In re Textron, Inc.
2011 U.S. Dist. LEXIS 103775
D.R.I.2011Background
- Walker filed a shareholder derivative action on Textron against two officers and 11 of its 13 directors.
- Defendants moved to dismiss for failure to make a pre-suit demand; the central issue is whether demand futility has been pled with particularity.
- Textron board approved a July 19, 2007 stock repurchase plan to buy up to 24 million shares during a period of anticipated economic downturn.
- During 2007–2008, Textron repurchased about $608 million of its stock; Campbell and French sold substantial portions of Textron stock during this period.
- Walker alleges the backlog and related statements by Campbell and French were misleading, masking risk of cancellations/deferrals that later materialized.
- The court applies Delaware law (Aronson and Rales tests) to evaluate demand futility on a claim-by-claim basis.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Counts I–IV: whether demand futility is pled properly | Walker argues majority directors face liability due to misstatements and non-disclosures. | Textron directors are disinterested/adequately informed; no viable primary violation pleaded by Campbell and French. | Counts I–IV do not plead a majority of directors face liability; demand not futile. |
| Counts I–IV: whether Section 20(a) control liability survives | Non-maker directors are control persons due to alleged tacit approval of statements. | Plaintiff fails to plead primary violation by a third party or control with particularity. | No violation pled against majority; Section 20(a) claims lacking particularity. |
| Counts III–IV: due care, loyalty, and good faith implications | Directors breached duty of loyalty/good faith through misstatements. | Exculpation and lack of particularized bad faith allegations bar liability. | Counts III–IV fail to plead substantial likelihood of loyalty/good-faith breach. |
| Counts V–VII: whether board approval of repurchase and failure to halt purchases support demand futility | Majority directors faced liability for approving hefty repurchases while backlog misstatements inflated stock price. | Plaintiff lacks particularized facts showing disloyalty or failure to inform; business judgment should protect. | Counts V–VII fail under Aronson for due care/loyalty; also under Rales for failure-to-halt claims. |
Key Cases Cited
- Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (two-prong test for demand futility; independent/disinterested directors and business judgment review)
- In re Citigroup Inc. S’holder Derivative Litig., 964 A.2d 106 (Del. Ch. 2009) (defines control-person liability and relates to Section 20(a) claims)
- Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 833 A.2d 961 (Del. Ch. 2003) (safety valve on Aronson; second prong applies when futility rests on business judgment)
- Brehm v. Eisner, 746 A.2d 244 (Del. 2000) (waste requires egregious/irrational transaction where compensation exceeds consideration)
- Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985) (due care standard and business judgment rule framework for informed decisions)
- Kamen v. Kemper Fin. Servs., 500 U.S. 90 (U.S. 1991) (state of incorporation governs substantive demand futility law; court adopts Delaware framework)