Korsinsky v. Winkelreid
143 A.D.3d 427
N.Y. App. Div.2016Background
- Plaintiff Michael Korsinsky filed a derivative action challenging Goldman Sachs’ valuation and awarding of compensatory stock options to directors and officers.
- Korsinsky originally sued in 2009 but sold his Goldman Sachs shares in July 2009; the operative pleading was a second amended complaint filed in 2013.
- Defendants moved to dismiss for failure to plead demand futility under Delaware law as applied in Wood v. Baum.
- The motion court dismissed the second amended complaint and later denied leave to file a third amended complaint.
- Korsinsky appealed the dismissal and the denial of leave to amend; the Appellate Division affirmed the dismissal and found the denial of leave to amend subsumed in the appeal from the judgment.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether demand futility should be measured against the 2009 board (when suit began) or the 2013 board (when SAC filed) | Korsinsky argued the pleading related back so demand futility could be judged against the 2009 board | Defendants argued the SAC must be judged against the 2013 board because the original complaint was not validly in litigation | Court held demand futility must be assessed as to the 2013 board; the original complaint would not have survived dismissal due to Korsinsky’s July 2009 share sale (Braddock) |
| Whether SAC pleaded particularized facts showing directors were interested or lacked independence (demand futility) | Korsinsky argued option awards to certain directors were sufficiently material to their economic circumstances to show interest/lack of independence | Defendants argued allegations were conclusory and failed to show materiality or lack of independence | Court held allegations were not particularized; plaintiff failed to show materiality of option grants or lack of director independence (Wood) |
| Whether board approval of the options was protected by business judgment or raised a substantial likelihood of liability | Korsinsky contended approval was tainted and thus not protected by business judgment | Defendants pointed to Goldman Sachs’ exculpatory charter clause and discretionary valuations as legitimate business judgment | Court held the exculpatory clause and discretionary valuation meant no substantial likelihood of liability; approvals were a valid exercise of business judgment (distinguishing Ryan v. Gifford) |
| Whether leave to file a third amended complaint should be granted | Korsinsky proposed additional demand-futility allegations and some purported direct claims | Defendants argued new allegations failed to cure defects and new direct claims were actually derivative | Court denied leave; proposed allegations did not cure deficiencies and the "direct" claims were retooled derivative claims requiring demand (Tooley, Wood) |
Key Cases Cited
- Wood v. Baum, 953 A.2d 136 (Del. 2008) (demand futility standard for derivative suits)
- Braddock v. Zimmerman, 906 A.2d 776 (Del. 2006) (relation-back requires original pleading to have been "validly in litigation")
- Ryan v. Gifford, 918 A.2d 341 (Del. Ch. 2007) (fraudulent backdating can defeat business judgment protection)
- Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) (distinguishing derivative and direct claims)
- Wietschner v. Dimon, 139 A.D.3d 461 (1st Dept. 2016) (charter exculpation limits directors’ liability)
- Fairpoint Cos., LLC v. Vella, 134 A.D.3d 645 (1st Dept. 2015) (denial of leave to amend where proposed allegations do not cure pleading defects)
- Orman v. Cullman, 794 A.2d 5 (Del. Ch. 2002) (assessing materiality of director compensation in demand-futility analysis)