Rales v. Blasband

• Citation: 634 A.2d 927
• Court: United States State Supreme Court of Delaware
• Decision Date: 04 October 1993
• Parties: Fed. Sec. L. Rep. P 98,821 Steven M. RALES, Mitchell P. Rales, and John Doe 1-10, Defendants Below, Appellants, and Easco Hand Tools, Inc. and Danaher Corporation, Nominal Defendants Below, Appellants, v. Alfred BLASBAND, derivatively and on behalf of Easco Hand Tools, Inc. and Danaher Corporation, Plaintiff Below, Appellee. . Submitted:

Page 927

634 A.2d 927

Fed. Sec. L. Rep. P 98,821

Steven M. RALES, Mitchell P. Rales, and John Doe 1-10 Defendants Below, Appellants, and Easco Hand Tools, Inc. and Danaher Corporation, Nominal Defendants Below, Appellants, v. Alfred BLASBAND, derivatively and on behalf of Easco Hand Tools, Inc. and Danaher Corporation, Plaintiff Below, Appellee.

Supreme Court of Delaware.

Submitted: Oct. 4, 1993.

Decided: Dec. 22, 1993.

Revised: Dec. 23, 1993.

Upon Certification of Question of Law from the United States District Court for the District of Delaware. THE CERTIFIED QUESTION IS ANSWERED IN THE AFFIRMATIVE.

Stephen P. Lamb (argued), Robert A. Glen, Cathy L. Reese and Jaya B. Gokhale of Skadden, Arps, Slate, Meagher & Flom, Wilmington, for appellants Steven M. Rales and Mitchell P. Rales.

David C. McBride of Young, Conaway, Stargatt & Taylor, Wilmington, for appellants Danaher Corp. and Easco Hand Tools, Inc.

Mark Minuti of Saul, Ewing, Remick & Saul, Wilmington, Stephen A. Whinston (argued), and Arthur Stock of Berger & Montague, P.C., Philadelphia, PA, for appellee Alfred Blasband.

Before VEASEY, C.J., MOORE and HOLLAND, JJ.

VEASEY, Chief Justice:

This certified question of law comes before the Court pursuant to Article IV, Section 11(9) of the Delaware Constitution and Supreme Court Rule 41. The question of law was certified by the United States District Court for the District of Delaware (the "District Court"), and was accepted by this Court on June 16, 1993. See Rales v. Blasband, Del.Supr., 626 A.2d 1364 (1993). Briefing and oral argument in this Court followed. This is the decision of the Court on the certified question.

The underlying action pending in the District Court is a stockholder derivative action filed on March 25, 1991, by Alfred Blasband ("Blasband") on behalf of Danaher Corporation, a Delaware corporation ("Danaher"). Blasband's original complaint was dismissed by the District Court on August 15, 1992, based on Blasband's lack of standing, but the United States Court of Appeals for the Third Circuit (the "Third Circuit") vacated the District Court's order and permitted Blasband to amend his complaint. Blasband v. Rales, 971 F.2d 1034 (3d Cir.1992) ("Blasband I"). Following Blasband's filing of an amended complaint (the "amended complaint"), the defendants filed a motion to dismiss and moved to certify the following question of law to this Court:

In the context of this novel action, which is neither a simple derivative suit nor a double derivative suit, but which the United States Court of Appeals for the Third Circuit describes as a "first cousin to a double derivative suit," has plaintiff Alfred Blasband, in accordance with the substantive law of the State of Delaware, alleged facts to show that demand is excused on the board of directors of Danaher Corporation, a Delaware corporation?

After consideration of the allegations of the amended complaint, the briefs, and the oral argument of the parties in this Court, it is our conclusion that the certified question must be answered in the affirmative. Because the amended complaint does not challenge a decision of the board of directors of Danaher (the "Board"), the test enunciated in Aronson v. Lewis, Del.Supr., 473 A.2d 805 (1984) is not implicated. In the unusual context of this case, demand on the Board is excused because the amended complaint alleges particularized facts creating a reasonable doubt that a majority of the Board would be disinterested or independent in making a decision on a demand.

I. FACTS ¹

Blasband is currently a stockholder of Danaher. Prior to 1990 Blasband owned 1100 shares of Easco Hand Tools, Inc., a Delaware corporation ("Easco"). Easco entered into a merger agreement with Danaher in February 1990 whereby Easco became a wholly-owned subsidiary of Danaher (the "Merger").

Steven M. Rales and Mitchell P. Rales (the "Rales brothers") have been directors, officers, or stockholders of Easco and Danaher at relevant times. Prior to the Merger, the Rales brothers were directors of Easco, and together owned approximately 52 percent of Easco's common stock. They continued to serve as directors of Easco after the Merger.

The Rales brothers also own approximately 44 percent of Danaher's common stock. Prior to the Merger, Mitchell Rales was President and Steven Rales was Chief Executive Officer of Danaher. The Rales brothers resigned their positions as officers of Danaher in early 1990, but continued to serve as members of the Board. ² The Board consists of eight members. The other six members are Danaher's President and Chief Executive Officer, George Sherman ("Sherman"), Donald E. Ehrlich ("Ehrlich"), Mortimer Caplin ("Caplin"), George D. Kellner ("Kellner"), A. Emmett Stephenson, Jr. ("Stephenson"), and Walter Lohr ("Lohr"). A number of these directors have business relationships with the Rales brothers or with entities controlled by them. ³

The central focus of the amended complaint is the alleged misuse by the Easco board of the proceeds of a sale of that company's 12.875% Senior Subordinated Notes due 1998 (the "Notes"). On or about September 1, 1988, Easco sold $100 million of the Notes in a public offering (the "Offering"). The prospectus for the Offering stated that the proceeds from the sale of the Notes would be used for (1) repaying outstanding indebtedness, (2) funding corporate expansion, and (3) general corporate purposes. The prospectus further stated that "[p]ending such uses, the Company will invest the balance of the net proceeds from this offering in government and other marketable securities which are expected to yield a lower rate of return than the rate of interest borne by the Notes."

Blasband alleges that the defendants did not invest in "government and other marketable securities," but instead used over $61.9 million of the proceeds to buy highly speculative "junk bonds" offered through Drexel Burnham Lambert Inc. ("Drexel"). Blasband alleges that these junk bonds were bought by Easco because of the Rales brothers' desire to help Drexel at a time when it was under investigation and having trouble selling such bonds. The amended complaint describes the prior business relationship between the Rales brothers and Drexel in the mid-1980s, including Drexel's assistance in the Rales brothers' expansion of Danaher through corporate acquisitions and the role played by Drexel in the Rales brothers' attempt to acquire Interco, Inc. Moreover, Drexel was the underwriter of the Offering of Easco's Notes.

The amended complaint alleges that these investments have declined substantially in value, resulting in a loss to Easco of at least $14 million. Finally, Blasband complains that the Easco and Danaher boards of directors refused to comply with his request for information regarding the investments. ⁴

II. SCOPE AND STANDARD OF REVIEW

Because we are addressing a certified question of law, as distinct from a review of a lower court decision, the normal standards of review do not apply. This matter is presented in the context of a motion to dismiss Blasband's amended complaint filed in the District Court pursuant to Federal Rule of Civil Procedure ("Fed.R.Civ.P.") 23.1 for failure to demonstrate that demand on the Board is excused. The well-pleaded factual allegations of the derivative complaint are accepted as true on such a motion. E.g., In re General Motors Class E Stock Buyout Sec. Litig., 790 F.Supp. 77, 81 (D.Del.1992). See also Grobow v. Perot, Del.Supr., 539 A.2d 180, 186 (1988). Conclusory allegations, however, are not accepted as true. In re General Motors, 790 F.Supp. at 81. See also Allison v. General Motors Corp., 604 F.Supp. 1106 (D.Del.1985), aff'd, 782 F.2d 1026 (3d Cir.1986).

The scope of the issues that may be considered in addressing a certified question is limited by the procedural posture of the case. Supreme Court Rule 41(a) provides that this Court may not accept a certified question of law unless "the certifying court has not decided the question in the case." The question of Blasband's standing to pursue the derivative claims in the amended complaint has already been decided by the Third Circuit. Blasband I, 971 F.2d at 1046. That ruling therefore is the law of the case, and cannot be reconsidered by this Court in the present proceeding. See Blasband v. Rales, 979 F.2d 324 (3d Cir.1992) ("Blasband II") (holding in mandamus action that the District Court was precluded from certifying essentially the same standing question when the Court of Appeals had already decided the issue). The same principle applies to other determinations made by the Third Circuit in its decision. ⁵

The parties have raised a threshold issue regarding this Court's ability to consider the legal standards which are applicable to the certified question. Blasband contends that the role of this Court in responding to the certified question is limited to a mechanical application of the two-part test ⁶ set forth in Aronson v. Lewis, Del.Supr., 473 A.2d 805, 814 (1984). The defendants disagree, and argue that the Court should apply a test more stringent than the Aronson test to protect corporations against strike suits.

Consideration of this issue must begin with the language of the certified question itself:

In the context of this novel action, which is neither a simple derivative suit nor a double derivative suit, but which the United States Court of Appeals for the Third Circuit describes as a "first cousin to a double derivative suit," has plaintiff Alfred Blasband, in accordance with the substantive law of the State of Delaware, alleged facts to show that demand is excused on the board of directors of Danaher Corporation, a Delaware corporation?

(Emphasis added). The certified question does not limit the issue presented to the mere application of the Aronson test, but instead calls upon this Court to decide whether Blasband's amended complaint establishes that demand is excused under the "substantive law...