Drage v. Procter & Gamble

• Citation: 694 NE 2d 479,119 Ohio App.3d 19
• Decision Date: 26 March 1997
• Docket Number: No. C-960227.,C-960227.
• Parties: DRAGE, Appellant, v. PROCTER & GAMBLE et al., Appellees.
• Court: Ohio Court of Appeals

119 Ohio App.3d 19

694 NE 2d 479

DRAGE, Appellant, v. PROCTER & GAMBLE et al., Appellees.

No. C-960227.

Court of Appeals of Ohio, First District, Hamilton County.

Decided March 26, 1997.

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Murray & Murray, John T. Murray and Patrick G. Warner, for appellant.

Dinsmore & Shohl, Thomas S. Calder, John D. Luken and Steven Benz, for appellee Procter & Gamble.

Graydon, Head & Ritchey, John B. Pinney and R.K. Wellington II, for appellees Edwin L. Artzt, Gordon F. Brunner, Gerald V. Dirvin, Durk I. Jager, Harald Einsmann, John E. Pepper, Erik G. Nelson, Edwin H. Eaton, Jr., and Raymond Mains.

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HILDEBRANDT, Judge.

This case comes before the court on appeal from dismissal pursuant to Civ.R. 12(B)(6) of the amended complaint of plaintiff-appellant Elaine Drage in the Hamilton County Court of Common Pleas. Defendants-appellees in this case are Procter & Gamble ("P&G") and six of its directors and three of its officers ("the defendant directors"): Edwin L. Artzt, Gordon F. Brunner, Gerald V. Dirvin, Durk I. Jager, Harald Einsmann, John E. Pepper, Erik G. Nelson, Edwin H. Eaton, Jr., and Raymond Mains.¹ Appellant filed a shareholder derivative action against P&G and the defendant directors alleging improprieties in certain investments in which P&G and the defendant directors engaged, which resulted in a large financial loss for P&G.

P&G and the defendant directors filed motions to dismiss pursuant to Civ.R. 12(B)(6), arguing that appellant had not properly pleaded all of the requirements of Civ.R. 23.1, governing shareholder derivative actions. Specifically, appellees argued that appellant had failed to allege with particularity any reason that would excuse a precomplaint demand on the remaining directors of P&G who had not been named as defendants and who were not alleged to have directly participated in the challenged transactions.

The lower court granted appellees' motions, and appellant timely appealed to this court.

STANDARD OF REVIEW

In the review of an appeal of a dismissal for failure to state a claim on which relief can be granted pursuant to Civ.R. 12(B)(6), the material allegations of the complaint are taken as admitted, and this court may not affirm a dismissal unless it appears "beyond doubt from the complaint that the plaintiff can prove no set of facts entitling him to recovery." O'Brien v. Univ. Community Tenants Union, Inc. (1975), 42 Ohio St.2d 242, 71 O.O.2d 223, 327 N.E.2d 753. The parties agree that whether demand is excused is a matter within the sound discretion of the court.

APPELLANT'S ASSIGNMENT OF ERROR

The court below found that a demand on the six directors who are defendants in this action would have been futile, as they were alleged to have actively engaged in misconduct related to certain investments. That finding is not challenged on appeal. However, the court found that the appellant did not allege with particularity any reason that demand on the remaining thirteen directors of the corporation would have been futile.

Appellant advances only one assignment of error on appeal:

"The trial court erred, as a matter of law and to the prejudice of the plaintiffappellant, in granting the defendant-appellees' motion to dismiss for failure to make a pre-suit demand on the directors."

Finding this assignment of error to be without merit, we affirm the judgment of the court below.

INTRODUCTION

The directors of a corporation are charged with the responsibility of making decisions on behalf of the corporation and are the proper parties to bring a suit on behalf of the corporation or, in their business judgment, to forgo a lawsuit. R.C. 1701.59(A) states in part that "except where the law, the articles, or the regulations require action to be authorized or taken by shareholders, all of the authority of a corporation shall be exercised by or under the direction of its directors."

Under Ohio law, it is presumed that any action taken by a director on behalf of the corporation is taken in good faith and for the benefit of the corporation. R.C. 1701.59(C)(1); Abrahamson v. Waddell (1992), 63 Ohio Misc.2d 270, 273, 624 N.E.2d 1118, 1120. The board of directors has the primary authority to file a lawsuit on behalf of the corporation. Wadsworth v. Davis (1862), 13 Ohio St. 123, 130-131. The shareholders may make a demand on the directors to bring a suit on behalf of the corporation, but no shareholder has an independent right to bring suit unless the board refuses to do so and that refusal is wrongful, fraudulent, or arbitrary, or is the result of bad faith or bias on the part of the directors. Cooper v. Cent. Alloy Steel Corp. (1931), 43 Ohio App. 455, 183 N.E. 439.

An exception to the general demand rule permits a shareholder to proceed with an independent suit without making a demand when the shareholder can demonstrate that the demand would have been futile.

Civ.R. 23.1 states:

"In a derivative action brought by one or more legal or equitable owners of shares to enforce a right of a corporation, the corporation having failed to enforce a right which may be properly asserted by it, the complaint shall be verified and shall allege * * * with particularity the efforts, if any, made by the plaintiff to obtain the action he desires from the directors and, if necessary, from the shareholders and the reasons for his failure to obtain the action or for not making the effort."

Futility means that the directors' minds are closed to argument and that they cannot properly exercise their business judgment in determining whether the suit should be filed. It is not enough to show that the directors simply disagree with a shareholder about filing a suit. See Kamen v. Kemper Fin. Serv., Inc. (C.A.7, 1991), 939 F.2d 458, 462; Heineman v. Datapoint Corp. (Del.1992), 611 A.2d 950.

"The bedrock of corporate law is the rule that the business and affairs of a corporation are managed by and under the direction of its board." Pogostin v. Rice (Del.1984), 480 A.2d 619, 624. As stated above, Ohio law endorses this principle of corporate law. R.C. 1701.59. All acts of a board of directors of an Ohio corporation are presumed to have been taken in good faith. R.C. 1701.59(C)(1); Abrahamson v. Waddell (1992), 63 Ohio Misc.2d 270, 273, 624 N.E.2d 1118, 1120.

Because of these fundamental precepts of corporate law, courts indulge the fiction (or presumption) that directors can make an unbiased, independent business judgment about whether it would be in the corporation's best interests to sue some or all of the other directors. Thus, courts have consistently rejected the idea that demand is always futile when the directors are targeted as the wrongdoers in the suit the shareholders wish the corporation to bring; that is, a bare allegation that the directors would not want to sue themselves or each other does not show that demand would be futile. See, e.g., Aronson v. Lewis (Del.1984), 473 A.2d 805, 818; Lewis v. Graves (C.A.2, 1983), 701 F.2d 245, 248-249; Heit v. Baird (C.A.1, 1977), 567 F.2d 1157, 1162; Lewis v. Anselmi (S.D.N.Y.1983), 564 F.Supp. 768, 772.

Courts have expressed concern that the acceptance of the argument that it is futile for a shareholder to request a board of directors to sue itself would "abrogate Rule 23.1 and weaken the managerial powers of directors." Aronson v. Lewis, supra, 473 A.2d at 818; Pogostin, supra, 480 A.2d at 624.

Proceeding, then, from this fiction (or presumption) that directors of a corporation can exercise independent, unbiased judgment when determining whether to sue themselves, courts require plaintiffs to show that this presumed independence does not exist. For instance, as discussed below, when all directors are named as wrongdoers/defendants in a suit, futility may exist. Likewise, self-dealing by the board members (where they gain directly from the challenged transactions) or the domination of the nondefendant directors by the defendant directors may show futility. In this case, appellant has pointed to no facts that would show futility as that term is used in the law of shareholder derivative actions.

APPELLANT'S FIRST ARGUMENT IN SUPPORT OF FUTILITY

Appellant first claims in her brief on appeal that demand is excused when the directors disagree with the contentions of the plaintiff prior to filing the lawsuit. The appellant failed to allege this disagreement with any particularity in the amended complaint. There is no indication in the amended complaint that appellant was ever aware of whether the directors disagreed with her contentions prior to the time the suit was filed.

Appellant does allege in the amended complaint that the defendant directors' disagreement with her contentions is shown by the directors' refusal to file a claim under the directors' and officers' insurance policy to recover the loss allegedly occasioned by the directors' alleged wrongful acts. Appellant also claims that a lawsuit instituted against Bankers Trust, an entity involved in the investment transactions, by appellees shows that appellees disagreed with appellant's contention that the individual defendant directors were responsible to P&G for the losses.

The weight of authority establishes that the futility of demand must be determined by looking at the positions of the parties when the derivative suit is initially filed. After a suit is filed, the directors may take action in their defense that could be construed as contrary to the claims of the shareholders, but that might not have been taken if a suit had not been filed. See Shields on Behalf of Sundstrand Corp. v. Erickson (N.D.Ill.1989), 710 F.Supp. 686; Seidel v. Pub. Serv. Co. (D.N.H.1985), 616 F.Supp. 1342; Blasband v. Rales (C.A.3, 1992), 971 F.2d 1034; Kamen v. Kemper (C.A.7, 1991), 939 F.2d 458; In re Storage Technology Corp. Securities Litigation (D.Colo.1992), 804 F.Supp. 1368.

Both of the events referred to by appellant in her first...