Rodriguez v. Loudeye Corp.

• Decision Date: 07 April 2008
• Docket Number: No. 59932-1-I.,59932-1-I.
• Citation: 189 P.3d 168,144 Wash.App. 709
• Court: Washington Court of Appeals
• Parties: Eli RODRIGUEZ, individually, and on behalf of others similarly situated, Appellant, v. LOUDEYE CORP., Michael A. Brochu, Jason S. Berman, Kurt R. Krauss, Johan C. Liedgren and Frank A. Varasano, Respondents, and Nokia, Inc., and Loretta Acquisition Corporation, Defendants.

189 P.3d 168

144 Wash.App. 709

Eli RODRIGUEZ, individually, and on behalf of others similarly situated, Appellant, v. LOUDEYE CORP., Michael A. Brochu, Jason S. Berman, Kurt R. Krauss, Johan C. Liedgren and Frank A. Varasano, Respondents, and Nokia, Inc., and Loretta Acquisition Corporation, Defendants.

No. 59932-1-I.

Court of Appeals of Washington, Division 1.

April 7, 2008.

Publication Ordered June 3, 2008.

Clifford A. Cantor, Law Offices of Clifford A. Cantor, Sammamish, WA, Karen T. Rogers, Michiyo M. Furukawa, Milberg Weiss LLP, Los Angeles, CA, for Appellant.

Daniel J. Dunne, Charles J. Ha, Leonard J. Feldman, Christopher Lanese, Heller Ehrman LLP, Seattle, WA, for Respondents.

AGID, J.

¶ 1 Shareholders of Loudeye Corp. ("Loudeye"), a Delaware corporation, appeal the trial court's order dismissing their complaint against Loudeye directors alleging breach of their fiduciary duties in conducting a merger with Nokia Corp. ("Nokia"). The shareholders assert the trial court improperly considered an exculpatory provision in Loudeye's charter that bars any claims for damages against its directors for breach of the duty of due care and that the complaint sufficiently alleges that the directors breached their fiduciary duties of care, loyalty and good faith. But Delaware law permits a trial court to dismiss on a CR 12(b)(6) motion claims for breach of the duty of care based on exculpatory provisions in a corporate charter, and the complaint fails to allege sufficient facts to support a claim for breach of the duty of loyalty or good faith. We therefore affirm.

FACTS

¶ 2 Loudeye is a company that provided media content, mostly digital music, for use in cell phones and consumer electronics. In June 2004, Loudeye acquired OD2, a European based provider of digital media store services. In July 2004, Loudeye began collaborating with Nokia about music services offered by OD2. By November 2005, Loudeye and Nokia had entered into a non-disclosure agreement in "`contemplation of [Loudeye] sharing confidential information with Nokia outside the scope of Loudeye and Nokia's [then] existing commercial relationship.'"¹

¶ 3 Loudeye's directors also hired an investment banking firm, Allen and Company LLC ("Allen & Co."), to help them identify strategic partners willing to acquire or merge with Loudeye. According to Loudeye's proxy statement, Allen & Co. was retained because "despite management's cost containment efforts, the revenue generated by Loudeye's two digital store platforms was insufficient to maintain both [the American and European digital music] platforms on a long term basis." The proxy statement notes that in February 2006, two of Loudeye's major United States customers terminated their relationship with Loudeye.²

¶ 4 Working with Allen & Co., Loudeye then contacted at least 72 potential suitors to solicit interest in a merger or acquisition and held discussions with 26 of these suitors, three of whom ultimately made offers. In May 2006, Loudeye representatives went to London to make due diligence presentations to Nokia about Loudeye's European business. At the same time, Loudeye representatives conducted due diligence meetings in London and Bristol, U.K., about a potential merger with another company.

¶ 5 On June 22, 2006, Nokia made an offer to acquire Loudeye in a cash merger at $4.50 per share, subject to certain conditions including an exclusivity agreement. On the date of the offer the closing price of Loudeye's stock was $1.66 per share. On June 26, 2006, Loudeye counter-offered for $5.00 per share, but Nokia refused the counter offer. Two other companies then submitted offers for prices significantly lower than Nokia's offer. On August 7, 2006, management presented to Loudeye's board of directors a definitive merger agreement with Nokia and the board unanimously voted to approve and recommend it to the stockholders.

¶ 6 On October 6, before the vote was put to the shareholders, Eli Rodriguez filed this class action lawsuit on behalf of Loudeye shareholders, suing five members of Loudeye's board of directors. The complaint alleged that the directors breached their fiduciary duties by failing to auction, failing to adequately disclose information about other potential offers, and failing to obtain the best price. The complaint also alleged that the board had conflicts of interest, citing a termination agreement entitling CEO Michael Brochu to $325,000 if he was terminated without cause on or following the date of the merger. The complaint further alleged that "other control people at Loudeye receive[d] lucrative employment or retention packages" and "other perks, such as accelerated vesting of Loudeye stock options." The complaint then sought relief as follows:

preliminary and permanent injunctive and declaratory relief preventing the Defendants from inequitably and unlawfully depriving Plaintiff and the Class of their right to realize the full market value for their stock, by unlawfully entrenching themselves in their positions of control, and to compel the Defendants to carry out their fiduciary duties to maximize shareholder value.

¶ 17 On October 11, 2006, the stockholders voted on the merger and 90 percent of them voted in favor of the merger. The transaction closed on October 16, 2006. The shareholder class did not make any motions or take any action to enjoin the shareholder vote or the merger closing. On February 21, 2007, defendant directors moved to dismiss the complaint for failure to state a claim and the trial court granted the motion.

I. CR 12(b)(6) Dismissal

¶ 8 The shareholders argue that the trial court erred by dismissing their complaint because (1) the court improperly considered a Section 102(b)(7) exculpatory provision on a CR 12(b)(6) motion to dismiss and (2) the complaint contains sufficient allegations to establish that the directors breached their fiduciary duties. We review a trial court's ruling granting a CR 12(b)(6) motion to dismiss de novo.³ CR 12(b)(6) provides for dismissal of a complaint if it fails to state a claim upon which relief can be granted.⁴ Dismissal is warranted only if the court concludes, beyond a reasonable doubt, the plaintiff cannot prove any set of facts which would justify recovery.⁵ All facts alleged in the plaintiff's complaint are presumed true.⁶ But the court is not required to accept the complaint's legal conclusions as true.⁷

A. Effect of Section 102(b)(7) Exculpatory Provision

¶ 9 The shareholders first contend the trial court improperly considered an exculpatory provision in Loudeye's certificate of incorporation that bars any claims against its directors for breach of the duty of care. They contend that under Washington procedure, such a provision cannot support a CR 12(b)(6) motion to dismiss. We disagree.

¶ 10 Shareholder claims involving a corporation's internal affairs are governed by the law of the state in which the corporation was incorporated.⁸ Thus, the parties agree that because Loudeye is a Delaware corporation, Delaware law applies here. Under Delaware law, the business judgment rule protects a corporate director's business decisions against shareholder lawsuits.⁹ This rule protects directors from liability for decisions that "can be attributed to any rational business purpose,"¹⁰ and creates a presumption that "the Board acted independently, with due care, in good faith and in the honest belief that its actions were in the stockholders' best interests."¹¹ Thus, to bring a claim against a corporate director, a shareholder must allege sufficient facts to overcome this presumption.¹² Those facts must show that the board of directors, in reaching its challenged decision, breached any of its three primary fiduciary duties.

¶ 11 The three primary fiduciary duties of directors of Delaware corporations are due care, loyalty, and good faith.¹³ The Delaware code authorizes Delaware corporations to immunize directors from liability for damages arising out of breaches of their fiduciary duties.¹⁴ Under Section 102(b)(7), a corporation may include a provision in its certificate of incorporation that eliminates a director's personal liability for breach of the duty of care, but not for breach of the duties of loyalty and good faith.¹⁵

¶ 12 In conducting a sale of corporate control, a director's duty is to seek out the best value reasonably available to the stockholders.¹⁶ Failure to do so may amount to a breach of the directors' fiduciary duties if it is "the result of illicit motivation (bad faith), personal interest divergent from shareholder interest (disloyalty) or a lack of due care."¹⁷ But if a complaint merely alleges that the directors were grossly negligent in performing their duties in selling the corporation, without some factual basis to suspect their motivations, any finding of liability will necessarily be based on breaches of the duty of care, not loyalty or good faith.¹⁸ And in such cases, a Section 102(b)(7) provision will bar any for claim for damages.¹⁹

¶ 13 The shareholders argue that the trial court improperly considered the Section 102(b)(7) provision because it is an affirmative defense and under Washington procedure cannot support a CR 12(b)(6) motion to dismiss. While they acknowledge that Delaware law allows the provision to bar a claim for breach of the duty of care on a CR 12(b)(6) motion, they assert that this is a matter of Delaware procedure which is not recognized in Washington. They note that while Delaware substantive law applies here, procedure is determined by Washington law. And, without citation to any supporting Washington authority, they assert that Section 102(b)(7) director immunity cannot defeat their claims of breach of fiduciary duties on a CR 12(b)(6) motion to dismiss because it must be proved as an affirmative defense. We disagree.

¶ 14 The shareholders mischaracterize the role of a Section 102(b)(7) provision in a motion to dismiss as purely procedural. They rely on...