La. Mun. Police Employees' Ret. Sys. v. Wynn

• Decision Date: 18 July 2016
• Docket Number: No. 14–15695,14–15695
• Citation: 829 F.3d 1048
• Parties: Louisiana Municipal Police Employees' Retirement System; Boilermakers Lodge No. 154 Retirement Fund; Maryanne Solak; Excavators Union Local 731 Welfare Fund, Plaintiffs–Appellants, v. Stephen A. Wynn ; Linda Chen; Russell Goldsmith; Ray R. Irani; John A. Moran; Robert J. Miller; Marc D. Schorr; Alvin V. Shoemaker; D. Boone Wayson; Allan Zeman; Elaine P. Wynn; Wynn Resorts Limited, Defendants–Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

829 F.3d 1048

Louisiana Municipal Police Employees' Retirement System; Boilermakers Lodge No. 154 Retirement Fund; Maryanne Solak; Excavators Union Local 731 Welfare Fund, Plaintiffs–Appellants

v.Stephen A. Wynn ; Linda Chen; Russell Goldsmith; Ray R. Irani; John A. Moran; Robert J. Miller; Marc D. Schorr; Alvin V. Shoemaker; D. Boone Wayson; Allan Zeman; Elaine P. Wynn; Wynn Resorts Limited, Defendants–Appellees.

No. 14–15695

United States Court of Appeals, Ninth Circuit.

Argued and Submitted May 12, 2016—San Francisco, California

Filed July 18, 2016

Richard A. Speirs (argued) and Christopher Lometti, Cohen Milstein Sellers & Toll PLLC, New York, New York; Daniel S. Sommers, and Elizabeth A. Aniskevich, Cohen Milstein Sellers & Toll PLLC, Washington, D.C.; for Plaintiff–Appellant Excavators Union Local 731 Welfare Fund.

Felipe J. Arroyo (argued), Shane P. Sanders, and Gina Stassi, Robbins Arroyo LLP, San Diego, California, for Plaintiff–Appellant Boilermakers Lodge No. 154 Retirement Fund.

John T. Jasnoch, Scott + Scott Attorneys at Law LLP, San Diego, California, for Plaintiff–Appellant Louisiana Municipal Police Employees' Retirement System.

Geoffrey M. Johnson, Scott + Scott Attorneys at Law LLP, Cleveland Heights, Ohio, for Plaintiff–Appellant Louisiana Municipal Police Employees' Retirement System.

John P. Aldrich, Aldrich Law Firm Ltd, Las Vegas, Nevada, for Plaintiffs–Appellants.

Todd L. Bice (argued), James J. Pisanelli, and Debra L. Spinelli, Pisanelli Bice PLLC, Las Vegas, Nevada; Paul K. Rowe, Bradley R. Wilson, and Grant R. Mainland, Wachtell, Lipton, Rosen & Katz, New York, New York; Robert L. Shapiro, Glaser Weil Fink Howard Avchen & Shapiro LLP, Los Angeles, California; for Defendants–Appellees Linda Chen, Russell Goldsmith, Ray R. Irani, John A. Moran, Robert J. Miller, Marc D. Schorr, Alvin V. Shoemaker, D. Boone Wayson, and Allan Zeman.

John B. Quinn and Michael T. Zeller, Quinn Emanuel Urquhart & Sullivan LLP, Los Angeles, California, for Defendant–Appellee Elaine P. Wynn.

Donald J. Campbell and J. Colby Williams, Campbell & Williams, Las Vegas, Nevada, for Defendant–Appellee Stephen A. Wynn.

Before: Jerome Farris, Diarmuid F. O'Scannlain, and Morgan Christen, Circuit Judges.

OPINION

O'SCANNLAIN

, Circuit Judge:

We must decide whether shareholders may pursue a derivative lawsuit against a corporation's board of directors despite their failure to demand that the board initiate this litigation itself.

I

This is a shareholder derivative suit. The plaintiffs are shareholders of Wynn Resorts, Limited (“Wynn Resorts”), a Nevada corporation that owns and operates casinos in Las Vegas and Macau, the latter through its subsidiary, Wynn Macau, Limited. The defendants are Wynn Resorts itself and eleven individuals who sit or sat on its board of directors. The shareholders wish to challenge two actions the board took on behalf of its subsidiary Wynn Macau: a 2011 decision to donate $135 million to the University of Macau Development Foundation, and a 2012 decision to redeem the shares held by a former director named Kazuo Okada, who was the only director to vote against the donation.

We recite the facts as alleged in the shareholders' amended complaint, and we assume them to be true for purposes of this appeal.

A

In 2006 Wynn Resorts opened its first hotel in Macau, China under a lease from the Macau government with a term from 2002–2022. Also in 2006 Wynn Resorts applied to the Macau government for a second lease agreement to build a new resort and casino. Central to the present dispute is the University of Macau and its Development Foundation, which is presided over by many of the same government officials who have substantial control over gaming matters and the real estate industry in Macau.

Five years after Wynn Resorts submitted its application for a second lease agreement, the Macau government still had not approved it, but in May 2011 the board authorized a donation to the Development Foundation totaling $135 million over a ten year period. Okada was the only director on the eleven-member board to vote against the donation.¹ About a month after the donation, the Macau government accepted Wynn Resorts's application for a second lease.

In February 2012, the U.S. Securities and Exchange Commission (“SEC”) launched an informal inquiry into the Macau donation. The shareholders do not allege that the SEC's investigation escalated into a formal enforcement proceeding, and in fact, the shareholders acknowledge that after they filed this suit, the SEC concluded its investigation without taking further action. The Nevada Gaming Commission Board (“GCB”) also undertook an investigation into the Macau donation, but the shareholders' complaint acknowledges that the GCB had terminated its investigation, finding no violations of state law, by the time the shareholders brought this suit.

Meanwhile, in October or November 2011, Okada began demanding a separate investigation into the Macau donation. Around the same time, in November 2011, Steve Wynn—the company's Chairman and CEO—hired former FBI director Louis Freeh to investigate allegations that Okada had made improper gifts to gaming regulators in the Philippines. Freeh concluded that Okada was “unsuitable” to own shares of Wynn Resorts, under Nevada law and the corporation's Articles of Incorporation, and so the corporation forcibly redeemed Okada's $2.77 billion equity stake in the company in exchange for a promisory note worth $1.9 billion. The Okada redemption is the subject of separate lawsuits between Steve Wynn and Okada in Nevada state court.

B

Their eyebrows raised by these decisions, the shareholders decided to sue the Wynn Resorts board. In the shareholders' estimation, the Macau donation was nothing but a quid pro quo bribe, and the Okada redemption had no legitimate business purpose but was merely a gambit Steve Wynn used to oust a dissenting director and intimidate the others into complying with his wishes from there on out.

The shareholders filed their derivative action in federal district court in 2012, and after it was dismissed, they amended their complaint in April 2013. At the time the shareholders filed their amended complaint, the Wynn Resorts board of directors had eight members: Steve Wynn, Elaine Wynn, Robert Miller, D. Boone Wayson, J. Edward Virtue, John Hagenbuch, Ray Irani, and Alvin Shoemaker. Four of the defendants who are still parties to the suit—Linda Chen, Russell Goldsmith, John Moran, and Allan Zeman—are former members of the board, and had ceased to be directors by the time the shareholders filed their amended complaint.

The complaint alleges that the director defendants breached their fiduciary duties and committed corporate waste by approving the Macau donation because, the shareholders allege, the donation caused the company to incur legal expenses and be exposed to potential liability. The complaint also alleges that the defendants breached their fiduciary duties by redeeming Okada's shares because, the shareholders allege, such action had no legitimate purpose and merely encumbered the company with a higher debt load.

C

Before bringing their suit on behalf of the corporation, however, the shareholders were required either to make a demand on the board of directors or to explain why such demand would be futile. The shareholders did not make a demand. Instead, they argued that demand would be futile, for three reasons: first, Steve Wynn is “interested”—meaning he cannot be expected to exercise impartial judgment about whether it is in the corporation's best interests to sue the board as the shareholders wish to do—and a majority of the board is alleged to be “beholden” to him and therefore likewise incapable of exercising impartial judgment about whether to sue the board; second, the directors allegedly cannot be impartial because they face a substantial likelihood of incurring personal liability for their decision to approve the Macau donation; and third, the directors allegedly cannot be impartial because there is a reasonable doubt as to whether their decision to redeem Okada's shares would be given the benefit of the business judgment rule if it were challenged in court.

The district court disagreed, and dismissed the amended complaint under Federal Rule of Civil Procedure 23.1

. The district court found Steve Wynn to be interested, but held that the shareholders had not adequately alleged a majority of the board to be “beholden” to him. The district court also held that the shareholders had not sufficiently alleged a substantial likelihood that the directors would incur personal liability for approving the Macau donation. Finally, the district court held that the shareholders had not alleged enough to create a reasonable doubt about whether the Okada redemption would be given the benefit of the business judgment rule if it were challenged in court.

The shareholders timely appealed.

II

Before turning to the merits, we must address two issues with respect to our jurisdiction to hear this case.²

This suit arises entirely under state law, with the shareholders bringing state-law causes of action for breach of fiduciary duty and waste of corporate assets, and seeking in response a permanent injunction and restitution for unjust enrichment. The shareholders' complaint alleges federal jurisdiction exclusively under 28 U.S.C. § 1332(a)(2)

, part of the diversity jurisdiction statute which covers suits between “citizens of a State and citizens or subjects of a foreign state.” There are two problems with that jurisdictional pleading.

A

First, § 1332(a)(2)

is an improper basis because the plaintiffs are alleged to be American citizens, and the defendants are alleged to be a mix of American citizens and foreign citizens. Because there are American citizens on both sides of the case, jurisdiction cannot be grounded in § 1332(a)(2). See, e.g. , Newman–Green, Inc. v. Alfonzo–Larrain , 490 U.S. 826, 828–29, 109 S.Ct. 2218, 104 L.Ed.2d 893 (1989) (explaining th...