City of Harper Woods Employees' Ret. v. Olver

• Citation: 589 F.3d 1292
• Decision Date: 29 December 2009
• Docket Number: No. 08-7101.,08-7101.
• Parties: CITY OF HARPER WOODS EMPLOYEES' RETIREMENT SYSTEM, Derivatively on Behalf of BAE Systems Plc., Appellant v. Richard (Dick) L. OLVER, et al., Appellees.
• Court: U.S. Court of Appeals — District of Columbia Circuit

589 F.3d 1292 CITY OF HARPER WOODS EMPLOYEES' RETIREMENT SYSTEM, Derivatively on Behalf of BAE Systems Plc., Appellant
v.
Richard (Dick) L. OLVER, et al., Appellees. No. 08-7101. United States Court of Appeals, District of Columbia Circuit. Argued September 24, 2009. Decided December 29, 2009.

[589 F.3d 1294]

Appeal from the United States District Court for the District of Columbia, No. 1:07-cv-01646.

Eric Alan Isaacson argued the cause for appellant. With him on the briefs were Patrick J. Coughlin, Mark Solomon, and Roger M. Adelman. Jonathan W. Cuneo entered an appearance.

Lawrence Byrne argued the cause for appellees BAE Systems, PLC and the Individual BAE Systems PLC appellees. With him on the brief were Mary K. Warren and Sterling P.A. Darling, Jr.

Christopher T. Lutz, Eric M. Roth, Adir G. Waldman, and Richard L. Brusca were on the brief for appellees the PNC Financial Services Group, Inc. and the Allbrittons.

Before: GINSBURG and HENDERSON, Circuit Judges, and EDWARDS, Senior Circuit Judge.

Opinion for the Court filed by Senior Circuit Judge EDWARDS.

EDWARDS, Senior Circuit Judge:

City of Harper Woods Employees' Retirement System ("Harper Woods"), a pension fund, brought a shareholder derivative suit on behalf of BAE Systems PLC ("BAE") alleging intentional, reckless, and negligent breaches of fiduciary duties and waste of corporate assets by current and former directors and executives of BAE. Harper Woods also sued PNC Financial Services Group, the legal successor to Riggs Bank, as well as Joseph, Barbara, and Robert Allbritton, Riggs' former controlling shareholders and operating executives, for aiding and abetting the alleged breaches of fiduciary duties. The District Court dismissed the suit, holding that English law controls and that Harper Woods has no standing under English law to pursue the instant action. See City of Harper Woods Employees' Ret. Sys. v. Olver, 577 F.Supp.2d 124, 137 (D.D.C.2008). Harper Woods appeals the dismissal of its complaint, contending that the District Court erred in applying English law. Harper Woods also asserts that, if English law in fact bars this derivative suit, a public policy exception to the applicable choice of law rule applies, and that District of Columbia law should thus govern its suit.

We affirm the judgment of the District Court. First, we find that, pursuant to the District of Columbia's internal affairs doctrine, English law applies to this case. Second, we hold that Harper Woods has not shown that its complaint falls outside the rule of Foss v. Harbottle, (1843) 2 Hare 461, 67 E.R. 189, which establishes that the company, not a shareholder, is the proper plaintiff in a suit seeking redress

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for wrongs allegedly committed against the company. Moreover, we find that Harper Woods has failed to demonstrate that an exception to the rule of Foss v. Harbottle applies in this case. Finally, we hold that Harper Woods forfeited its claim that the District Court erred in dismissing its complaint with prejudice.

I. BACKGROUND

BAE is a publicly owned corporation, incorporated in England and Wales, that operates in the United States through its subsidiary BAE Systems, Inc. Harper Woods is a pension fund that owns approximately 3500 American Depository Receipts ("ADR") representing shares of BAE. An ADR "represents ownership in a security issued by a foreign company in foreign markets." City of Monroe Employees Ret. Sys. v. Bridgestone Corp., 399 F.3d 651, 656 n. 2 (6th Cir.2005).

On September 19, 2007, Harper Woods filed a shareholder derivative suit on behalf of BAE against BAE's board of directors, some of whom are also officers of the company, and 12 former officers and directors ("BAE defendants"). Harper Woods named BAE as a nominal defendant in the suit, as is typical with shareholder derivative suits. BAE Systems, Inc., the American subsidiary, was not named as a defendant.

Harper Woods alleged that the BAE defendants engaged in "intentional, reckless, and/or negligent breaches of their fiduciary duties of care, control and candor, involving illegal, improper, and/or ultra vires conduct, including causing BAE to violate the laws of the United States and international business codes and conventions ... by making, or permitting to be made, improper and/or illegal bribes, kickbacks and other payments." Complaint ¶ 1, reprinted in 1 Joint Appendix ("J.A.") 27. According to Harper Woods, the BAE defendants "caused BAE to engage in a pattern and practice of making illegal and improper payments to secure contracts and false and misleading statements to conceal and cover them up," in violation of U.S. and United Kingdom law. Id. ¶ 5, 1 J.A. 29-30. Specifically, Harper Woods alleged that the BAE defendants "undertook illegal and improper conduct ... in breach of their fiduciary duties to BAE," including paying more than $2 billion in bribes and kickbacks to Prince Bandar Bin Sultan of Saudi Arabia in order to obtain a large contract (known as the Al-Yamamah contract) from the Saudi Arabian Ministry of Defense. Id. ¶¶ 6-8, 1 J.A. 30-32. Harper Woods further alleged that the "illegal or improper payments were secretly bargained for at the outset of the Al-Yamamah contract," and that Bandar received most of this money in Washington, D.C., via an account at Riggs Bank. Id. ¶¶ 8-9, 1 J.A. 31-32. Harper Woods sought damages (including punitive damages), an accounting by defendants, and an order directing BAE to undertake certain corporate governance reforms. Id. at 88-89, 1 J.A. 114-15.

The BAE defendants moved to dismiss on three grounds: lack of standing, forum non conveniens, and lack of personal jurisdiction. They submitted with their motion to dismiss a declaration from Martin Moore QC, a barrister in private practice in London appointed Queen's Counsel in 2002. Decl. of Martin Moore QC, ¶ 1 (Feb. 1, 2008), reprinted in 3 J.A. 755; see also BLACK'S LAW DICTIONARY (9th ed.2009) (defining Queen's Counsel as "an elite, senior-level barrister or advocate"). Mr. Moore was "asked to give [his] view as to the circumstances in which, as a matter of English law, a shareholder in an English incorporated company, such as BAE PLC, can bring proceedings derivatively on behalf of that company to remedy alleged

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harm caused to the company concerned." Moore Decl. ¶ 6, 3 J.A. 756. BAE also asked Mr. Moore "to consider from an English law standpoint whether the Plaintiff's allegations in this action are sufficient to establish its right to bring the claims asserted in the Complaint derivatively on behalf of BAE PLC against the named defendants." Id.

Mr. Moore concluded that Harper Woods could not bring its derivative action against the BAE defendants on behalf of BAE. Id. ¶ 80, 3 J.A. 775. He stated that the conduct of the BAE defendant directors came within the English rule of Foss v. Harbottle, which provides that the company is the proper plaintiff when a wrong is done to the company, whether by a director or by others. Id. ¶ 30, 3 J.A. 763. Though the wrongs allegedly committed by the BAE defendants constituted breaches of regulatory, civil, or criminal law, the rule of Foss v. Harbottle concerns itself with alleged wrongs done to the company. Id. ¶¶ 37, 39, 3 J.A. 765. The "essence" of the alleged wrongs done to the company by the director-defendants consisted of "mismanagement and failure of oversight," according to Mr. Moore. Id. ¶ 17, 3 J.A. 759; see also id. ¶ 39, 3 J.A. 765-66. Since the directors' conduct could be ratified by a majority of shareholders, Mr. Moore stated that the company was the proper plaintiff in an action against the directors unless one of the exceptions to the Foss rule applied. Id. ¶¶ 39-40, 3 J.A. 766. Mr. Moore then declared that none of the exceptions applied. See id. ¶¶ 33, 49, 52, 57, 3 J.A. 764, 768-70. Finally, Mr. Moore described remedies for director misconduct, other than derivative suits. Id. ¶¶ 75-79, 3 J.A. 774-75. Under English law, these remedies include statutory rights to demand a shareholder meeting, to submit resolutions at the meeting, and to remove directors by ordinary resolution; to petition the High Court in England for relief on the grounds that the company's affairs have been or are conducted in a way that is unfairly prejudicial to shareholder interests; and in some circumstances to bring a claim directly against the directors accused of misconduct. Id. ¶¶ 76-78, 3 J.A. 774-75.

Opposing BAE's motion to dismiss, Harper Woods submitted a declaration from Paul Girolami QC, a barrister appointed Queen's Counsel in 2002 and appointed in 2006 to sit as a deputy High Court Judge in the Chancery Division of the High Court. Decl. of Paul Girolami QC, ¶¶ 1-2 (Apr. 23, 2008), reprinted in 5 J.A. 1282-83. Mr. Girolami declared, "I have been asked to give my views on, and in response to, the declaration of Mr. Moore. Like him I have made this declaration on the same basis as I would have done were this expert evidence given in English proceedings." Id. ¶ 4, 5 J.A. 1283. Additionally, Mr. Girolami stated, "It is not ... for me to express views on what the Complaint should properly be understood as alleging, nor on whether Mr. Moore's understanding is correct. But it does seem to me possible that his characterisation of the Complaint is too limited...." Id. ¶ 5, 5 J.A. 1283-84. Expressing his views on English company law, Mr. Girolami agreed with Mr. Moore that, as a general matter, a complaint for mismanagement and failure of supervision falls within the rule barring shareholder derivative suits; he stated, however, that shareholders could bring a derivative suit for other breaches beyond failure of oversight if those breaches were incapable of ratification by a majority of shareholders. Id. ¶ 6(3)-(4), 5 J.A. 1284-85. In particular, Mr. Girolami asserted that, under English law, directors may commit breaches of duty, in addition to ultra vires acts, that are incapable of being...