Friday, September 20, 2013
Sixth Circuit Court of Appeals Affirms Dismissal of Derivative Action Brought Without Demand, Holds Futility Exception Not Satisfied
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.