Apple Inc. v. Superior Court of Santa Clara Cnty., H044133

• Decision Date: 11 December 2017
• Docket Number: H044133
• Citation: 227 Cal.Rptr.3d 8,18 Cal.App.5th 222
• Court: California Court of Appeals Court of Appeals
• Parties: APPLE INC. et al., Petitioners, v. The SUPERIOR COURT of Santa Clara County, Respondent; The Police Retirement System of St. Louis et al., Real Parties in Interest.

18 Cal.App.5th 222

227 Cal.Rptr.3d 8

APPLE INC. et al., Petitioners,

v. The SUPERIOR COURT of Santa Clara County, Respondent;The Police Retirement System of St. Louis et al., Real Parties in Interest.

H044133

Court of Appeal, Sixth District, California.

Filed December 11, 2017

O'Melveny & Myers, Seth A. Aronson, Los Angeles, Michael F. Tubach, San Francisco, Sidley Austin, Norman J. Blears, Palo Alto for Petitioners Apple Inc., Timothy D. Cook, Millard Drexler, Arthur D. Levinson

None on record for Counsel Respondent Superior Court of Santa Clara County

Robbins Arroyo, Brian J. Robbins, Kevin A. Seely, Gina Stassi, Michael J. Nicoud, San Diego, Cotchett, Pitre & McCarthy, Joseph W. Cotchett, Nancy L. Fineman, Mark C. Molumphy, Camilo Artiga-Purcell, Burlingame for Real Parties in Interest The Police Retirement System of St. Louis, John F. Krawczyk, John Barto

Premo, J.

This writ petition presents an issue of first impression concerning the demand futility pleading requirement in a shareholder derivative suit under California law. The question is whether a plaintiff alleging derivative claims in an amended complaint following the grant of leave to amend must plead demand futility with respect to the board of directors in place as of the filing of the amended complaint or the initial complaint, when the composition of the board of directors has changed in the interim.

Petitioners Apple Inc. (Apple), Timothy Cook, Millard Drexler, and Arthur Levinson (together "petitioners") argue that fundamental principles of corporate law require the court to assess demand futility as to the board in place when the amended complaint is filed, consistent with the rule enunciated by the Delaware Supreme Court in Braddock v . Zimmerman (2006) 906 A.2d 776 ( Braddock ). Respondent Santa Clara County Superior Court declined to apply the Braddock rule, citing the absence of any published California authority on the issue. The superior court overruled petitioners' demurrer after finding that the amended complaint adequately alleged demand futility as to the board in place when the original action was filed. Plaintiffs and real parties in interest the Police Retirement System of St. Louis, John Krawczyk, II, and John Barto (together "plaintiffs") argue that the court applied the correct rule and, in any event, that the amended complaint adequately pleads demand futility regardless of which board of directors is considered.

We conclude that Braddock is consistent in relevant respects with California law and that, under the circumstances of this case, the respondent superior court should have assessed the pleading of demand futility with respect to the board of directors in place at the time the amended complaint was filed.

I. OVERVIEW OF APPLICABLE LEGAL PRINCIPLES

The issues presented herein may be better understood in view of certain principles of corporate law and shareholder derivative suits. We begin with the summary of these principles set forth in Bader v . Anderson (2009) 179 Cal.App.4th 775, 101 Cal.Rptr.3d 821 ( Bader ).

As a general rule, "[m]anagement of a corporation, including decisions concerning the prosecution of actions, is vested in its board of directors.

When the board refuses to enforce corporate claims, however, the shareholder derivative suit provides a limited exception to the rule that the corporation is the proper party plaintiff. In deference to the managerial role of directors and in order to curb potential abuse, the shareholder asserting a derivative claim must make a threshold showing that he or she made a presuit demand on the board to take the desired action. This demand requirement was recognized over 120 years ago by the Supreme Court (see Hawes v . [City of Oakland ] (1881) 104 U.S. 450, 26 L.Ed. 827 ), and is codified in California (see Corp. Code, § 800, subd. (b)(2) ; hereafter, § 800(b)(2) ).^{[1 ]} Under section 800(b)(2), a plaintiff must plead 'with particularity' the attempts that were made to secure board action before bringing suit, or, alternatively, the factual basis upon which the plaintiff believes that a demand on the board was unnecessary, i.e., that a demand would have been futile. Difficulties often arise in shareholder derivative suits in resolving whether the plaintiff has alleged sufficient facts supporting demand futility, thereby obviating the need for a prior demand on the board and the concomitant opportunity for the directors to decide whether to pursue litigation on the corporation's behalf." ( Bader , supra , 179 Cal.App.4th at p. 782, 101 Cal.Rptr.3d 821.)

Because the role of managing the business of the corporation is vested in its board of directors, not its shareholders ( Grosset v . Wenaas (2008) 42 Cal.4th 1100, 1108, 72 Cal.Rptr.3d 129, 175 P.3d 1184 ( Grosset )), a shareholder seeking redress on behalf of the corporation for alleged mismanagement by corporate officers " 'must make an earnest, not a simulated effort, with the managing body of the corporation, to induce remedial action on their part, and this must be apparent to the court.' " ( Bader , supra , 179 Cal.App.4th at p. 789, 101 Cal.Rptr.3d 821.) The presuit demand requirement provides " 'a limited exception to the usual rule that the proper party to bring a claim on behalf of a corporation is the corporation itself, acting through its directors or the majority of its shareholders. ...' " ( Ibid . ) It serves primarily " ' "to protect the managerial freedom of those to whom the responsibility of running the business is delegated ...." ' " ( id . at pp. 789-790, 101 Cal.Rptr.3d 821 ) and "to prevent the abuse of the derivative suit remedy." ( Id . at p. 790, 101 Cal.Rptr.3d 821.)

In accordance with this purpose, California law requires the plaintiff who files a shareholder derivative suit to "allege[ ] in the complaint with particularity plaintiff's efforts to secure from the board such action as plaintiff desires, or the reasons for not making such effort, and allege further that plaintiff has either informed the corporation or the board in writing of the ultimate facts of each cause of action against each defendant or delivered to the corporation or the board a true copy of the complaint which plaintiff proposes to file." ( § 800(b)(2).) Demand futility under section 800(b)(2) thus requires a plaintiff who alleges "reasons for not making such effort" to plead, with particularity, the circumstances excusing her from making a demand. (Ibid .)

Bader explained that few California cases have delineated the circumstances constituting demand futility, but "given the requirement under section 800(b)(2) that allegations be made 'with particularity,' it is clear that general averments that the directors were involved in a conspiracy or aided and abetted the wrongful acts complained of will not suffice .... [Citation.] Likewise, a general claim that there is nationwide structural bias common to corporate boards will not excuse the making of a demand before bringing a derivative suit. [Citation.] Rather, 'the court must be apprised of facts specific to each director from which it can conclude that that particular director could or could not be expected to fairly evaluate the claims of the shareholder plaintiff.' " ( Bader , supra , 179 Cal.App.4th at p. 790, 101 Cal.Rptr.3d 821.)

California courts commonly look to two tests enunciated by the Delaware Supreme Court for determining the adequacy of the pleading of demand futility. Where a decision of the board of directors is challenged in the derivative suit, the Aronson test asks "whether, under the particularized facts alleged, a reasonable doubt is created that: (1) the directors are disinterested and independent [or] (2) the challenged transaction was otherwise the product of a valid exercise of business judgment." ( Aronson v. Lewis (Del. 1984) 473 A.2d 805, 814 ( Aronson );² accord Bader , supra , 179 Cal.App.4th at p. 791, 101 Cal.Rptr.3d 821 ; Oakland Raiders v. National Football League (2001) 93 Cal.App.4th 572, 587, 113 Cal.Rptr.2d 255 ( Oakland Raiders ).) But where "the board that would be considering the demand did not make a business decision which is being challenged in the derivative suit" ( Rales v. Blasband (Del. 1993) 634 A.2d 927, 933-934 ( Rales )), the Rales test asks whether "the particularized factual allegations of a derivative stockholder complaint create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand. If the derivative plaintiff satisfies this burden, then demand will be excused as futile." ( Rales , supra , at p. 934 ; accord Bader , supra , at pp. 791-792, 101 Cal.Rptr.3d 821 [summarizing Rales ].)

These principles are not in debate here. But neither do they answer whether California law requires the plaintiff to reassert demand futility upon the filing of an amended derivative complaint when the composition of the board of directors has changed. In the absence of California authority, the parties dispute the applicability of Delaware case law addressing that scenario, as set forth in Braddock .

The Delaware Supreme Court in Braddock considered under what circumstances a shareholder is required to make demand or plead demand futility when filing an amended derivative complaint. Following the precept that boards of directors manage the affairs of corporations and, by extension, must be given the opportunity through the demand requirement to rectify an alleged wrong or control any litigation that arises, the court ruled that a change in the composition of a previously conflicted board is relevant insofar as it may determine whether, "as of the time the complaint was filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand." ( Braddock , supra , 906 A.2d at p. 785.) The court found this to be true, however, "only as to...