Sciabacucchi v. Burns
1:15-cv-07506
S.D.N.Y.Jul 29, 2016Background
- Plaintiff Matthew Sciabacucchi, a Xerox shareholder, brought a derivative suit alleging directors and officers breached fiduciary duties and were unjustly enriched related to Xerox’s 2010 acquisition of Affiliated Computer Services, Inc. (ACS) and subsequent SEC investigation.
- Sciabacucchi made a pre-suit demand (Oct. 30, 2013) requesting the Board investigate and prosecute claims; the Board formed a Demand Review Committee (DRC) of two independent directors and retained outside counsel (Levine Lee) to investigate.
- The DRC and counsel spent ~9 months reviewing thousands of pages of SEC and internal investigation materials, interviewed 13 current/former directors, officers or employees and Xerox’s outside auditor, and met repeatedly before recommending refusal of the demand. The full Board unanimously adopted the recommendation and refused to sue.
- Sciabacucchi sought further detail about witnesses interviewed (specifically whether SEC personnel were interviewed); Xerox declined to provide more information, stating the DRC and Board had access to all necessary materials.
- Plaintiff alleged the DRC’s investigation was incomplete (e.g., did not interview SEC representatives) and that the Board acted in bad faith, so demand refusal should not be protected by New York’s business judgment rule.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether demand refusal is reviewable because the DRC lacked disinterested independence | DRC/Board failed to investigate in good faith and were conflicted, so business judgment protection is lost | DRC members were independent and not self-interested; no plausible allegation of personal financial benefit | Court: No plausible allegation of self-interest; business judgment rule applies |
| Whether the DRC’s investigation was so inadequate as to be a sham | Investigation omitted interviewing SEC personnel and was therefore incomplete and a pretext | DRC retained independent counsel, reviewed thousands of pages (including SEC transcripts), interviewed relevant witnesses including outside auditor; no requirement to interview specific outsiders | Court: Investigation was sufficiently thorough and not a sham; refusal shielded by business judgment rule |
| Whether plaintiff pleaded particularized facts under Rule 23.1 to overcome demand refusal | Plaintiff alleged specific deficiencies (no SEC interviews, refusal to disclose details) sufficient to plead lack of good faith | Defendants rely on documentary record showing extensive investigation and communications with counsel | Court: Plaintiff failed to plead particularized facts showing wrongful refusal; dismissal required |
| Whether Page/Ballmer decisions compel broader investigation here | Plaintiff cites those cases to argue external interviews were needed | Defendants distinguish those cases on facts (company-level penalties/non-prosecution context absent here) | Court: Those cases are factually distinguishable; do not require additional inquiry here |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (pleading plausibility standard)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (plausibility and Twombly standard)
- Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90 (pre-suit demand requirement for derivative suits)
- Auerbach v. Bennett, 47 N.Y.2d 619 (business judgment rule and review of demand investigations)
- Espinoza ex rel. JPMorgan Chase & Co. v. Dimon, 797 F.3d 229 (derivative-action principles and demand pleading)