Apple Inc. v. Superior Court of Santa Clara Cnty.

plaintiff must plead 'with particularity' the attempts that were made to secure board action before bringing suit, or, alternatively, the factual basis upon which the plaintiff believes that a demand on the board was unnecessary, i.e., that a demand would have been futile. Difficulties often arise in shareholder derivative suits in resolving whether the plaintiff has alleged sufficient facts supporting demand futility, thereby obviating the need for a prior demand on the board and the concomitant opportunity for the directors to decide whether to pursue litigation on the corporation's behalf." ( Bader , supra , 179 Cal.App.4th at p. 782, 101 Cal.Rptr.3d 821 .)

Because the role of managing the business of the corporation is vested in its board of directors, not its shareholders ( Grosset v . Wenaas (2008) 42 Cal.4th 1100 , 1108, 72 Cal.Rptr.3d 129 , 175 P.3d 1184 ( Grosset )), a shareholder seeking redress on behalf of the corporation for alleged mismanagement by corporate officers " 'must make an earnest, not a simulated effort, with the managing body of the corporation, to induce remedial action on their part, and this must be apparent to the court.' " ( Bader , supra , 179 Cal.App.4th at p. 789, 101 Cal.Rptr.3d 821 .) The presuit demand requirement provides " 'a limited exception to the usual rule that the proper party to bring a claim on behalf of a corporation is the corporation itself, acting through its directors or the majority of its shareholders. ...' " ( Ibid . ) It serves primarily " ' "to protect the managerial freedom of those to whom the responsibility of running the business is delegated ...." ' " ( id . at pp. 789-790, 101 Cal.Rptr.3d 821 ) and "to prevent the abuse of the derivative suit remedy." ( Id . at p. 790, 101 Cal.Rptr.3d 821 .)

In accordance with this purpose, California law requires the plaintiff who files a shareholder derivative suit to "allege[ ] in the complaint with particularity plaintiff's efforts to secure from the board such action as plaintiff desires, or the reasons for not making such effort, and allege further that plaintiff has either informed the corporation or the board in writing of the ultimate facts of each cause of action against each defendant or delivered to the corporation or the board a true copy of the complaint which plaintiff proposes to file." ( § 800(b)(2).) Demand futility under

duties by enabling or permitting these illegal agreements over many years.

The action at bar consolidates three individual shareholder derivative lawsuits filed in March, April, and July 2014. It follows the settlement of an action filed by the Department of Justice in 2010 against Apple, Adobe, Google, Intel, Intuit, and Pixar based on " 'violations of the federal antitrust laws,' " which plaintiffs allege the Apple board never disclosed to shareholders in any proxy statement or regulatory filings, and several federal class action lawsuits brought by employees of Apple and other technology companies, which were consolidated under the caption In re High-Tech Employee Antitrust Litigation , No. 11-CV-2509-LHK (N.D. Cal.) and settled in March 2015.

knowledge of the agreements to the directors who served on the board's compensation committee. The committee was responsible for overseeing the

in Braddock should apply under the extraordinary circumstances of a derivative action that seeks to divest a company's board of its authority to consider and oversee litigation.

The superior court declined to apply Braddock , noting that Apple was a California corporation and petitioners had failed to cite "any California authority supporting" their argument that the relevant board was that in place as of the filing of the amended complaint. The court also sought to distinguish Braddock , noting that its order sustaining petitioners' prior demurrer to the initial complaint did not " 'dismiss' " the action, but simply sustained the demurrer with express leave to amend.

The superior court nonetheless found that the amended complaint failed to state sufficient, particularized facts to excuse demand as to a majority of the 2014 Board. The court emphasized that general allegations of involvement in a conspiracy, based on the inference that a majority of the board expressly or tacitly approved the anticompetitive agreements and practices, are not sufficient to establish demand futility under California law. The court sustained the demurrer with leave to amend on that ground but overruled the demurrer on the alternative ground of failure to state facts sufficient to constitute a cause of action, noting it was "entirely unsupported" by any argument in petitioners' papers.

Plaintiffs filed the operative complaint in April 2016, again alleging demand futility with respect to the 2014 Board. Petitioners' demurrer to the operative complaint argued that plaintiffs had failed to allege demand futility with sufficient particularity and, based on the reasoning of Braddock , should have alleged demand futility with respect to the current board. Specifically, since the filing of the original actions and the amended complaint, Susan Wagner had replaced defendant Campbell, and James Bell had replaced defendant Drexler. Petitioners contended that the operative complaint failed to allege demand futility as to non-defendant directors Wagner, Bell, and Sugar, and alleged only conclusory facts regarding non-defendant directors Jung, Gore, and Iger. Petitioners maintained that the "lack of material allegations against six of Apple's eight" board members was "alone sufficient

facts regarding defendant Drexler and non-defendant Iger supported a "reasonable inference" that demand was futile as to those two directors. Regarding the board generally, the court stated that "specific allegations of widely-known misconduct spanning many years and involving numerous Silicon Valley companies with shared board members, coupled with the direct evidence of knowledge and participation by some Apple board members, support an inference that a majority of the board knew of and condoned these agreements and establishes demand futility for purposes of demurrer." The court concluded that the operative complaint met the demand excusal requirement for at least half of the 2014 Board, allowing the first and fifth causes of action to proceed.

Petitioners sought writ relief from this court directing the respondent superior court to vacate its order overruling the demurrer and to enter a new order sustaining the demurrer as to the first and fifth causes of action. We issued an order to show cause and stayed the superior court proceedings, and requested briefing from the parties.

A. PROPRIETY OF WRIT RELIEF

"An order overruling a demurrer is not directly appealable, but may be reviewed on appeal from the final judgment. [Citation.] Appeal is presumed to be an adequate remedy and writ review is rarely granted unless a

the [special litigation committee] defense." ( Id . at p. 1005, 84 Cal.Rptr.3d 642 , emphasis added.) Patrick outlines these dual avenues of recourse but says nothing about the availability of writ relief if the standing issue is wrongly decided. This distinction is important since appointment of a special litigation committee may presuppose that other members of the board are interested. (See Oakland Raiders , supra , 93 Cal.App.4th at p. 590, 113 Cal.Rptr.2d 255 ["failure to appoint a special litigation committee to investigate the claims made in a derivative suit cannot raise an inference of demand futility because there is no necessity to appoint a special litigation committee if the board itself is disinterested"]; Desaigoudar v . Meyercord (2003) 108 Cal.App.4th 173 , 184-185, 133 Cal.Rptr.2d 408 [the "common practice" in shareholder derivative suits alleging wrongdoing on the part of a majority of directors is for the board to appoint a special litigation committee of independent directors to investigate the challenged transaction].)

existing at the commencement of a derivative suit.' " ( Id . at p. 791, 101 Cal.Rptr.3d 821 , quoting Aronson , supra , 473 A.2d at p. 810.) This passage supports the general rule that demand futility is measured as of the time the derivative action is filed.

But as Bader recognized, Delaware courts do not apply the Aronson test mechanically. Thus, where the challenged conduct did not arise from board action, the court applies the alternate test from Rales , which "inquires 'whether the board that would be addressing the demand can impartially consider its merits without being influenced by improper considerations.' " ( Bader , supra , 179 Cal.App.4th at p. 791, 101 Cal.Rptr.3d 821 , quoting Rales , supra , 634 A.2d at p. 934.) That test asks whether the allegations " 'create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand.' " ( Bader , supra , at pp. 791-792, 101 Cal.Rptr.3d 821 .) The Rales test highlights the specificity of the demand inquiry in relation to the nature of the conduct challenged and the board's alleged role, if any, in that conduct.

( Braddock , supra , 906 A.2d at p. 779.) Nearly two years later, the plaintiff sought leave to file a second amended complaint. By that time, five members of the board of directors had been replaced, and two new board seats had been created and filled, resulting in a 13-member board that included only six of the former members. ( Braddock , supra , at p. 779.) The defendants opposed leave to file the second amended complaint, arguing in part that demand futility had to be assessed with respect to the new board, since the majority was disinterested and capable of independently consider the plaintiff's claims. ( Braddock , supra , at p. 780.) The Court of

furthers the "fundamental purpose of a derivative action," which "is to provide a means by which a stockholder may seek to enforce the rights of a corporation when the corporate board refuses to do so." ( Grosset , supra , 42 Cal.4th at p. 1114, 72 Cal.Rptr.3d 129 , 175 P.3d 1184 .) Plaintiffs offer no compelling reason-and we have identified none-for departing from Braddock 's sound conclusion that when an amended complaint asserts derivative claims that are not already validly in litigation, the demand requirement pertains to the board of directors in place at that time. ( Braddock , supra , 906 A.2d at p. 786.)

The narrow application of Braddock belies plaintiffs' claim that implementing its rule will allow corporate defendants to file seriatim demurrers with each amended complaint and require the court to revisit the threshold demand futility issue. To begin, a derivative plaintiff under California law already must make a demand on the company's board to take legal action or show that it would have been futile to do so at the time the case is initiated. ( § 800(b)(2).) If the suit is properly initiated and the derivative claims are validly in issue, the presuit demand requirement has been met; hence, the filing of an amended complaint arising from those same claims will not trigger reassessment of the demand requirement.

Braddock reiterated this point by citing an earlier Court of Chancery ruling: " 'When claims have been properly laid before the court and are in litigation, neither [the demand requirement] nor the policy it implements requires that a court decline to permit further litigation of those claims upon the replacement of the interested board with a disinterested one .... [¶] ... [A]n amendment or supplement to a complaint that elaborates upon facts relating to acts or transactions alleged in the original pleading, or asserts new legal theories of recovery based upon the acts or transactions that formed the substance of the original pleading, would not ... require a derivative plaintiff to bring any part of an amended or supplemental complaint to the board prior to filing.' " ( Braddock , supra , 906 A.2d at p. 785.)

Only if the trial court has deemed the complaint inadequate-either for failure to state a claim or failure to meet the demand requirement, and the plaintiff reasserts the derivative claims in an amended complaint to avoid dismissal-will the rule apply. Braddock preserves this distinction by identifying the circumstances in which a plaintiff filing an amended derivative complaint need not make demand-or plead its futility-with respect to a new board. Under this rubric, a plaintiff who demonstrates that the original

to "institut[ing] or maintain[ing]" a derivative claim ( § 800, subd. (b) ).

We believe this conclusion harmonizes with the California Supreme Court's consideration of standing in a somewhat related context involving continuous stock ownership in a derivative action. The high court considered whether the plaintiff in a derivative suit had standing to continue litigating the action after involuntarily losing his stock in the nominal defendant corporation due to a merger. ( Grosset , supra , 42 Cal.4th at p. 1104, 72 Cal.Rptr.3d 129 , 175 P.3d 1184 .) The court observed that while the language of section 800, subdivision (b)"d[id] not clearly impose" a continuous ownership requirement, there were "other considerations" that supported or even compelled an interpretation of the statute to require continuous ownership. ( Grosset , supra , at p. 1114, 72 Cal.Rptr.3d 129 , 175 P.3d 1184 .) These included "the statutory purpose to minimize abuse of the derivative suit" and "the basic legal principles pertaining to corporations and shareholder litigation." ( Ibid . ) The court reiterated that the authority to pursue a claim on a corporation's behalf rests with the board of directors. ( Ibid . ) A stockholder can seek to enforce the corporation's rights in a derivative suit, but "[t]he fact remains that a derivative claim belongs to the corporation, not to the plaintiff asserting the claim on the corporation's behalf." ( Id . at p. 1118, 72 Cal.Rptr.3d 129 , 175 P.3d 1184 .) The court concluded that because the plaintiff no longer owned stock in the corporation, he did not have standing to continue litigating the derivative action. ( Id . at p. 1119, 72 Cal.Rptr.3d 129 , 175 P.3d 1184 .)

We similarly find that although the pleading requirement imposed by section 800(b)(2) does not address the precise circumstances arising here, it constrains the derivative mechanism to those occasions in which the board,

Braddock , supra , 906 A.2d at p. 779 ), the relevant holding was not tied to a threshold change in board composition. Rather, the rationale behind the rule in Braddock was to enable the board in place at the time of the filing of an amended complaint to exercise its authority over the affairs of the corporation by reviewing the derivative claims not yet "validly in litigation." ( Id . at p. 786.)

Plaintiffs cite several cases in support of the proposition that Braddock applies only when a majority of the board has changed. Two of these cases predate Braddock but are nonetheless consistent with its holding; in both, the

Grimshaw v. Ford Motor Co . (1981) 119 Cal.App.3d 757 , 787, 174 Cal.Rptr. 348 ) and may depend on courts drawing logical and reasonable inferences (see Evid. Code, § 600, subd. (b) ; Phillips v. Honeywell Internat. Inc . (2017) 9 Cal.App.5th 1061 , 1078, 217 Cal.Rptr.3d 147 ). But this general precept does not displace statutory law that requires the particularized pleading of demand futility. "[G]iven the requirement under section 800(b)(2) that allegations be made 'with particularity,' it is clear that general averments that the directors were involved in a conspiracy or aided and abetted the wrongful acts complained of will not suffice .... [Citation.] ... Rather, 'the court must be apprised of facts specific to each director from which it can conclude that that particular director could or could not be expected to fairly evaluate the claims of the shareholder plaintiff.' [Citation.] Thus, the court, in reviewing the allegations to support demand futility, must be able to determine on a director-by-director basis whether ... each possesses independence or disinterest such that he or she may fairly evaluate the challenged transaction." ( Bader , supra , 179 Cal.App.4th at p. 790, 101 Cal.Rptr.3d 821 .)

Where, as here, the derivative claim stems from conduct that did not involve a decision of the board, the Rales test applies. Plaintiffs were "required to allege facts 'with particularity' ( § 800(b)(2) ) sufficient to 'create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand.' " ( Bader , supra , 179 Cal.App.4th at p. 797, 101 Cal.Rptr.3d 821 .) Broad or conclusory allegations are insufficient ( Shields , supra , 15 Cal.App.4th at p. 1621, 19 Cal.Rptr.2d 459 ), as are "facts relating to the structural bias common to corporate boards ...." ( Oakland Raiders , supra , 93 Cal.App.4th at p. 587, 113 Cal.Rptr.2d 255 .) Hence, "the court must be apprised of facts specific to each director from which it can conclude that that particular director could or could not be expected to fairly evaluate the claims of the shareholder plaintiff." ( Shields , supra , at p. 1622, 19 Cal.Rptr.2d 459 ; see also Rales , supra , 634 A.2d at pp. 935-936 [whether the board can impartially consider a demand depends on the members' ability to act independently and free of personal interest in light of the allegations confronting them].)

In re Sagent Technology, Inc., Derivative Litig . (N.D.Cal. 2003) 278 F.Supp.2d 1079 , 1089.)" ( Id . at pp. 792-793, 101 Cal.Rptr.3d 821 .)

We independently review the sufficiency of the demand futility pleading. ( Bader , supra , 179 Cal.App.4th at p. 786, 101 Cal.Rptr.3d 821 .) Plaintiffs' allegations focus substantially on the threatening force that Apple co-founder and CEO Steve Jobs exerted in negotiating and enforcing non-solicitation agreements with heads of companies, including many that appeared on Apple's "Hands Off" list and his " 'tight control' " over the Apple directors and outspoken belief that companies in business relationships should not hire each other's technical people. Plaintiffs claim that particularized allegations showing that defendants Campbell, Levinson, and Schmidt knew about Apple's policies and practices, combined with Jobs' aggressive backing of the policies and sway over board members, are sufficient to establish knowledge on the part of the entire Apple board.

Plaintiffs further rely on allegations of the directors' close personal and business ties with Jobs, particularly as to Cook, Levinson, and Iger, who became Disney's CEO in 2005 and formed a relationship with Jobs around that time, when he approached Jobs (who was then Pixar's CEO) about a Disney/Pixar acquisition. Plaintiffs allege that Iger and Jobs maintained a close personal relationship thereafter, evidenced by Iger's willingness to keep secret Jobs' recurrence of cancer in 2006 despite his fiduciary duty to Disney to disclose matters material to Disney's Pixar acquisition. Plaintiffs contend that these allegations support the inference that the board knew about the anticompetitive policies and suggest the directors "could not be impartial in deciding to bring a lawsuit which would tarnish" Jobs's legacy.

that Iger "knew of the

Elia, Acting P.J.

Grover, J.

This writ petition presents an issue of first impression concerning the demand futility pleading requirement in a shareholder derivative suit under California law. The question is whether a plaintiff alleging derivative claims in an amended complaint following the grant of leave to amend must plead demand futility with respect to the board of directors in place as of the filing of the amended complaint or the initial complaint, when the composition of the board of directors has changed in the interim.

Petitioners Apple Inc. (Apple), Timothy Cook, Millard Drexler, and Arthur Levinson (together "petitioners") argue that fundamental principles of corporate law require the court to assess demand futility as to the board in place when the amended complaint is filed, consistent with the rule enunciated by the Delaware Supreme Court in Braddock v . Zimmerman (2006) 906 A.2d 776 ( Braddock ). Respondent Santa Clara County Superior Court declined to apply the Braddock rule, citing the absence of any published California authority on the issue. The superior court overruled petitioners' demurrer after finding that the amended complaint adequately alleged demand futility as to the board in place when the original action was filed. Plaintiffs and real parties in interest the Police Retirement System of St. Louis, John Krawczyk, II, and John Barto (together "plaintiffs") argue that the court applied the correct rule and, in any event, that the amended complaint adequately pleads demand futility regardless of which board of directors is considered.

We conclude that Braddock is consistent in relevant respects with California law and that, under the circumstances of this case, the respondent superior court should have assessed the pleading of demand futility with respect to the board of directors in place at the time the amended complaint was filed.

The issues presented herein may be better understood in view of certain principles of corporate law and shareholder derivative suits. We begin with the summary of these principles set forth in Bader v . Anderson (2009) 179 Cal.App.4th 775 , 101 Cal.Rptr.3d 821 ( Bader ).

As a general rule, "[m]anagement of a corporation, including decisions concerning the prosecution of actions, is vested in its board of directors.

section 800(b)(2) thus requires a plaintiff who alleges "reasons for not making such effort" to plead, with particularity, the circumstances excusing her from making a demand. ( Ibid .)

Bader explained that few California cases have delineated the circumstances constituting demand futility, but "given the requirement under section 800(b)(2) that allegations be made 'with particularity,' it is clear that general averments that the directors were involved in a conspiracy or aided and abetted the wrongful acts complained of will not suffice .... [Citation.] Likewise, a general claim that there is nationwide structural bias common to corporate boards will not excuse the making of a demand before bringing a derivative suit. [Citation.] Rather, 'the court must be apprised of facts specific to each director from which it can conclude that that particular director could or could not be expected to fairly evaluate the claims of the shareholder plaintiff.' " ( Bader , supra , 179 Cal.App.4th at p. 790, 101 Cal.Rptr.3d 821 .)

California courts commonly look to two tests enunciated by the Delaware Supreme Court for determining the adequacy of the pleading of demand futility. Where a decision of the board of directors is challenged in the derivative suit, the Aronson test asks "whether, under the particularized facts alleged, a reasonable doubt is created that: (1) the directors are

The Delaware Supreme Court in Braddock considered under what circumstances a shareholder is required to make demand or plead demand futility when filing an amended derivative complaint. Following the precept that boards of directors manage the affairs of corporations and, by extension, must be given the opportunity through the demand requirement to rectify an alleged wrong or control any litigation that arises, the court ruled that a change in the composition of a previously conflicted board is relevant insofar as it may determine whether, "as of the time the complaint was filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand." ( Braddock , supra , 906 A.2d at p. 785.) The court found this to be true, however, "only as to derivative claims in the amended complaint that are not already validly in litigation." ( Id . at p. 786.) Braddock thus stands for the proposition that the demand inquiry in an amended derivative complaint following a dismissal without prejudice "must be assessed by reference to the board in place at the time when the amended complaint is filed." ( Ibid . )

We consider Braddock 's application under California law after reviewing the pertinent facts and detailed procedural history of this case.

A

. COMPLAINT ALLEGATIONS

Plaintiffs, who are Apple shareholders, bring this consolidated derivative action on behalf of nominal defendant Apple. The heart of plaintiffs' case is Apple's alleged pursuit and enforcement of anticompetitive agreements with other Silicon Valley companies to prohibit the recruitment or "cold calling" of each other's employees. Plaintiffs allege that certain current and former members of Apple's board of directors were aware of or tacitly approved of Apple's practices and breached their fiduciary

to establish standing and excuse plaintiffs' failure to make a demand, and/or failure to state a cause of action-petitioners argued only the standing and demand futility ground. They declared that since the filing of the original derivative actions, defendants Campbell and Drexler had left Apple's board, and Susan Wagner had joined the board. Petitioners argued that as a matter of law, demand futility must be analyzed as of the filing of the then-current (amended) complaint filed in June 2015, not with respect to the board in place when the prior, legally insufficient claims were filed. Petitioners contended that the "compelling logic" of the Delaware Supreme Court's decision

to defeat" plaintiffs' claims, though the operative complaint also failed to plead demand futility as to the 2014 Board. Plaintiffs further demurred to the operative complaint causes of action on the ground of failure to state facts sufficient to constitute a cause of action.

C. ORDER ON THE OPERATIVE COMPLAINT

In a detailed written order, the superior court overruled the demurrer to the first and fifth causes of action for breach of fiduciary duty and indemnification on the ground of demand futility and standing, but rejected the demurrer to those causes of action for failure to state a claim, noting it had overruled petitioners' prior demurrer on that ground for having failed to offer any argument in support. The court sustained without leave to amend the demurrer to the other three causes of action, finding the asserted claims were beyond the scope of the prior order granting leave to amend.

On the issue of demand futility, the court adhered to its earlier conclusion that demand futility is assessed as of the time a derivative action is filed, noting that petitioners "still cite no authority" applying Braddock under California law. The court found that plaintiffs had specifically alleged demand futility as to defendants Campbell, Cook, and Levinson. In a footnote, the court further found that particularized

significant issue of law is raised, or resolution of the issue would result in a final disposition as to the petitioner." ( Casterson v . Superior Court (2002) 101 Cal.App.4th 177 , 182, 123 Cal.Rptr.2d 637 .) "Although appellate courts are loath to exercise their discretion to review rulings at the pleading stage, they will do so where the circumstances are compelling and the issue is of widespread interest. ( Brandt v . Superior Court (1985) 37 Cal.3d 813 , 816, 210 Cal.Rptr. 211 , 693 P.2d 796 .)" ( County of Santa Clara v . Superior Court (2009) 171 Cal.App.4th 119 , 126, 89 Cal.Rptr.3d 520 .)

Writ review is appropriate here to help ensure the pleading of demand futility in derivative suits involving California corporations is consistent in relevant respects with California corporate law-including with case authority that looks to Delaware law on related issues in derivative litigation. Plaintiffs argue, unconvincingly, that writ relief is inappropriate because an appeal would be available following a judgment in this case, and any claimed harm due to petitioners' purported loss of the right to control the company's litigation is not irreparable and could be addressed by appointment of " 'a special litigation committee of independent directors to investigate the challenged transaction.' " ( Patrick v . Alacer Corp . (2008) 167 Cal.App.4th 995 , 1005, 84 Cal.Rptr.3d 642 ( Patrick ).) But as Patrick makes clear, a board's ability to appoint a special litigation committee to investigate the merits of the derivative claim and potentially assert the special litigation committee defense does not alter or negate its right to contest the derivative plaintiff's standing in the first instance.

The standing requirements for a derivative action, including the demand requirement, "reflect the limited adverse relationship between the shareholder plaintiff and the corporation." ( Patrick , supra , 167 Cal.App.4th at p. 1004, 84 Cal.Rptr.3d 642 .) It follows that while the corporation cannot "challenge the merits of a derivative claim filed on its behalf and from which it stands to benefit," it "may assert defenses contesting the plaintiff's right or decision to bring suit, such as asserting the shareholder plaintiff's lack of standing or

The question presented in this case is whether the superior court utilized the correct framework to analyze the alleged interest of the members of the board, and thus whether plaintiffs have properly pleaded demand futility and can proceed with the derivative litigation. Because appointment of a special litigation committee would not resolve that question, the extraordinary remedy of writ review is appropriate.

B. STANDARD OF REVIEW

We review an order overruling a demurrer de novo, accepting as true all facts properly pleaded in the complaint in order to determine whether the demurrer should be overruled. ( Casterson v . Superior Court , supra , 101 Cal.App.4th at pp. 182-183, 123 Cal.Rptr.2d 637 .) The settled rules for reviewing the sufficiency of a complaint apply: " ' "We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. [Citation.] We also consider matters which may be judicially noticed." [Citation.] Further, we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context.' " ( Bader , supra , 179 Cal.App.4th at p. 786, 101 Cal.Rptr.3d 821 , quoting Blank v . Kirwan (1985) 39 Cal.3d 311 , 318, 216 Cal.Rptr. 718 , 703 P.2d 58 .)

Accordingly, we review de novo the allegations of the operative complaint against the particularized demand futility pleading requirement applicable to shareholder derivative litigation and with respect to the relevant board of directors at Apple.

C. ANALYSIS

Petitioners contend that the superior court erred in two ways: first, by declining to adopt the reasoning of Braddock and instead assessing demand futility with respect to the board of directors in place when the derivative litigation commenced; and second, by inferring that demand would have been futile as to an unspecified majority of the Apple board even though plaintiffs alleged particularized facts as to only three directors.

Plaintiffs respond that this court need not reach the issue of whether Braddock applies under California law, because (1) they have adequately alleged demand futility regardless of which board of directors is considered, and (2) the reasoning and factual circumstances of Braddock are distinguishable since that case involved "the existence of a new independent board of directors" ( Braddock , supra , 906 A.2d at p. 786 ) following dismissal of the prior complaint, whereas in this case only two out of the eight members of

Apple's board of directors had changed as of the filing of the operative complaint, which was based

Plaintiffs did not contest or question petitioners' showing regarding the composition of Apple's board until this writ proceeding. We might assume this was because the superior court indicated it would assess demand futility with respect to the 2014 Board. Yet even in this court, plaintiffs offer no alternate interpretation of the SEC filings and point to no contrary evidence to suggest the timing of changes to the board is in dispute. This stands in contrast to cases involving the erroneous use of judicial notice on demurrer, where a document is subject to conflicting interpretations and the ruling on demurrer improperly determines disputed facts. (See, e.g., Fremont , supra , 148 Cal.App.4th at pp. 112-115, 55 Cal.Rptr.3d 621 [trial court erred by taking judicial notice of disputed letter agreement and interpreting the document].)

The taking of judicial notice of Apple's SEC filings establishes only their existence and reported contents, and more closely resembles cases in which there is no factual dispute concerning the matter to be noticed. (See, e.g., StorMedia , supra , 20 Cal.4th at p. 457, fn. 10, 84 Cal.Rptr.2d 843 , 976 P.2d 214 [confirming allegations in the complaint by referencing a judicially-noticed employee stock purchase plan that showed the " 'exercise date' on which stock

2. The Rationale of the Delaware Supreme Court in Braddock Applies to the Pleading of Demand Futility Under California Law

The superior court founded its demand futility analysis on the principle that "under California law, demand futility is assessed as of the time a derivative action is initially filed." The court drew its conclusion in part from this court's decision in Bader . As we shall explain, the superior court's conclusion was not incorrect but was incomplete under the circumstances. The principles governing derivative litigation under California law lead us to conclude, consistent with Braddock , that when a trial court declares derivative claims to be legally insufficient and grants leave to amend, the demand requirement must be reassessed against the disinterest and independence of the board of directors in place when the amended derivative claims are filed.

a. The Reasoning in Braddock Is Consistent with California Law

As discussed in section I, Bader adopted the Delaware Supreme Court's tests for the pleading of demand futility, set forth in Aronson and Rales . Bader explained that where the derivative claims challenge an affirmative decision or act of the board, the adequacy of the pleading is determined by the two-pronged test from Aronson . ( Bader , supra , 179 Cal.App.4th at pp. 790-791, 101 Cal.Rptr.3d 821 .) Under that test, " '[f]utility is gauged by the circumstances

Chancery, however, ruled that because the single count in the second amended complaint was alleged in the first amended complaint, it remained " 'validly in litigation' " and, therefore, demand was properly excused based on the board that was in place at the time of the first amended complaint. ( Braddock , supra , at p. 780.)

The Delaware Supreme Court reversed. It held that "the Court of Chancery should have assessed demand futility ... with regard to the board that was in place at the time" the second amended complaint was filed. ( Braddock , supra , 906 A.2d at p. 786.) The court explained that demand futility must be determined pursuant to the standards articulated in Aronson or in Rales . ( Id . at p. 784.) The demand requirement should not be construed so " 'as to stall the derivative suit mechanism where it has been properly initiated' or to 'interrupt litigation.' " ( Id . at p. 785.) But when "the original complaint was either not well pleaded as a derivative action or did not satisfy the legal test for demand excusal," the court reasoned that "the existence of a new independent board of directors is relevant" to the "derivative claims in the amended complaint that are not already validly in litigation." ( Id . at p. 786.)

The court specified three conditions that "must exist to excuse a plaintiff from making demand ... when a complaint is amended after a new board of directors is in place: first, the original complaint was well pleaded as a derivative action; second, the original complaint satisfied the legal test for demand excusal; and third, the act or transaction complained of in the amendment is essentially the same as the act or transaction challenged in the original complaint." ( Braddock , supra , 906 A.2d at p. 786.) Since claims that have been dismissed without prejudice and with leave to amend are "not validly in litigation," the Braddock court concluded that a plaintiff who files an amended complaint under those circumstances must comply with the demand requirement "by reference to the board in place at the time when the amended complaint is filed." ( Ibid . )

Petitioners urge this court to adopt the rule set forth in Braddock as a matter of California law. They maintain that Braddock simply extended the general rule, followed in Delaware and in California, that a plaintiff bringing a derivative suit must make demand on the company's board to take legal action or show that it would have been futile to do so at the time the case was initiated. They argue that Braddock reinforces the policy behind the demand requirement, imposes no improper burden on plaintiffs, and ensures consistency with courts applying Delaware law and the laws of other states.

In response, plaintiffs dispute the relevance of Braddock -suggesting that Delaware cases do not reveal a clear doctrine as to the demand requirement

when an amended complaint is filed-and seek to distinguish Braddock as setting forth a narrow exception that does not apply under the circumstances in this case.

We find that Braddock expresses a narrow extension of the general rule and

Braddock thus remains authority under Delaware law and is consistent with the principles behind the demand requirement in California. Viewed as a matter of standing, a determination on demurrer that a plaintiff has failed to adequately allege demand futility means the plaintiff has yet to establish standing to pursue the derivative claims. As the Court of Appeal explained, "[F]or a plaintiff to have standing to file a derivative action, it must allege the corporation knew about the claim and was urged to pursue it to no avail or, in any event, the corporation would not have pursued the claim." ( Patrick , supra , 167 Cal.App.4th at pp. 1004-1005, 84 Cal.Rptr.3d 642 .) It follows that a plaintiff reasserting derivative claims in an amended complaint, after a sustained demurrer on demand futility grounds, remains subject to the standing requirement and must allege demand futility with respect to the board that would be addressing demand at that time. (See Bader , supra , 179 Cal.App.4th at p. 791, 101 Cal.Rptr.3d 821 [court "inquires 'whether the board that would be addressing the demand can impartially consider its merits without being influenced by improper considerations' "].) To conclude otherwise would dilute the function of the demand requirement, which serves to protect the managerial freedom of the board and to prevent abuse of the derivative suit remedy, since the prior pleading never met the basic demand precondition

properly presented with a demand, either refuses to act or would be disabled from acting due to majority interest or lack of independence. For the mechanism to function, derivative claims not already validly in litigation should be subject to the same requirement at the time they are filed.

b. The Demand Requirement Must Be Reassessed if ( 1 ) the Derivative Claims Were Not Validly in Litigation , and ( 2 ) Changes to the Board Affect the Alleged Futility of Demand as to Those Claims

We need look no further than the circumstances of this case for a suitable example of how Braddock 's reasoning applies under California law.

As discussed earlier, the superior court sustained petitioners' demurrers to the initial complaint and amended complaint, finding as to each that plaintiffs had failed to adequately allege demand futility, and granted leave to amend. The court further noted that it was overruling the demurrer to the amended complaint on the ground of failure to state a cause of action. Plaintiffs contend based on this latter ruling that their derivative claims were validly in litigation when they filed the operative complaint. They argue that procedural differences between a sustained demurrer with leave to amend under California law, and the grant of a motion to dismiss under Delaware law, negate any application of Braddock here, and that Braddock applies only where there is a new and independent board in place that can consider a demand. These arguments are unavailing.

Contrary to plaintiffs' assertion that the superior court found plaintiffs' amended complaint had adequately pled causes of action for breach of fiduciary duty and unjust enrichment, the court stated only that it was overruling the demurrer on

place when the operative complaint was filed in April 2016. To the extent the court analyzed demand futility with respect to the 2014 Board, the

established by circumstantial evidence, they only need to plead facts sufficient to support an inference of reasonable doubt that the director in question can act impartially, citing Sandys v. Pincus (Del. 2016) 152 A.3d 124 ( Sandys ). They further argue that knowledge on the part of certain directors can support an inference as to the other directors, citing Saito v. McCall (Del. Ch. 2004) 2004 Del. Ch. Lexis 205 ( Saito ), overruled on other grounds by Lambrecht v. O'Neal (Del. 2010) 3 A.3d 277 , 293. Plaintiffs contend on this basis that it was reasonable for the superior court to draw inferences from particularized facts about certain board members' knowledge of and complicity in the anti-recruitment agreements.

Plaintiffs are correct that knowledge may be established by circumstantial evidence (see

"A director will be deemed not to be disinterested if the facts alleged 'demonstrat[e] a potential personal benefit or detriment to the director as a result of the decision.' " ( Bader , supra , 179 Cal.App.4th at p. 792, 101 Cal.Rptr.3d 821 ; see also Rales , supra , 634 A.2d at p. 936.) Lack of independence means that a director is susceptible to " 'extraneous considerations or influences' " rather than the " 'corporate merits of the subject before the board.' " ( Bader , supra , at p. 792, 101 Cal.Rptr.3d 821 .) It is not enough to claim that "directors lack independence because they are dominated by" or were " ' "personally selected" ' " by a controlling shareholder. ( Ibid . ) Rather, "the plaintiff is required to present specific facts showing 'that through personal or other relationships the directors are beholden to the controlling person.' " ( Ibid ., quoting Aronson , supra , 473 A.2d at p. 815.) Because the " 'threat of personal liability for approving a questioned transaction' by itself is insufficient to refute the disinterestedness or independence of a director" ( Bader , supra , at p. 792, 101 Cal.Rptr.3d 821 ), " '[a] plaintiff may not "bootstrap allegations of futility" by pleading merely that "the directors participated in the challenged transaction or that they would be reluctant to sue themselves." [Citation.]' (

Plaintiffs also assert that the directors' direct supervision of recruiting and compensation at Apple supports the inference that they were not disinterested and knew of the anticompetitive practices. The operative complaint alleges that the compensation committee, which included directors Levinson, Gore, and later Jung, was responsible for overseeing the development of compensation programs for all employees and for approving the overall salary budget and merit increase budget. The committee "regularly discussed the need to attract and retain employees and evaluated the competitiveness of Apple's compensation practices in comparison to peer technology companies," including in correspondence with Apple's vice-president for human resources and with the help of an outside consultant retained in 2004 to conduct a compensation program market study. Plaintiffs refer to SEC filings quoted in the operative complaint and signed by several defendants and director Gore, which acknowledged Apple's need to attract and retain skilled personnel and cited the intense competition for personnel in the information technology industry. Plaintiffs also refer to proxy statements in which the directors solicited stockholder approval of stock-based compensation programs to increase competitiveness and allegedly made misleading statements about employee retention practices and competition.

We find these allegations, viewed in their context and in light of the complaint as a whole ( Bader , supra , 179 Cal.App.4th at p. 786, 101 Cal.Rptr.3d 821 ), insufficient to support an inference of lack of disinterest or independence, at least as to directors Gore and Jung. The allegations regarding Gore and Jung do not extend beyond each of their general roles as a director and member of the compensation committee. The facts alleged about the committee's activities are unremarkable

more, neither the general activities of the compensation committee, nor the detailed allegations regarding an Apple/Pixar agreement or Disney's 2006 acquisition of Pixar, support an inference that Gore knew of, let alone participated-as plaintiffs claim-in the alleged conspiracy. The same is true for director Jung, who plaintiffs simply allege "was also on the Compensation Committee in 2008."

We also are not persuaded that knowledge of Apple's non-solicitation practices and allegedly anticompetitive agreements with other companies can be imputed to Gore and Jung, for purposes of establishing demand futility, merely because they served on the board or the compensation committee alongside directors who are the subject of more direct allegations. Plaintiffs' reliance on a footnote in an unpublished Court of Chancery case for this proposition is unavailing. (See Saito , supra , 2004 Del. Ch. Lexis 205, at *33, fn. 68 [inferring that several directors' awareness of accounting irregularities "was communicated to other" board members in connection with a merger].) Whereas here, the allegations pertaining to the compensation committee suggest standard activities to oversee and adjust Apple's compensation practices in a highly competitive industry, the allegations in Saito indicated that accounting practices amounting to "at least a $40 to $55 million problem" were discussed by the audit committee in the midst of merger negotiations and were conveyed to the board of the merger partner, which nonetheless failed to react. ( Id . at *34.) In the absence of any facts to suggest the compensation committee was informed of Apple's non-solicitation practices affecting recruitment and hiring, there is no basis to infer knowledge on the part of Gore or Jung.

To be clear, our conclusion regarding Gore and Jung is based on the absence of any particularized factual allegations to support an inference of even general knowledge about the purportedly anticompetitive agreements with other companies, let alone knowledge or involvement sufficient to disable them from fairly considering plaintiffs' claims. This is particularly true where Gore and Jung held no "overlapping"

This context-specific conclusion should not be interpreted too broadly in light of petitioners' contentions regarding the superior court's use of inference. Courts evaluating demand futility at the pleading stage can draw reasonable inferences as to director interest when adequately founded on particularized allegations . (See Brehm v . Eisner , supra , 746 A.2d at p. 255 ["[p]laintiffs are entitled to all reasonable factual inferences that logically flow from the particularized facts alleged, but conclusory allegations are not considered as expressly pleaded facts or factual inferences"]; Sandys , supra , 152 A.3d at p. 128 [while the plaintiff " 'is bound to plead particularized facts in pleading a derivative complaint,' " the court assessing the sufficiency of the derivative complaint is " 'bound to draw all inferences from those particularized facts in favor of the plaintiff, not the defendant' "]; see also City of Stockton v . Superior Court (2007) 42 Cal.4th 730 , 747, 68 Cal.Rptr.3d 295 , 171 P.3d 20 [noting the "ordinary standards of demurrer review still apply" upon writ review of an order overruling a demurrer].)

Thus, particularized allegations of pervasive and continued corporate misconduct can support an inference of board knowledge and intentional disregard for purposes of assessing demand futility, particularly where the conduct relates to a product or policy "critical to a company's success" or "of special importance to it." ( Rosenbloom v . Pyott (9th Cir. 2014) 765 F.3d 1137 , 1154.) The Ninth Circuit Court of Appeals, interpreting Delaware case law, recently reaffirmed this principle in Rosenbloom , which the superior court cited as support for its conclusion that direct allegations regarding knowledge of Apple's non-recruitment practices and agreements on the part of a few directors supports a pleading stage inference that the other board members "knew of and condoned" the agreements. But whereas "a battery of particularized factual allegations" in Rosenbloom suggested that the board of the nominal defendant pharmaceutical company approved a strategic plan premised on the unlawful promotion of off-label sales of the drug Botox and closely monitored the increase in off-label sales over a period of years ( id . at p. 1152 ), plaintiffs' allegations in this case do not support an inference of either centralized action or conscious inaction on the part of the Apple board. At most, we concur with the superior court's inclination that particularized allegations regarding director Iger-based on his relationship with Jobs and on the testimony of Apple's vice president for human resources, which suggested the timing of Apple's non-solicitation agreement with Pixar was linked with Disney's acquisition of Pixar and Jobs's " 'coming on the board at Disney' "-supported a "reasonable inference"

non-solicitation agreements" and consented to the practice as CEO and board member of the parent company of Pixar.

Since the operative complaint does not allege that demand would have been futile as to directors Sugar, Wagner, and Bell, and we have found the allegations insufficient to disqualify directors Gore and Jung from fairly exercising " 'independent and disinterested business judgment in responding to a demand' " ( Bader , supra , 179 Cal.App.4th at p. 797, 101 Cal.Rptr.3d 821 ), we conclude that plaintiffs have failed to adequately plead excuse from the demand requirement ( § 800(b)(2) ) as to a majority of Apple's eight-member board of directors. Consequently, petitioners' demurrer to the operative complaint must be sustained.

4. Leave to Amend

In considering whether the demurrer should be sustained without leave to amend, we observe on the one hand that plaintiffs have not proposed how they would amend the operative complaint if the pleading is deemed inadequate with respect to the 2016 Board. It is generally the plaintiff's burden to " 'show in what manner he can amend his complaint and how that amendment will change the legal effect of his pleading.' " ( Goodman v . Kennedy (1976) 18 Cal.3d 335 , 349, 134 Cal.Rptr. 375 , 556 P.2d 737 ; see also Align Technology, Inc. v. Tran (2009) 179 Cal.App.4th 949 , 971, 102 Cal.Rptr.3d 343 .)

We cannot conclude on the record before us, however, that there is no reasonable possibility that plaintiffs can allege demand futility as to the required number of Apple board members. ( Quelimane Co. v. Stewart Title Guaranty Co . (1998) 19 Cal.4th 26 , 39, 77 Cal.Rptr.2d 709 , 960 P.2d 513 [leave to amend must be granted where "there is a reasonable possibility that the defect can be cured by amendment"].) Given the procedural posture of the case and the superior court's early indication that it would assess demand futility as of the time the original derivative actions were filed, plaintiffs were never directed to the correct point of reference for their pleading.

We take guidance on this point from our Supreme Court, which has explained that while "[d]enial of leave to amend is not unusual following writ review of an overruled demurrer, ... [citations] ..., leave to amend is properly granted where resolution of the legal issues does not foreclose the possibility that the plaintiff may supply necessary factual allegations. [Citation.] If the plaintiff has not had an opportunity to amend the complaint in response to the demurrer, leave to amend is liberally allowed as a matter of fairness, unless the complaint shows on its face that it is incapable of amendment." (

City of Stockton v . Superior Court , supra , 42 Cal.4th at p. 747, 68 Cal.Rptr.3d 295 , 171 P.3d 20 .) Because the operative complaint "does not on its face foreclose any reasonable possibility of amendment," we will direct the superior court to grant plaintiffs leave to amend, should they seek to do so. ( Ibid . )

Let a peremptory writ of mandate issue directing respondent superior court to vacate its order of October 5, 2016, overruling petitioners' demurrer to the first and fifth causes of action of the second amended consolidated shareholder derivative complaint, and to enter a new order sustaining the demurrer as to those causes of action, with leave to amend. The temporary stay order is vacated. Costs in this original proceeding are awarded to petitioners.

WE CONCUR: