Spiegel v. Buntrock
| Decision Date | 12 December 1989 |
| Parties | , Fed. Sec. L. Rep. P 95,310 Ted SPIEGEL, Plaintiff Below, Appellant, v. Dean L. BUNTROCK, Jerry E. Dempsey, Peter H. Huizenga, James E. Koenig, Alexander Trowbridge, Lee L. Morgan, Peer Pedersen, Olin N. Emmons, James R. Peterson, Donald F. Flynn, Phillip B. Rooney and Waste Management, Inc., Defendants Below, Appellees. . Submitted: |
| Court | United States State Supreme Court of Delaware |
Joseph A. Rosenthal (argued), and Kevin Gross of Morris, Rosenthal, Monhait & Gross, P.A., Wilmington, and Mordecai Rosenfeld, New York City, on behalf of appellant.
Clark W. Furlow (argued), of Lassen, Smith, Katzenstein & Furlow, Wilmington, Wallace L. Timmeny (argued), James E. Ballowe, Jr. of McGuire, Woods, Battle & Booth, Washington, D.C., and F.L. Peter Stone of Connolly, Bove, Lodge & Hutz, Wilmington, on behalf of appellees.
Before HORSEY, WALSH and HOLLAND, Justices.
This is an appeal from an order of the Court of Chancery dismissing a derivative action filed by the plaintiff-appellant, Ted Spiegel ("Spiegel"), a shareholder of Waste Management, Inc. ("Waste Management"). In his complaint, Spiegel alleged that Dean L. Buntrock ("Buntrock"), Chairman of the Board of Directors and Chief Executive Officer of Waste Management; Jerry E. Dempsey ("Dempsey"), Vice Chairman; Peter H. Huizenga ("Huizenga"), Vice President and Secretary; and James E. Koenig ("Koenig"), Staff Vice President 1 (collectively "management defendants"), improperly acquired stock in ChemLawn Corporation ("ChemLawn"), based upon inside information, during the two years immediately preceding Waste Management's tender offer for ChemLawn. Spiegel sought to compel the management defendants to account to Waste Management for the personal profits they made upon the sale of their ChemLawn stock.
The underlying issue in this controversy is the often debated subject of when the requirement that a stockholder make demand on a board of directors, prior to filing a derivative lawsuit for the benefit of a corporation, is excused and when a demand, which has been made, is properly refused. Superimposed upon the "demand excused/demand refused" debate 2 are additional issues relating to the use of a special litigation committee by the Board of Waste Management, and the propriety of continuing to argue that demand was excused, after a demand has been made. All of the issues raised implicate the proper standard of judicial review.
This case presented the Court of Chancery with a procedural paradox in that each party's argument was the antithesis of their action. Spiegel contended that demand was excused. However, when his failure to make a pre-suit demand was raised by the Board of Waste Management ("Board") as a defense, Spiegel responded by filing a demand. The Board contended that demand was required, because it was disinterested and capable of responding to Spiegel's request for legal action. However, when a demand for such action was made by Spiegel, the Board responded by appointing a special litigation committee with complete authority to review and act upon Spiegel's request. Ultimately, each party used their opponent's legal sword as their own legal shield. Spiegel argued that by appointing a special litigation committee, the Board conceded that demand was excused and the Board argued that by filing a demand Spiegel had admitted that one was required.
The Court of Chancery carefully reviewed the allegations in Spiegel's complaint and found that demand was not excused. Thereafter, the Court of Chancery proceeded to examine the post-suit demand for legal action, which was sent to the Board by Spiegel, and the decision to refuse that demand. The Court of Chancery held that the decision to refuse Spiegel's demand was subject to review according to the traditional business judgment rule, notwithstanding the fact that the Board had delegated its authority to act on Spiegel's demand to a special litigation committee. Applying the traditional business judgment rule, the Court of Chancery held that Spiegel's demand, for the Board to take legal action on behalf of Waste Management, was properly refused.
On appeal, Spiegel contends that, even though he made a demand, given the facts of this case, demand was excused nevertheless. Therefore, Spiegel argues that the Court of Chancery should have reviewed the Board's motion to dismiss his complaint according to the procedures established in Zapata Corp. v. Maldonado, Del.Supr., 430 A.2d 779 (1981), rather than the traditional business judgment rule. Alternatively, Spiegel contends that even if the Zapata procedures are not applicable in this case, the Court of Chancery erred in dismissing his derivative complaint because Waste Management failed to meet its burden under Chancery Court Rule 56 of showing that there were no genuine issues of material fact.
We find that the record supports both of the Court of Chancery's rulings. Consequently, it is not necessary to address the other issues raised by Spiegel. We find that the Court of Chancery's decision to dismiss Spiegel's complaint should be affirmed.
Waste Management is a Delaware corporation headquartered in Oak Brook, Illinois. It provides domestic and international waste removal and disposal services. In the spring of 1984, Waste Management decided to diversify its operations by expanding into new service areas.
In an effort to accomplish its goal, Waste Management hired Dempsey, who had led the successful diversification of Borg Warner Corporation. 3 Buntrock requested Dempsey to perform a study of service industries which might be of interest to Waste Management. Dempsey retained the consulting division of Arthur Andersen & Co. to assist him with the study.
Dempsey prepared two reports, dated February 8, 1985 and March 13, 1985. The reports were titled "Waste Management, Inc. Acquisition Project Meeting." Both reports were presented to the Board by Dempsey. ChemLawn, a leader in the lawn care industry, was among eight companies included in each initial analysis. During the next two years, several additional reports were prepared to assist the Board in evaluating companies for potential acquisition.
Waste Management's interest in ChemLawn gradually intensified until on February 26, 1987, it launched a cash tender offer for ChemLawn at $27.00 per share. 4 The tender offer included a disclosure that the management defendants owned shares of ChemLawn stock, which they had acquired during the prior two years. 5 Waste Management's tender offer proved to be unsuccessful.
ChemLawn was purchased by EcoLab, Inc. for $36.50 per share. On March 30, 1987, the Wall Street Journal carried an article entitled "ChemLawn's Sale Could Yield $1 Million In Profit for Officials of Thwarted Suitor." 6 That same day, Spiegel filed the action against Waste Management, and its directors, that is the subject of this appeal.
On April 30, 1987, the Board filed a motion to dismiss Spiegel's complaint pursuant to Court of Chancery Rule 23.1. The basis for that motion was that Spiegel had failed to make a demand upon the Board prior to instituting his derivative suit and had failed to allege with particularity facts demonstrating that such a demand would have been futile. See Ch.Ct.R. 23.1. 7 The Board's motion also sought dismissal of the action against the seven disinterested directors because Spiegel's complaint alleged no wrongdoing by them.
Spiegel did not immediately contest the Board's motion to dismiss in the Court of Chancery. 8 Instead, Spiegel responded by making a demand to the Board in a letter which stated:
On behalf of Ted Spiegel, a shareholder of Waste Management, Inc., we hereby formally demand that the Board of Directors take all appropriate action to redress the wrongs as alleged in the enclosed complaint.
In response to Spiegel's demand letter, the Board established a special litigation committee of outside directors (the "Committee") "for the purpose of conducting an independent review of the transactions in the common stock of ChemLawn Corporation by officers of the Company." 9 "Pursuant to Section 141(c) of the Delaware General Corporation Law and [Waste Management's] by-laws," the Board delegated authority to the Committee "to determine, as a result of its independent review, whatever action may be appropriate in the interest of the Company...."
The Committee conducted an investigation into Spiegel's allegations that spanned over five months. The Committee was represented by its own independent counsel, a Washington, D.C., attorney who was the former Deputy Director of Enforcement at the Securities and Exchange Commission, and who now specializes in securities law in private practice. The Committee interviewed a great many people, both within and without Waste Management. 10 It also reviewed volumes of documents.
The Committee's report found that Waste Management had a continuing low level interest in ChemLawn, as one of many possible acquisition targets, throughout the two-year period in question, but that there was never any "serious interest" until January and February of 1987. On the basis of its investigation, and its analysis of the applicable law, the Committee concluded that it would not be in the best interests of Waste Management and its stockholders to pursue Spiegel's derivative action. The Committee's report stated, in part:
The Committee has determined to seek dismissal of the complaints in the pending derivative litigation. The Committee believes that the best interests of the Company would be furthered by terminating rather than pursuing the derivative litigation.... There is no question that ... discovery would be disruptive and burdensome in the extreme to the Company, its employees, and its directors. In addition, the publicity which would accompany the continuation of the lawsuit would result in immediate damage to the Company's goodwill and reputation with...
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