Laborers' Local v. Intersil
2012 U.S. Dist. LEXIS 30289
N.D. Cal.2012Background
- This is a shareholders’ derivative action brought on behalf of Intersil against executives and directors alleging excessive 2010 executive compensation under a pay-for-performance policy.
- Plaintiff Laborers’ Local #231 Pension Fund did not make a pre-suit demand on Intersil’s board, claiming demand would be futile due to potential board liability for loyalty breaches.
- Intersil is a Delaware corporation; California law governs demand futility because of its main business location, with Delaware law applying to the demand requirement under the internal affairs doctrine.
- The Board approved substantial 2010 pay raises for named executives; the 2010 compensation reportedly increased while company net income and EPS declined.
- A nonbinding shareholder say-on-pay vote in May 2011 rejected Intersil’s 2010 compensation by 56%, which the complaint argues bears on the board’s loyalty and business judgment.
- Defendants moved to dismiss under Rule 12(b)(6) and Rule 23.1; the court grants dismissal with leave to amend, addressing demand futility, unjust enrichment, and aiding-and-abetting claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether demand futility is established under Aronson prongs | Aronson prongs show board conflicts and loyalty concerns. | Plaintiff fails to plead a majority of disinterested/independent directors. | Demand not excused; Aronson prong I not satisfied. |
| Whether the Dodd-Frank say-on-pay vote rebutts the business judgment presumption | Negative say-on-pay vote undermines board informed business judgment. | Vote alone is insufficient to rebut the business judgment rule. | 56% negative vote alone does not rebut business judgment; prong II not satisfied. |
| Whether the unjust enrichment claim is viable given demand futility | Unjust enrichment stems from improper pay; demand excused. | Demand not excused; same deficiencies as fiduciary claims. | Demand futility not pled; unjust enrichment claim dismissed with leave to amend. |
| Whether the aiding-and-abetting claim against Compensia survives | Compensia knowingly assisted breach of fiduciary duty. | State-law choice and pleading failure; no particular aiding act alleged. | Aiding and abetting claim dismissed with leave to amend. |
Key Cases Cited
- Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (duty of loyalty; demand futility framework for derivative suits)
- Rales v. Blasband, 634 A.2d 927 (Del. 1993) (two-prong test for excusing demand; independence and business judgment)
- In re Walt Disney Co. Derivative Litig., 825 A.2d 275 (Del. Ch. 2003) (presumption of business judgment; need to rebut with information)
- In re J.P. Morgan Chase & Co. S’holder Litig., 906 A.2d 808 (Del. Ch. 2005) (requirements to plead lack of informed decision for business judgment scrutiny)
- In re Lear Corp. S’holder Litig., 967 A.2d 640 (Del. Ch. 2008) (board actions in good faith despite unlikely shareholder approval)
- Beard Research, Inc. v. Kates, 8 A.3d 573 (Del. Ch. 2010) (definition of aiding and abetting in Delaware context)
- Cede & Co. v. Technicolor, Inc., 634 A.2d 345 (Del. 1993) (duty of loyalty and corporate actions; standard for fiduciary duties)