Louisiana Municipal Police Employees' Retirement System v. Wynn
2016 U.S. App. LEXIS 13100
9th Cir.2016Background
- Shareholders of Wynn Resorts sued derivatively challenging (1) a $135 million donation by Wynn Macau to the University of Macau Development Foundation (2011) and (2) the forced redemption of director Kazuo Okada’s equity for a promissory note (2011–2012).
- Plaintiffs did not make a pre-suit demand on the board and pleaded demand futility under Nevada law (which looks to Delaware precedent) when they filed an amended complaint in April 2013.
- At the time of the amended complaint the board had eight members; plaintiffs conceded Steve Wynn and Elaine Wynn were interested and thus needed to plead at least two of the remaining six directors were not independent (beholden to Steve Wynn).
- Plaintiffs advanced three futility theories: (1) majority of board is beholden to Steve Wynn; (2) directors face a substantial likelihood of personal liability for approving the Macau donation; and (3) reasonable doubt that the business-judgment rule would protect the Okada redemption.
- The district court dismissed under Fed. R. Civ. P. 23.1 for failure to plead demand futility; the Ninth Circuit affirmed. The Ninth Circuit also cured a jurisdictional defect by dismissing a nondiverse former director (Linda Chen) and treating plaintiffs’ jurisdictional allegation as amended to 28 U.S.C. § 1332(a)(3).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether plaintiff pleaded demand futility via a majority of directors being ‘beholden’ to Steve Wynn | Plaintiffs: many board members were hand-picked by S. Wynn, had financial/social ties, and would not risk offending him — so at least two non-interested directors (Miller, Wayson, Virtue) lack independence | Defendants: ties alleged are speculative, stale, or insubstantial; plaintiffs failed to plead materiality/contextual dependence required under Delaware law | Held: Allegations insufficiently particularized; plaintiffs failed to show two non-interested directors were beholden; dismissal affirmed |
| Whether directors face a substantial likelihood of personal liability for the Macau donation | Plaintiffs: directors acted knowing or intentionally in violation of law (FCPA risk); they voted without seeing legal opinion and knew Macau is corrupt, so liability is plausible | Defendants: plaintiffs plead at most negligence; Nevada law requires intent or knowing violation for liability; investigations (SEC, GCB) yielded no enforcement | Held: Allegations do not raise reasonable inference of knowing misconduct; no substantial likelihood of liability; futility not shown |
| Whether business-judgment rule protection for the Okada redemption is doubtful | Plaintiffs: redemption served no legitimate business purpose and was a pretext to oust a dissenter, so BJR protection is doubtful | Defendants: conversion from equity to debt can legitimate protect gaming-license interests; Nevada statutes treat equity and debt differently; Freeh report provided a basis | Held: Plaintiffs’ theory fails; conversion plausibly had a legitimate corporate purpose and BJR protection not undermined |
| Whether federal diversity jurisdiction exists given pleading defects and a stateless party (Linda Chen) | Plaintiffs: pleaded jurisdiction under § 1332(a)(2) (alienage) but later conceded § 1332(a)(3) applies if Chen is dismissed | Defendants: Chen’s sworn declarations show she is domiciled in Macau and is not a citizen of any U.S. state, defeating diversity | Held: Court exercised discretion under Rule 21 to dismiss Chen as dispensable, allowed amendment to § 1332(a)(3), and thereby cured jurisdictional defect |
Key Cases Cited
- Potter v. Hughes, 546 F.3d 1051 (9th Cir. 2008) (discusses Rule 23.1 demand futility and standard of review)
- Rosenbloom v. Pyott, 765 F.3d 1137 (9th Cir. 2014) (heightened pleading requirement for derivative demand futility)
- Newman-Green, Inc. v. Alfonzo-Larrain, 490 U.S. 826 (U.S. 1989) (statutory requirements for diversity jurisdiction and effect of U.S. citizen defendants)
- Shoen v. SAC Holding Corp., 137 P.3d 1171 (Nev. 2006) (Nevada follows Delaware law on demand futility standards)
- In re MFW S’holders Litig., 67 A.3d 496 (Del. Ch. 2013) (materiality standard for director independence/beholdenness)
- Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040 (Del. 2004) (test for director independence and willingness to risk reputation versus preserving relationships)
- In re Walt Disney Co. Derivative Litig., 825 A.2d 275 (Del. Ch. 2003) (standards for rebutting business judgment rule presumption)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (U.S. 2007) (courts may consider documents incorporated by reference and judicially noticeable facts on pleadings)