Unión De Empleados De Muelles De Puerto Rico PRSSA Welfare Plan v. UBS Financial Services Inc.
704 F.3d 155
1st Cir.2013Background
- Shareholders AP and PRSSA sue derivatively to enforce corporate claims due to UBS-linked bonds losses in Puerto Rico Funds.
- Funds (II, III, IV, Tax-Free II) are Puerto Rico exempt from the 40 Act; investments heavily loaded with ERS bonds purchased via UBS Trust and UBS Financial.
- UBS Trust acted as investment adviser; UBS Financial underwrote ERS bonds and shared in underwriting fees; Funds’ boards allegedly failed to protect funds’ interests.
- District court dismissed for lack of presuit demand futility pleadings; plaintiffs sought leave to amend but were denied.
- Court holds demand futility pleadings and standard of review should be evaluated under Delaware law standards for Rales-based analysis; district court’s dismissal vacated and case remanded for further proceedings.
- Plaintiffs present six directors as potentially non-disinterested/independent; the court ultimately finds sufficient particularized facts to create reasonable doubt about six directors’ ability to impartially evaluate a demand; remand allowed for further proceedings consistent with this opinion.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Proper standard of review for dismissal based on futility | District court abused by not using de novo review | Traditionally abuse of discretion review | De novo review governs dismissal for futility |
| Applicable test for demand futility under Delaware law | Rales is the appropriate test for fiduciary board decisions via the adviser | Aronson or other tests might apply in some contexts | Rales applies; focus on individual directors’ disinterestedness and independence |
| Did pleadings show six directors’ lack of independence/interest to render futility established | Facts show substantial connections and entanglements with UBS entities | Some directors’ ties insufficient to negate independence | Yes; six directors show reasonable doubt about independent judgment, making futility established; remand for further proceedings |
Key Cases Cited
- Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (two-step demand futility framework under Delaware law)
- Rales v. Blasband, 634 A.2d 927 (Del. 1993) (define applicability of Rales for director overhauls; focus on individual directors)
- In re Sonus Networks, Inc., 499 F.3d 47 (1st Cir. 2007) (discussion of de novo standard and pleading requirements)
- In re Oracle Corp. Deriv. Litig., 824 A.2d 917 (Del. Ch. 2003) (Rales-based analysis in mutual fund/director context)
- In re Verisign, Inc. Deriv. Litig., 531 F. Supp. 2d 1173 (N.D. Cal. 2007) (independence/loyalty considerations in Rales framework)