Shoen v. Sac Holding Corp.

• Decision Date: 13 July 2006
• Docket Number: No. 41563.,41563.
• Citation: 137 P.3d 1171
• Parties: Paul F. SHOEN; Alan Kahn; and Glenbrook Capital Limited Partnership, Appellants, v. SAC HOLDING CORPORATION, a Nevada Corporation; SAC Holding Corporation II, a Nevada Corporation; Three SAC Self-Storage Corporation, a Nevada Corporation; Four SAC Self-Storage Corporation, a Nevada Corporation; Five SAC Self-Storage Corporation, a Nevada Corporation; Six SAC Self-Storage Corporation, a Nevada Corporation; Six-A SAC Self-Storage Corporation, a Nevada Corporation; Six-B SAC Self-Storage Corporation, a Nevada Corporation; Six-C SAC Self-Storage Corporation, a Nevada Corporation; Seven SAC Self-Storage Corporation, a Nevada Corporation; Eight SAC Self-Storage Corporation, a Nevada Corporation; Nine SAC Self-Storage Corporation, a Nevada Corporation; Ten SAC Self-Storage Corporation, a Nevada Corporation; Eleven SAC Self-Storage Corporation, a Nevada Corporation; Twelve SAC Self-Storage Corporation, a Nevada Corporation; Thirteen SAC Self-Storage Corporation, a Nevada Corporation; Fourteen SAC Self-Storage Corporation, a Nevada Corporation; Fifteen SAC Self-Storage Corporation, a Nevada Corporation; Sixteen SAC Self-Storage Corporation, a Nevada Corporation; Seventeen SAC Self-Storage Corporation, a Nevada Corporation; Eighteen SAC Self-Storage Corporation, a Nevada Corporation; Nineteen SAC Self-Storage Limited Partnership, a Nevada Limited Partnership; Twenty SAC Self-Storage Corporation, a Nevada Corporation; Twenty-One SAC Self-Storage Corporation, a Nevada Corporation; Twenty-Two SAC Self-Storage Corporation, a Nevada Corporation; Twenty-Three SAC Self-Storage Corporation, a Nevada Corporation; Twenty-Four SAC Self-Storage Limited Partnership, a Nevada Limited Partnership; Twenty-Five SAC Self-Storage Limited Partnership, a Nevada Limited Partnership; Twenty-Six SAC Self-Storage Limited Partnership, a Nevada Limited Partnership; Twenty-Seven SAC Self-Storage Limited Partnership, a Nevada Limited Partnership; Edward J. Shoen, an Individual; Mark V. Shoen, an Individual; James P. Shoen, an Individual; John M. Dodds, an Individual; William E. Carty, an Individual; Richard Herrera, an Individual; Aubrey Johnson, an Individual; Charles J. Bayer, an Individual; John P. Brogan, an Individual; James J. Grogan, an Individual; and AMERCO, a Nevada Corporation, Respondents. Ron Belec, Appellant, v. AMERCO, a Nevada Corporation; Edward J. Shoen, an Individual; Mark V. Shoen, an Individual; James P. Shoen, an Individual; John M. Dodds, an Individual; William E. Carty, an Individual; Charles J. Bayer, an Individual; John P. Brogan, an Individual; and James J. Grogan, an Individual, Respondents.
• Court: Nevada Supreme Court

137 P.3d 1171

Paul F. SHOEN; Alan Kahn; and Glenbrook Capital Limited Partnership, Appellants, v. SAC HOLDING CORPORATION, a Nevada Corporation; SAC Holding Corporation II, a Nevada Corporation; Three SAC Self-Storage Corporation, a Nevada Corporation; Four SAC Self-Storage Corporation, a Nevada Corporation; Five SAC Self-Storage Corporation, a Nevada Corporation; Six SAC Self-Storage Corporation, a Nevada Corporation; Six-A SAC Self-Storage Corporation, a Nevada Corporation; Six-B SAC Self-Storage Corporation, a Nevada Corporation; Six-C SAC Self-Storage Corporation, a Nevada Corporation; Seven SAC Self-Storage Corporation, a Nevada Corporation; Eight SAC Self-Storage Corporation, a Nevada Corporation; Nine SAC Self-Storage Corporation, a Nevada Corporation; Ten SAC Self-Storage Corporation, a Nevada Corporation; Eleven SAC Self-Storage Corporation, a Nevada Corporation; Twelve SAC Self-Storage Corporation, a Nevada Corporation; Thirteen SAC Self-Storage Corporation, a Nevada Corporation; Fourteen SAC Self-Storage Corporation, a Nevada Corporation; Fifteen SAC Self-Storage Corporation, a Nevada Corporation; Sixteen SAC Self-Storage Corporation, a Nevada Corporation; Seventeen SAC Self-Storage Corporation, a Nevada Corporation; Eighteen SAC Self-Storage Corporation, a Nevada Corporation; Nineteen SAC Self-Storage Limited Partnership, a Nevada Limited Partnership; Twenty SAC Self-Storage Corporation, a Nevada Corporation; Twenty-One SAC Self-Storage Corporation, a Nevada Corporation; Twenty-Two SAC Self-Storage Corporation, a Nevada Corporation; Twenty-Three SAC Self-Storage Corporation, a Nevada Corporation; Twenty-Four SAC Self-Storage Limited Partnership, a Nevada Limited Partnership; Twenty-Five SAC Self-Storage Limited Partnership, a Nevada Limited Partnership; Twenty-Six SAC Self-Storage Limited Partnership, a Nevada Limited Partnership; Twenty-Seven SAC Self-Storage Limited Partnership, a Nevada Limited Partnership; Edward J. Shoen, an Individual; Mark V. Shoen, an Individual; James P. Shoen, an Individual; John M. Dodds, an Individual; William E. Carty, an Individual; Richard Herrera, an Individual; Aubrey Johnson, an Individual; Charles J. Bayer, an Individual; John P. Brogan, an Individual; James J. Grogan, an Individual; and AMERCO, a Nevada Corporation, Respondents.

Ron Belec, Appellant, v. AMERCO, a Nevada Corporation; Edward J. Shoen, an Individual; Mark V. Shoen, an Individual; James P. Shoen, an Individual; John M. Dodds, an Individual; William E. Carty, an Individual; Charles J. Bayer, an Individual; John P. Brogan, an Individual; and James J. Grogan, an Individual, Respondents.

No. 41563.

Supreme Court of Nevada.

July 13, 2006.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Beckley Singleton, Chtd., and Daniel F. Polsenberg, Las Vegas; Berman Devalerio Pease Tabacco Burt & Pucillo and Christopher T. Heffelfinger, San Francisco, California; Harold B. Obstfeld, New York, New York; Robbins Umeda & Fink and Brian Robbins, San Diego, California, for Appellants Belec, Glenbrook Capital and Kahn.

Lewis & Roca and Martha J. Ashcraft and James E. Berchtold, Las Vegas; Latham & Watkins and Brian T. Glennon and Marc W. Rappel, Los Angeles, California, for Appellant Paul Shoen.

Calvin R.X. Dunlap and Associates and Calvin R.X. Dunlap, Reno; Squire, Sanders & Dempsey, L.L.P., and Brian A. Cabianca and Mark A. Nadeau, Phoenix, Arizona, for Respondents SAC Entities and Mark Shoen.

Laxalt & Nomura, Ltd., and Daniel T. Hayward and Kerry Zachariasen Malone, Reno; Morrison & Foerster, LLP, and Melvin R. Goldman and Jack W. Londen, San Francisco, California, and Mark R. McDonald, Los Angeles, California, for Respondent AMERCO.

Parsons Behle & Latimer and John P. Fowler and Rew R. Goodenow, Reno; Irell & Manella, LLP, and Charles Edward Elder, Daniel Patrick Lefler and David Siegel, Los Angeles, California, for Respondents Bayer, Brogan, Dodds, Grogan, Herrera, and Johnson.

McDonald Carano Wilson LLP and Pat Lundvall and Thomas R.C. Wilson II, Reno; Pillsbury Winthrop Shaw Pittman LLP and Theodore Keith Bell and Walter J. Robinson, Palo Alto, California, for Respondents Edward J. Shoen, James P. Shoen and William E. Carty.

Before the Court En Banc.

OPINION

HARDESTY, J.

In resolving this appeal, we clarify when the demand for corrective action that a shareholder must make upon a company's board of directors before filing a derivative suit may be excused as futile. Appellants Paul Shoen, Ron Belec, Glenbrook Capital, L.P., and Alan Kahn are shareholders in AMERCO, a Nevada holding company whose main subsidiary is U-Haul International, Inc. In 2002 and 2003, appellants filed four separate derivative suits, on behalf of nominal respondent AMERCO, against respondents who are (1) then-current and former AMERCO directors; (2) self-storage corporations or partnerships, known as the SAC entities; and (3) the SAC entities' sole shareholder Mark Shoen.¹ All four suits were essentially based on allegations of improper and unfair dealings and transactions between AMERCO and the SAC entities, to the detriment of AMERCO's shareholders.

Appellants made no demand on the AMERCO directors for corrective action before filing their complaints. The district court dismissed appellants' amended and proposed consolidated complaints, finding that they did not sufficiently allege that such a demand would be futile.

We conclude that, when a shareholder's demand would be made to the same board that voted to take (or reject) an action, so that the allegedly improper action constitutes a business decision by the board, a shareholder asserting demand futility must allege, with particularity, facts that raise a reasonable doubt as to the directors' independence or their entitlement to protection under the business judgment rule. However, when a board does not affirmatively make a business decision or agree to the subject action, the demand requirement will be excused as futile only when particularized pleadings show that at least fifty percent of the directors considering the demand for corrective action would be unable to act impartially.

Because we now clarify the test for determining whether a complaint sufficiently alleges demand futility, we reverse the district court's order dismissing the shareholders' complaints, amended complaint, and proposed consolidated complaint for failure to make a demand or to sufficiently allege demand futility, and we remand this matter for further proceedings consistent with this opinion.

FACTS AND PROCEDURAL HISTORY

Incorporated in Nevada in 1969, AMERCO operates as the holding company for business dealings that involve U-Haul International, Inc. U-Haul was founded by Leonard Samuel Shoen in 1945, and its business concerns include wholly owned U-Haul centers and a network of independent dealers that sell moving products and rent trucks, trailers, and self-storage units to "do-it-yourself" movers. In addition to its U-Haul concerns, AMERCO acquires and develops real property for self-storage facilities through a subsidiary called AMERCO Real Estate Corporation (AREC). Ultimately, Leonard transferred most of his AMERCO stock to his thirteen children, including sons Paul, Edward J. (Joe), James, and Mark, which led, in the 1980s, to an unfortunate and well-documented family feud between shifting factions for corporate control.

The derivative suits allege that, in addition to owning AMERCO stock, each of the four sons is or has at relevant times served as an AMERCO director and/or officer. Joe and James have served on AMERCO's board of directors since 1986. Mark served as a director between 1990 and 1997 and is also employed as an AMERCO executive officer. While Paul no longer participates as an AMERCO officer or director, he served on the board of directors for several years before 1991, and from 1997 to 1998.

In the 1990s, Joe, James, and Mark formed SAC Holding Corporation and various SAC Self-Storage Corporations and partnerships to operate as real estate holding companies (the SAC entities). In 1994, however, before filing for personal bankruptcy, Joe and James² transferred their shares in the SAC entities to Mark. Ever since that time, Mark has been the SAC entities' sole shareholder.

According to appellants, Joe, James, and Mark have formed an "insider group." Through board domination, appellants claim, the "insider group" brothers have engaged in acts to further their own interests, to the detriment of AMERCO shareholders, by building a competing business in the SAC entities. This operation was accomplished, they assert, through the transfer of AMERCO's self-storage business and assets to the SAC entities at unfair terms.

Consequently, appellants filed derivative suits seeking, among other things, to "halt and unwind" the AMERCO-SAC entities transactions. But none of the appellants made any pre-suit demand on the AMERCO board of directors or the other shareholders to obtain the corrective action. Instead, appellants alleged in their complaints that any such demand would be futile, in large part because several board members, while not voting for the challenged transactions, participated in the wrongdoing and because the board is dominated and controlled by the interested "insider group" — and in particular, by Joe.

District court proceedings

After Paul and another shareholder, Ron Belec, filed their individual derivative actions, respondents moved to dismiss the two actions for failure to make the required pre-suit demands or to allege with particularity why it would have been futile to do so. Although the district court denied the motions, the court indicated that demand futility had not been shown and granted both Paul and Belec leave to amend their complaints.

Paul, but not Belec, then filed an amended complaint, and respondents again asked the court to dismiss Paul's action. Specifically, respondents contended that Paul had again failed to satisfactorily plead...