Shields v. Singleton
| Decision Date | 20 May 1993 |
| Docket Number | No. B051487,B051487 |
| Court | California Court of Appeals Court of Appeals |
| Parties | Rodney B. SHIELDS, Plaintiff and Appellant, v. Henry E. SINGLETON, et al. Defendants and Respondents. Civ. |
Milberg, Weiss, Bershad, Specthrie & Lerach, William S. Lerach, Alan Schulman, Kevin P. Roddy, San Diego, and Greenfield & Chimicles, Patrick J. Grannan and Richard D. Greenfield, Los Angeles, for plaintiff and appellant.
Irell & Manella, Gregory R. Smith, David Siegel, David I. Gindler, Daniel P. Lefler, Latham & Watkins, William J. Meeske, Brian C. Riopelle, Los Angeles, and Heller, Ehrman, White & McAuliffe, M. Laurence Popofsky, Miles N. Ruthberg, Pamela S. Palmer, and Steven A. Blum, San Francisco, for defendants and respondents.
In this shareholder derivative action plaintiff Rodney B. Shields is suing on behalf of Teledyne, Inc. (the Company) to recover for the Company damages it allegedly suffered due to the unlawful activities of certain employees of a subsidiary of the Company. The defendants to this action may be divided into three groups: The directors of the Company (Henry E. Singleton (who is also Chairman of the Company), George A. Roberts (who is the Company's president and chief executive officer), George Kozmetsky, Arthur Rock and Fayez Sarofim); the officers of the Company (Hudson B. Drake, William P. Rutledge, Jerrold V. Jerome, Leo W. Killen, Allen H. Orbuch, G. Williams Rutherford, Judith R. Nelson, and Gordon J. Bean); and certain individual employees and consultants of a subsidiary of the Company who are not parties to this appeal.
Plaintiff's claims are based on the federal government's wide-ranging investigation, known as Operation Ill Wind, of fraud and corruption in the procurement of military defense contracts, and the criminal and civil suits which resulted from that investigation. Teledyne Electronics, Inc., a division of Teledyne Industries, Inc. which is a subsidiary of the Company, was indicted in the scandal, as were several of its executives, including three defendants named in this action. No officer, director or employee of the Company was ever implicated in any criminal wrongdoing, and plaintiff makes no such claim in this suit. Rather, plaintiff contends that defendants intentionally or negligently breached their fiduciary duties to the Company by, in effect, failing to prevent the criminal acts of Teledyne Electronics employees, and are therefore liable to the Company for the damages it sustained, including criminal and civil penalties, settlement payments and legal fees, as well as loss of future business as a result of disqualification from bidding on government contracts. Plaintiff's second amended complaint, with which we are here concerned, also contains a claim that defendants violated the Racketeer Influenced and Corrupt Organizations Act.
The officer and director defendants demurred to the complaint on three occasions, each time claiming that (1) plaintiff failed to meet the pre-filing demand requirements of CORPORATIONS CODE SECTION 800, AND (2)1 the complaint failed to allege facts sufficient to state a cause of action against the demurring defendants. The trial court sustained each demurrer.
Plaintiff contends on appeal that he satisfied the pre-filing requirements of section 800 by voluntarily posting a $50,000 bond pursuant to subdivision (e) of that section, and that, in any event, he properly alleged that demand on the board would have been futile and was therefore excused.
The following facts are gleaned from the allegations of the complaint: The Company was incorporated in Delaware but maintains its principal place of business and conducts substantially all of its activities in California. The Company maintains numerous subsidiaries, of which it owns all or nearly all of the voting stock. Company revenues in 1988 were $3.5 billion, while the annual revenues of Teledyne Electronics are $75 million, virtually all of which are related to the defense industry.
The complaint alleges that George H. Kaub, Dale Schnittjer and Eugene R. Sullivan, each of whom was an employee of Teledyne Electronics, agreed to pay $160,000 to two consultants in order to obtain inside information from a civilian employee of the U.S. Navy, to aid Teledyne Electronics in obtaining defense procurement contracts. Specifically, Teledyne Electronics was awarded a $24 million Army contract, known as the AN/AMP 424 contract, for certain military combat equipment, which it would not have received but for the illegal bribes. With the exception of Mr. Schnittjer, each of the foregoing individuals, all of whom are named as defendants in this lawsuit, was convicted of federal criminal charges in connection with Operation Ill Wind.
The substance of plaintiff's claims against the director defendants are contained in the section of the complaint entitled "Allegations of Wrongdoing." There plaintiff alleges:
In addition, plaintiff alleges that all of the directors were "interested" in, and direct beneficiaries of, the underlying wrongdoing because they received compensation and awards which were based on the Company's consolidated earnings, which in turn were inflated by reason of the illegal defense procurement activities. These allegations are based upon the following facts: Three of the directors (Singleton, Kozmetsky and Sarofim) together own approximately 25% of the Company's shares; four of the directors (Singleton, Roberts, Rock and Sarofim) sit on the board of directors of Argonaut Group, Inc., while two of these (Singleton and Roberts) are members of the board of directors of United Insurance. Rock and Sarofim are members of the Audit Committee of the Company's board of directors, which "reviews the scope of the audit and non-audit assignments and the related fees, the accounting principles applied by the Company in financial reporting, the scope of internal auditing procedures and the adequacy of internal controls," and Singleton, Roberts and Rock are members of the board's Executive Committee, which "[e]xcept for certain powers which may be exercised only by the full Board of Directors, ... may exercise all powers and authority of the Board of Directors in the management of the business of the Company." The directors each receive $12,000 per year in director's fees, and members of the Audit and Executive Committee receive an additional $12,000 annually.
Pursuant to the terms of section 800, 2 in order for a shareholder to bring a derivative suit on behalf of the corporation, he must allege "with particularity" either (1) that he made a demand on the board of directors, which the board wrongfully refused, or (2) that such a demand would have been futile. Plaintiff's counsel sent a letter, dated November 22, 1988, to the Company's board of directors stating that certain unnamed senior executives of the Company "appear to be implicated" in the procurement scandal revealed by Operation Ill Wind and demanding that the Company sue the directors for breach of fiduciary duty for failing to hold accountable "those [unidentified] persons responsible for the Company's present plight." The Company responded to this demand on December 21, 1988, requesting that plaintiff's counsel "assist the Board of Directors by providing whatever specific information you have which causes you to believe that particular senior executives or directors of Teledyne, Inc. have engaged in wrongdoing...."
Neither plaintiff nor his counsel responded to the Company's request for further information. Rather, without any further communication with the board, plaintiff filed this action two months later, on February 23, 1989. Defendants demurred to the complaint on the grounds that plaintiff neither complied with the pre-filing demand requirement of section 800, subdivision (b) nor alleged sufficient facts to establish that demand would have been futile. The demurrers were sustained with leave to amend.
Thereafter, plaintiff voluntarily posted a $50,000 bond as provided by section 800, subdivision (e). 3 When the sufficiency of plaintiff's pre-filing demand was again challenged by way of demurrer to the first amended complaint, plaintiff argued that he had satisfied the requirements of the demand provisions of section 800, subdivision (b) by posting the bond pursuant to subdivision (e). The trial court rejected this argument and sustained the demurrer with leave to amend.
At the hearing on the third demurrer to the complaint, the trial court held that the general "group" allegations against the directors, which did not specify the precise acts which each individual director allegedly engaged in, were insufficient to establish demand futility. Consequently, the court sustained the demurrer without leave to amend.
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...S.Ct. 2231. We note also that a valid demand is a requirement for statutory standing under California law. Shields v. Singleton, 15 Cal.App.4th 1611, 1618, 19 Cal.Rptr.2d 459 (1993). Although California courts do not define the limits of our jurisdiction, this required demand supports our c......
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