In Re BIDZ.COM, INC. DERIVATIVE LITIGATION
2011 WL 759461
C.D. Cal.2011Background
- Nominal defendant Bidz.com, Inc. derivative action alleging Board oversight failures and deceptive practices.
- FAC alleges shill bidding, inflated appraisals, misdescriptions, counterfeit merchandise, and use of an auditor criticized by PCAOB.
- Board comprised of Zinberg (founder/CEO), Kong (CFO/Secretary), Hanelt (Chair), Itkin (former CFO), Singh; CTO Kuperman and COO Liu also involved.
- Citron Research reports in Nov. 2007 accused shill bidding; stock price dropped about 27% after disclosures; other negative online and BBB findings followed.
- Plaintiffs Hassan and Hughes seek derivative claims for breach of fiduciary duty, insider selling, §25402, waste, and unjust enrichment.
- Court previously granted dismissal for failure to plead pre-suit demand futility; Plaintiffs amended, Bidz moved to dismiss again; ruling grants Bidz motion without leave to amend.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Which demand futility test applies | Plaintiffs argue Aronson should apply for inaction-based claims. | Bidz argues Rales applies for inaction/oversight claim. | Rales governs; Aronson not applied due to inaction theory. |
| Independence of the outside directors | Plaintiffs contend Zinberg dominates; majority independence is compromised. | Bidz contends no particularized facts show lack of independence. | No particularized facts show director independence was undermined. |
| Disinterestedness of the board | Directors face substantial liability, undermining disinterestedness. | Exculpation clause and lack of bad faith facts negate disinterestedness concerns. | Plaintiffs fail to show substantial likelihood of personal liability among outside directors. |
| Oversight failures as a basis for futility | Board knew of shill bidding via reports and failed to act; constitutes failure of oversight. | General red flags without particularized knowledge fail to show breach. | Oversight allegations lack particularized facts showing knowledge and conscious disregard. |
| Totality of allegations and Rule 23.1 sufficiency | Cumulative allegations reveal systemic breaches by the Board. | Even cumulatively, allegations do not meet Rule 23.1's particularity standard. | Totality fails to create reasonable doubt about board impartiality; demand futility not shown. |
Key Cases Cited
- Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (establishes independence and business-judgment standards for demand futility)
- Rales v. Blasband, 634 A.2d 927 (Del. 1993) (one-step test for demand futility when no board decision is involved)
- Beam v. Stewart, 845 A.2d 1040 (Del. 2004) (presumption of independence for directors; framework for bad faith/interest)
- In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996) (oversight duties; gross negligence standard for failure to discharge fiduciary duties)
- In re Disney Derivative Litig., 906 A.2d 27 (Del. 2006) (bad faith/conscious disregard required where exculpation applies)
- In re Intel Corp. Derivative Litig., 621 F. Supp. 2d 165 (D. Del. 2009) (applies Rales to inaction-based claims and corporate governance context)