Bergstein v. Texas Intern. Co.

• Decision Date: 04 June 1982
• Citation: 453 A.2d 467
• Parties: Martin BERGSTEIN and William B. Weinberger, Plaintiffs, v. TEXAS INTERNATIONAL COMPANY, et al., Defendants. . Submitted:
• Court: Court of Chancery of Delaware

Page 467

453 A.2d 467

Martin BERGSTEIN and William B. Weinberger, Plaintiffs, v. TEXAS INTERNATIONAL COMPANY, et al., Defendants.

Court of Chancery of Delaware,

New Castle County.

Submitted: June 4, 1982.

Decided: Oct. 4, 1982.

As Amended: Oct. 12, 1982.

On Defendants' Motion to Dismiss: Denied.

Joseph A. Rosenthal, Morris & Rosenthal, P.A., Wilmington, and Philip R. Brookmeyer, of Arthur N. Abbey, and Lester L. Levy, Wolf, Popper, Ross, Wolf & Jones, New York City, for plaintiffs.

William Prickett, and Michael Hanrahan, Prickett, Jones, Elliott, Kristol & Schnee, Wilmington, and Daniel S. Greenfeld, and Michael L. Hirschfeld, Seyfarth, Shaw, Fairweather & Geraldson, New York City, for defendants.

HARTNETT, Vice Chancellor.

Defendants moved to dismiss this stockholder's derivative suit because plaintiffs did not make a demand for corrective action on the Board of Directors of the corporation before instituting suit and arguably did not allege with sufficient particularity in the complaint the reasons for failing to make a demand. The motion is without merit and must be denied.

I

On July 7, 1981 plaintiff-Weinberger brought this stockholder's derivative action against the corporate defendant, Texas International Company, and the individual defendants, who are directors of Texas International, alleging, inter alia, that there had been a breach of fiduciary duty, a waste of corporate assets, self-dealing, fraudulent nondisclosure of material information in proxy statements, and a failure to exercise proper business judgment. All of the wrongdoings allegedly occurred in connection with certain stock appreciation rights which were granted to some, but not all, of the directors. A similar action was filed by Martin Bergstein on September 4, 1981. By stipulation and order of this Court the two actions were consolidated.

Defendants' motion to dismiss the complaint is based on the claim that plaintiffs' assertions in the complaint as to why no demand was made are not sufficient to excuse a demand before suit as required by Chancery Rule 23.1. The Weinberger complaint, paragraph 41, alleges:

"No demand upon the Board of Directors of the Company to bring this action has been made. Such demand would have been futile, and is not required, inasmuch as all of the present members of the Board are defendants in this action and each defendant has participated in, approved, authorized or acquiesced in various of the acts and transactions complained of herein. Thus, any demand on them to address the wrongs complained of would constitute a demand to bring an action against themselves; and would have been futile in that they could not have been expected to bring such action or to prosecute it with diligence."

Chancery Court Rule 23.1 provides in part:

"... The complaint shall also 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 same language appears in Rule 23.1 of the Federal Rules of Civil Procedure.

II

In considering a motion to dismiss, only matters referred to in the pleadings can be considered. Heit v. Baird, 1st Cir., 567 F.2d 1157, 1159, n. 3 (1977); and the well-plead facts in the complaint must be assumed to be true. Roland Intern. Corp. v. Najjar, Del.Supr., 407 A.2d 1032 (1979); Laventhal, Krekstein, Horwath & Horwath v. Tuckman, Del.Supr., 372 A.2d 168 (1976). Conclusions of law or fact are, however, not assumed to be true or correct unless there exist allegations of specific facts which are sufficient to support the conclusions. Weinberger v. UOP, Inc., Del.Ch., 409 A.2d 1262, 1264 (1979); Cohen v. Mayor and Council of Wilmington, Del.Ch., 99 A.2d 393 (1953).

III

The Courts have enunciated many policy considerations which underlie the demand before suit requirements of Rule 23.1. These include the giving to corporate management an opportunity to correct any wrong or to seek an alternate course of action, thus avoiding expensive litigation; the early termination of meritless causes of action; and the prevention of strike suits. Cramer v. Gen. Tel. & Elec. Corp., 3d Cir., 582 F.2d 259, 275 (1978). Some Courts have also held that a corporation's decision to enforce a right on its own behalf is a matter of business judgment, within the domain of the board of directors. Lewis v. Curtis, 3d Cir., 671 F.2d 779, 784 (1982). Thus, when considering a motion to dismiss where there has been no demand before suit was filed, a Court is confronted with the necessity of balancing the conflicting interests. "It thus appears desirable to us to find a balancing point where bona fide stockholder power to bring corporate causes of action cannot be unfairly trampled on by the board of directors, but the corporation can rid itself of detrimental litigation." Zapata Corp. v. Maldonado, Del.Supr., 430 A.2d 779, 787 (1981).

Each case in which there has been no demand must, therefore, by its very nature, be carefully scrutinized and analyzed according to its own unique set of facts, taking into account the totality of the circumstances and the competing interests.

IV

Courts disagree frequently as to what amount of personal involvement is required before a director comes under a disability which prevents his making an unbiased decision as to whether a claim made on behalf of the stockholders of the corporation has sufficient merit to be pursued, thereby excusing a demand before suit. It is therefore always necessary to consider what underlying circumstances determine which directors are sufficiently independent to be able to make an unprejudiced decision to sue or not to sue. The Second U.S. Circuit Court of Appeals has expressed the opinion that a director who maintains a working relationship with other directors can never be truly independent. Lasker v. Burks, 2d Cir., 567 F.2d 1208, 1212 (1978). And this same Court has held that where all of the directors authorized or approved a challenged transaction, they could not be legally capable of deciding whether the claim had sufficient merit to be pursued by the corporation.

"We are not aware of any case that has determined that directors against whom a claim has been asserted and who have determined that the claim against them should not be pursued, do not stand in a dual relation which prevents the unprejudiced exercise of judgment." (emphasis added) (Citations omitted)

Galef v. Alexander, 2d Cir., 615 F.2d 51, 60 (1980).

On the other hand, the First U.S. Circuit Court of Appeals has vigorously enforced the demand requirement as "... a deliberate departure from the relaxed policy of 'notice' pleading promoted elsewhere in the Federal Rules." Heit v. Baird, supra at 1160.

The Third U.S. Circuit Court of Appeals agrees that the demand requirements of Rule 23.1 should be rigorously enforced, Lewis v. Curtis, supra at 784, Cramer v. Gen. Tel. & Elec. Corp., supra, 582 F.2d at 275, but has expressed the view that the judgment of the directors should not always be immune from judicial scrutiny. "In order for the directors' judgment to merit judicial deference, that judgment must have been made in good faith and independently of any influence of those persons suspected of wrongdoing." Supra 582 F.2d 275.

V

The standards for determination whether a demand upon the directors before suit is filed is required, or is not required because it would constitute an exercise in futility, is determined by the applicable state law. Weiss v. Temporary Inv. Fund, Inc., D.Del. 516 F.Supp. 665, 670, n. 13 (1981).

The Delaware Supreme Court, however, has not specifically set forth the criteria sufficient to excuse a demand on the board of directors prior to commencing suit. In Zapata corp. v. Maldonado, supra, the Delaware Supreme Court discussed the ability of a disinterested committee of directors to move for the termination of a stockholder's derivative action, but did not offer any guidelines which would apply to the present circumstances where no prior demand was made and no disinterested committee determined that the pending action was not in the best interests of the corporation.

In Dann v. Chrysler Corp., Del. Ch., 174 A.2d 696 (1961), this Court considered the issue. That suit was a stockholder's derivative suit in which there were ninety-seven defendants, some of whom were or had been directors, officers, officials or employees of the corporation. The remaining defendants were suppliers of goods or services to Chrysler. Fraud and gross negligence were alleged in the complaint, and, as in the present case, no demand was made on the directors prior to suit being commenced. The defendants moved to dismiss that action, contending that the complaint did not allege with sufficient specificity the reasons for not making a demand. Chancellor Seitz, however, held that a demand was excused:

"Plaintiffs allege as follows:

'13. Demand by plaintiffs that the Board of Directors of Chrysler bring this action was futile because such directors have either approved or ratified the fraudulent schemes, acts and transactions herein complained of, or have participated in the fraudulent acts, or have acquiesced in the said acts, or have shared profits as a result of the said acts. For those reasons it would be useless to request defendants, or any of them, to bring this action for the relief herein sought.'

Without prolonging the matter, I conclude that plaintiffs have at least alleged reasons for not making an effort to secure or demand action from the board. Plaintiffs charge all the board with being active or passive parties to the various alleged fraudulent schemes, etc. It is not normally to be expected that those charged with fraud or gross negligence would be amenable to a request that they take action against themselves.

I conclude that the motion to dismiss on the basis of Rule 23(b) should be denied." (...