Asbestos Workers Philadelphia Pension Fund v. Bell

Judgment, Supreme Court, New York County (Charles E. Ramos, J.), entered June 13, 2014, dismissing the complaint, unanimously affirmed, with costs.

This derivative action was brought by both an institutional and an individual shareholder of JP Morgan Chase & Co. (JPMorgan), without any pre-suit demand having been made.

On this appeal the only issue is whether Supreme Court correctly dismissed the action on the ground that plaintiffs neither made a pre-suit demand on the board nor pleaded facts sufficient to support a claim of demand futility. For the reasons set forth below, we find that the motion court correctly determined that plaintiff was not excused from making a presuit demand on the board and, consequently, that the complaint was properly dismissed.

Preliminarily we reject plaintiffs’ argument that to the extent their claims are premised on an abdication of responsibility, it is a direct claim for which no pre-suit demand is required. Here, because plaintiffs could not prevail on their claims without also showing injury to the corporation, the claims are derivative not direct, implicating the law of pre-suit demands (see Tooley v Donaldson, Lufkin & Jenrette, Inc., 845 A2d 1031 [Del 2004]).

Since JPMorgan is incorporated under Delaware law, Delaware law applies to plaintiff’s claims and the issue of demand futility (Del Ch Ct Rules rule 23.1; Wandel v Dimon, 135 AD3d 515 [1st Dept 2016]; see e.g. Siegel v J.P. Morgan Chase & Co., 103 AD3d 598 [1st Dept 2013], lv denied 21 NY3d 856 [2013]; In re Citigroup Inc. Shareholder Derivative Litig., 964 A2d 106 , 120 [Del Ch 2009]). In Delaware, as a condition precedent to a plaintiff bringing a shareholder derivative action on behalf of a corporation, the plaintiff must make a pre

Plaintiffs did not plead with particularity facts establishing that a majority of the board at the time they commenced this action was interested or lacked independence. With the exception of Dimon, who was both a director and officer of JPMorgan, the board members were all outside directors. Independence requires that a director’s decision be based on the merits of the subject before the board rather than extraneous considerations or influences (see In re J.P. Morgan Chase & Co. Shareholder Litig., 906 A2d 808 , 821 [Del Ch 2005], affd 906 A2d 766 [Del 2006]). No claim is made that any of the outside directors stood on both sides of the transactions at issue or that any of them stood to receive any personal financial gain. Rather the claim that the individual board members lack independence is based on plaintiffs’ argument that they will likely face individual liability for their acts. The fact that a director will be called upon to consider whether to sue himself or herself does not, in itself, warrant a conclusion that he or she lacks independence (see e.g. Rales v Blasband, 634 A2d at 936 ). The alleged facts must, instead, support a conclusion that the potential for liability rises to the level of substantial likelihood (In re

The second prong of Aronson, requiring particularized allegations creating reasonable doubt that the challenged transaction was not the product of a valid exercise of business judgment, also was not satisfied by plaintiffs. Plaintiffs contend that the board’s action, including the adoption of the January 2007 resolution delegating authority to a management committee, was not a valid exercise of business judgment. However, this factual assertion examines the board’s course of action in hindsight and hinges on certain warning signs that plaintiff alleges the board failed to heed, including some losses that reverted back to JPMorgan’s balance sheet by September 2008. Delaware law presumes that in making a business decision the board of directors acts in good faith and in the honest belief that the action is taken in the best interests of the company (In re Walt Disney Co. Derivative Litig., 906 A2d 27 , 52 [Del 2006]). In order to satisfy the second prong of the Aronson test, plaintiffs are required to plead particularized facts sufficient to raise a reason to doubt that (1) the action was taken honestly and in good faith or (2) the board was adequately informed in making the decision (In re J.P. Morgan Chase & Co. Shareholder Litig., 906 A2d at 824). These facts do not rebut the presumption of regularity of the board’s decision making process (Brehm v Eisner, 746 A2d at 259 ). Although risky, the

Even if plaintiffs’ claims regarding the board abdication constitute board inaction, implicating application of the alternative Rales test for demand futility, it fails. Where the claim is that the board directors consciously disregarded a known duty to act, in dereliction of their duties, the burden on the plaintiff to plead particularized and provable facts is even greater. This claim, sometimes referred to as “a breach of duty of care” or a “lack of oversight” claim is “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment” (see In re Caremark Intl. Inc. Derivative Litig., 698 A2d 959 , 967 [Del Ch 1996]). The test of whether a pre-suit demand is excused in these situations is whether, at of the time the complaint was filed, the board of directors could not have properly exercised its independent and disinterested business judgment in responding to a demand to act (Wandel v Dimon, 135 AD3d at 517 , citing Rales v Blashand, 634 A2d at 934 ).

To adequately plead a lack of oversight claim, a plaintiff must set forth particularized facts that there was a “sustained or systematic failure” by the board to exercise oversight, demonstrating “the lack of good faith that is a necessary condition to liability” (In re Caremark at 971). Plaintiffs’ claim that the individual directors are responsible for corporate losses because they failed to monitor corporate operations is insufficient. As under the Aronson test, the allegations must be that a majority of the board lacked independence due to a “substantial likelihood,” not just a “mere threat” of individual liability

Under these circumstances, a pre-suit demand is not excusable and Supreme Court was correct in granting defendants’ motion to dismiss the complaint.

Concur—Friedman, J.P., Andrias, Gische and Kapnick, JJ.