Sixth Circuit Court of Appeals Affirms
Dismissal of Derivative Action
Brought Without
Demand, Holds Futility Exception Not Satisfied
A just-released decision of the
Sixth Circuit Court of Appeals has affirmed the trial court’s dismissal of a
derivative action filed with respect to a public corporation incorporated in
Tennessee where the plaintiff shareholder did not make a demand upon the
corporation and was held to have not satisfied the demand futility
requirements. Lukas v. McPeak, ___ F.3d ___, 2013 WL 5272924 (6th Cir.
Sept. 19, 2013).
Lukas was a shareholder in
Miller Energy Resources, Inc., a Tennessee corporation. The corporation had made numerous
misstatements as to its value and as well had entered into an increasingly
beneficial compensation with its CEO.
Ultimately it was disclosed that certain assets, recorded on the books
as having a value of $350 million, were worth only $25-30 million, and that
value was further offset by $40 million in liabilities. Dismissal of the derivative action was sought
on the basis that he had not made a demand upon Miller’s board prior to filing
the suit and had failed to state claims against the individual directors. The District Court granted the motion to
dismiss on the grounds that he had failed to make the pre-suit demand and that failure
should not be excused.
The Sixth Circuit found that
under Tennessee law, a modified version of Delaware’s Aronson v. Lewis, 473 A.2d. 805, 814 (Del. 1984) test would be
applied with respect to assertions of futility.
Under Lewis ex rel. Citizens Sav. Bank & Trust Co. v. Boyd,
838 S.W.2d 215 , 221 (Tenn.Ct.App.1992), futility requires:
In demand-excused cases, the grounds
for the shareholder’s claim are (1) that the board is interested and not
independent and (2) that the challenged transaction is not protected by the
Business Judgment Rule.
This
test as applied in Tennessee is conjunctive, rather than a disjunctive test as
utilized in Delaware. The Sixth Circuit
analyzed on the string of Tennessee cases that it was argued indicate that
demand is excused when all of the directors are named as defendants. Ultimately, the Sixth Circuit would determine
that, of itself, that was not sufficient to excuse demand. Ultimately, Lukas’ claims would fail because
he had not shown that a majority of the board was interested and lacked
independence:
The District Court did not err in
its disinterested – and, independent analysis.
At best, Lukas’ allegations make out what the District Court already
acknowledged, that [the CEO/director’s] disinterest and independence may have
been comprised. However, Lukas does not
allege any specifics regarding other board members and does not city any
Tennessee authority supporting his contention that board members’ exposure to
potential liability via allegations consisting primarily of nonfeasance – as
opposed to malfeasance – should suffice to demonstrate a reasonable doubt as to
independence and disinterest.
There was a dissent, it arguing
that certain dated Tennessee law remains in place and effective, and suggesting
that the Sixth Circuit should have certified the decision to the Tennessee
Supreme Court for resolution.
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