cannot provide his best efforts and devote substantially all of his business time to Meyers Parking. Plaintiff charges the transactions--including the loans--were made solely for the purpose of personally benefitting Mr. Fink. Mr. Fink, it is also alleged, dominated and controlled Meyers Parking by virtue of his 47% stock ownership of the company and Mr. Fink is charged with having selected each of the directors of Meyers Parking although the complaint does not set forth any specific facts demonstrating how this was accomplished.
The entire Board of Directors of Meyers Parking was named in the complaint as defendants because, it is alleged, they approved, participated in, or acquiesced in these purportedly wasteful transactions. Plaintiff further alleged that no demand was made upon the Board of Meyers Parking prior to the filing of suit because the participation by the members of the Board in the transactions and the domination of the Board by Mr. Fink meant that a demand would have been asking the directors to sue themselves. Moreover, plaintiff urges that the fact that the defendants have now moved to dismiss this suit demonstrates that a demand before suit would have been futile due to the Board's obvious hostility to these claims.
The defendants moved to dismiss this action because plaintiff did not make a demand for redress of the alleged wrongs on the directors of Meyers Parking before filing this suit and because plaintiff, in the view of defendants, did not allege with particularity facts which, if true, are sufficient to excuse the failure to make the demand.
II
In considering a motion to dismiss, only those matters referred to in the pleadings are to be considered by the Court. All well plead facts will be assumed to be true and all inferences will be viewed in a light most favorable to the plaintiff. Del. State Troopers Lodge, etc. v. O'Rourke, Del.Ch., 403 A.2d 1109 (1979). Conclusions of law or fact, however, will not be assumed to be true without specific allegations of fact which support the conclusion. Bergstein v. Texas Intern. Co., Del.Ch., 453 A.2d 467 (1982), and cases cited therein.
Chancery Court Rule 23.1, which is virtually identical to Fed.R.Civ.P. 23.1, provides in relevant part:
"In a derivative action brought by one or more shareholders or members to enforce a right of a corporation ... [t]he complaint shall ... allege with particularity the efforts, if any, made by the plaintiff to obtain the action he desires from the directors or comparable authority and the reasons for his failure to obtain the action or for not making the effort."
This rule is one of substantive right--not simply a technical rule of pleading. It is designed to give a corporation, on whose behalf a derivative suit is brought, the opportunity to rectify the alleged wrong without suit or to control any litigation brought for its benefit. A plaintiff, therefore, who chooses not to make a demand prior to suit is faced with the responsibility of demonstrating with particularity why his demand on the Board of Directors would have been futile and if he fails in meeting this burden he will find that his suit will be dismissed, in response to a motion to dismiss, even if he has an otherwise meritorious claim. Bergstein v. Texas Intern. Co., supra; Mayer v. Adams, Del.Supr., 174 A.2d 313 (1961). The test for The business judgment rule, which is a presumption that a rational business decision of an officer or director is proper unless facts exist which remove the decision from the protection of the rule, is a potential defense to allegations of Board interestedness and demand futility. Bergstein v. Texas Intern. Co., supra; Lewis v. Curtis, 3d Cir., 671 F.2d 779 (1982). A plaintiff, however, is not required to allege, in order to excuse a demand before suit, that a challenged transaction could not, under any circumstances, be considered the product of business judgment. He must only allege facts which, if true, show that there is a reasonable inference that the business judgment rule is not applicable for purposes of considering a pre-suit demand pursuant to Rule 23.1. In certain circumstances, the challenged transaction, itself, may permit such an inference. However, in order for a plaintiff to overcome the presumption of the business judgment rule, and permit a Court to, at least, draw an inference that the rule is not applicable, there must be allegations of particular facts--and not conclusions--from which such an inference can be drawn. Bergstein v. Texas Intern. Co., supra.
determining whether a demand for redress before suit would have been futile is whether the Board, at the time of the filing of the suit, could have impartially considered and acted upon the demand. Interestedness affects impartiality and may arise in many ways. For example, it may arise from the personal financial interest of the director in the transaction or because he faces the possibility of personal liability due to his having improperly approved the transaction. Bergstein v. Texas Intern. Co., supra.
If the demand before suit requirement seems to pose a difficult burden for a plaintiff, it is well to note that any difficulty can be avoided by the making of a demand for redress before suit, thus giving the directors an opportunity to correct the alleged wrongs and to avoid unnecessary litigation.
III
The plaintiff contends that the fact that the defendants moved to dismiss the complaint demonstrates that the directors are obviously hostile to the claims for redress and have, therefore, always been biased. It is clear that the futility of a demand before suit, however, is...
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