Pikk v. Pedersen
2016 U.S. App. LEXIS 11095
| 10th Cir. | 2016Background
- ZAGG shareholders filed a derivative suit alleging violations of SEC § 14(a), breaches of fiduciary duty, unjust enrichment, and corporate waste arising from founder/CEO Robert Pedersen’s pledged (margin) stock and an alleged secret succession plan that elevated Randall Hales to CEO.
- Pedersen’s margin sales in Dec. 2011 and Aug. 2012 depressed ZAGG’s stock; the company’s 2011 Form 10-K and April 2012 proxy did not disclose Pedersen’s pledged shares as required by SEC rules.
- Plaintiffs sued derivatively in June 2013 without making a presuit demand on ZAGG’s six-member board, alleging demand would be futile because three director defendants faced substantial liability or were compromised by personal/business ties.
- Nevada law applies to the futility question; Nevada limits director liability by statute unless the plaintiff proves breach involving intentional misconduct, fraud, or knowing violation of law (placing burden of persuasion on plaintiff).
- The district court dismissed for failure to plead demand futility with particularity; the Tenth Circuit affirmed, holding plaintiffs failed to plead facts showing directors knowingly violated law or lacked independence.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether presuit demand was excused as futile because three directors faced a substantial likelihood of liability | Directors knew of Pedersen’s pledges and concealed a secret succession plan, so they faced substantial likelihood of liability under § 14(a) and fiduciary-duty claims | Nevada’s exculpatory statute shields directors unless plaintiffs plead they acted with intentional misconduct, fraud, or a knowing violation of law; plaintiffs bear the burden to plead this | Demand not excused—plaintiffs failed to plead particularized facts showing directors knew their conduct was wrongful, so no substantial likelihood of liability |
| Whether plaintiffs adequately pleaded that non-disclosure of Pedersen’s pledged shares was a knowing violation | Signatures on SEC filings and audit-committee roles permit inference directors knew nondisclosure violated SEC rules | Committee membership or signing filings is insufficient to infer legal knowledge; lawyers/accountants handle regulation specifics | Insufficient—allegations did not particularize directors’ knowledge that nondisclosure was wrongful |
| Whether plaintiffs adequately pleaded existence of a secret succession plan to replace Pedersen with Hales (and related knowing misconduct) | Temporal proximity of Hales’s appointment to the margin call and later statements showed a preexisting secret plan and concealment | Theory is speculative and implausible; allegations do not show plan predated margin events or that nondisclosure was wrongful | Insufficient—secret-plan theory too speculative to support demand futility |
| Whether three directors were non-independent due to personal/business ties (control) | Director Larabee (and others) were dominated by Hales/Pedersen via business relationships, so board lacked independent majority | Mere prior service together or friendships is insufficient; plaintiffs must plead bias-producing facts tying a controller’s interest to control | Insufficient—allegations (Larabee served with Hales on another board) are inadequate to plead lack of independence |
Key Cases Cited
- Kamen v. Kemper Fin. Servs., 500 U.S. 90 (federal common law adopts state of incorporation’s demand-futility standard for federal statutory derivative claims)
- Shoen v. SAC Holding Corp., 137 P.3d 1171 (Nev. 2006) (Nevada recognizes demand futility where directors are interested or not independent)
- Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (Delaware futility framework examining director interest and independence)
- Rales v. Blasband, 634 A.2d 927 (Del. 1993) (futility analysis where transaction-specific inquiry governs)
- Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040 (Del. 2004) (minority- independence rules; mere friendships/relationships insufficient to establish domination)
- Wood v. Baum, 953 A.2d 136 (Del. 2008) (where charter exculpates directors, plaintiffs must plead non-exculpated claims with particularity to show substantial threat of liability)
- In re Amerco Derivative Litig., 252 P.3d 681 (Nev. 2011) (interpreting Nevada’s director-exculpation principles)
- Guttman v. Huang, 823 A.2d 492 (Del. Ch. 2003) (board membership and committee service alone do not establish directors’ knowledge of wrongdoing)