Lukas Ex Rel. Miller Energy Resources, Inc. v. McPeak
730 F.3d 635
6th Cir.2013Background
- Patrick P. Lukas, a shareholder of Tennessee corporation Miller Energy, filed a derivative suit alleging breaches of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste after disclosures that Miller had materially overstated the value of acquired Alaska assets and later restated/acknowledged accounting errors.
- Miller’s Board amended CEO Scott Boruff’s employment agreement, increasing compensation and stock options in December 2010; later disclosures and a negative website report in 2011 caused a stock-price decline.
- Lukas sued Miller and nine directors in August 2011; defendants moved to dismiss for failure to plead a pre-suit demand (or excuse for not making one) and for failure to state claims.
- Tennessee law normally requires a written pre-suit demand in derivative suits, but recognizes an exception where demand would be futile; the complaint must plead futility “with particularity.”
- The district court applied a Tennessee appellate articulation of the Delaware Aronson two-part test (requiring a showing that the board was interested/not independent AND the challenged transaction was not protected by the business judgment rule) and dismissed for failure to plead particularized facts showing demand futility.
- The Sixth Circuit affirmed, holding (1) that Lewis’s articulation of an Aronson-like standard governs demand-futility analysis in Tennessee for federal courts sitting in diversity, and (2) that Lukas’s pleading failed to particularize why a majority of the board was interested or lacked independence.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a pre-suit demand was required or excused for futility | Lukas: Deaderick and Tennessee precedent excuse demand where the corporation is controlled by those who must be defendants (here, the board named as defendants), so demand was futile | Defs: Under Lewis (and subsequent Tennessee cases), Tennessee follows an Aronson-style test requiring particularized pleading that a majority of directors are interested/not independent (and business-judgment protection fails) | Court: Adopted Lewis’s Aronson-like standard for demand futility and affirmed dismissal for failure to plead particularized facts showing majority interest/lack of independence |
| Whether Tennessee follows Delaware’s disjunctive Aronson test (either prong) or a conjunctive test (both prongs) | Lukas: Even if Lewis applied Aronson, Delaware treats the prongs disjunctively, so meeting one suffices | Defs: Lewis articulated the test conjunctively (both prongs required); Tennessee authority supports applying Lewis as written | Court: Declined to adopt a disjunctive rule; applied the Lewis formulation and found Lukas failed the independence/disinterest showing (so did not reach broader prong-formulation question) |
| Proper standard of review for demand-futility dismissal | Lukas: De novo review of Rule 12(b)(6) dismissal and state-law application | Defs: Some circuits apply abuse-of-discretion when factual findings are involved | Held: Applied de novo review for both Rule 12(b)(6) and state-law interpretation (consistent with Sixth Circuit precedent) |
| Whether Deaderick alone excused demand whenever directors were named | Lukas: Deaderick (and repeated affirmations) means naming the board as defendants excuses demand | Defs: Deaderick must be read with later decisions; lower courts have refined the rule and require particularized allegations; Lewis reconciles Deaderick with modern demand-futility standards | Held: Deaderick remains good law but does not automatically excuse demand merely because directors are named; particularized allegations are required under the Lewis/Aronson framework |
Key Cases Cited
- Deaderick v. Wilson, 67 Tenn. 108 (Tenn. 1874) (early Tennessee rule excusing pre-suit demand when corporation is controlled by those who must be defendants)
- Lewis ex rel. Citizens Sav. Bank & Trust Co. v. Boyd, 838 S.W.2d 215 (Tenn. Ct. App. 1992) (Tenn. appellate discussion adopting an Aronson-style demand-futility articulation)
- Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (Delaware two-part demand-futility test referenced by Tennessee courts)
- McCarthy v. Middle Tenn. Elec. Membership Corp., 466 F.3d 399 (6th Cir. 2006) (Sixth Circuit citation applying Lewis in diversity context)
- Brehm v. Eisner, 746 A.2d 244 (Del. 2000) (Delaware decision explaining disjunctive application of the Aronson prongs)