144 Wash. App. 709 | Wash. Ct. App. | 2008
¶1 Shareholders of Loudeye Corp., a Delaware corporation, appeal the trial court’s order dismissing their complaint against Loudeye directors alleging breach of their fiduciary duties in conducting a merger with Nokia Corp. The shareholders assert the trial court improperly considered an exculpatory provision in Loudeye’s charter
FACTS
¶2 Loudeye is a company that provided media content, mostly digital music, for use in cell phones and consumer electronics. In June 2004, Loudeye acquired OD2, a European based provider of digital media store services. In July 2004, Loudeye began collaborating with Nokia about music services offered by OD2. By November 2005, Loudeye and Nokia had entered into a nondisclosure agreement in “ ‘contemplation of [Loudeye] sharing confidential information with Nokia outside the scope of Loudeye and Nokia’s [then] existing commercial relationship.’ ”
¶3 Loudeye’s directors also hired an investment banking firm, Allen and Company, LLC (Allen & Co.), to help them identify strategic partners willing to acquire or merge with Loudeye. According to Loudeye’s proxy statement, Allen & Co. was retained because “despite management’s cost containment efforts, the revenue generated by Loudeye’s two digital store platforms was insufficient to maintain both [the American and European digital music] platforms on a long term basis.” The proxy statement notes that in February 2006, two of Loudeye’s major United States customers terminated their relationship with Loudeye.
¶4 Working with Allen & Co., Loudeye then contacted at least 72 potential suitors to solicit interest in a merger or
¶5 On June 22, 2006, Nokia made an offer to acquire Loudeye in a cash merger at $4.50 per share, subject to certain conditions, including an exclusivity agreement. On the date of the offer, the closing price of Loudeye’s stock was $1.66 per share. On June 26, 2006, Loudeye counter offered for $5.00 per share, but Nokia refused the counter offer. Two other companies then submitted offers for prices significantly lower than Nokia’s offer. On August 7, 2006, management presented to Loudeye’s board of directors a definitive merger agreement with Nokia and the board unanimously voted to approve and recommend it to the stockholders.
¶6 On October 6, before the vote was put to the shareholders, Eli Rodriguez filed this class action lawsuit on behalf of Loudeye shareholders, suing five members of Loudeye’s board of directors. The complaint alleged that the directors breached their fiduciary duties by failing to auction, failing to adequately disclose information about other potential offers, and failing to obtain the best price. The complaint also alleged that the board had conflicts of interest, citing a termination agreement entitling Chief Executive Officer (CEO) Michael Brochu to $325,000 if he was terminated without cause on or following the date of the merger. The complaint further alleged that “other control people at Loudeye receive [d] lucrative employment or retention packages” and “other perks, such as accelerated vesting of Loudeye stock options.” The complaint then sought relief as follows:
preliminary and permanent injunctive and declaratory relief preventing the Defendants from inequitably and unlawfully depriving Plaintiff and the Class of their right to realize the full*717 market value for their stock, by unlawfully entrenching themselves in their positions of control, and to compel the Defendants to carry out their fiduciary duties to maximize shareholder value.
¶7 On October 11, 2006, the stockholders voted on the merger and 90 percent of them voted in favor of the merger. The transaction closed on October 16, 2006. The shareholder class did not make any motions or take any action to enjoin the shareholder vote or the merger closing. On February 21, 2007, defendant directors moved to dismiss the complaint for failure to state a claim and the trial court granted the motion.
I. CR 12(b)(6) Dismissal
¶8 The shareholders argue that the trial court erred by dismissing their complaint because (1) the court improperly considered a section 102(b)(7)
A. Effect of Section 102(b)(7) Exculpatory Provision
¶9 The shareholders first contend the trial court improperly considered an exculpatory provision in Loudeye’s certificate of incorporation that bars any claims against its directors for breach of the duty of care. They contend that under Washington procedure, such a provision cannot support a CR 12(b)(6) motion to dismiss. We disagree.
¶10 Shareholder claims involving a corporation’s internal affairs are governed by the law of the state in which the corporation was incorporated.
¶11 The three primary fiduciary duties of directors of Delaware corporations are due care, loyalty, and good
¶12 In conducting a sale of corporate control, a director’s duty is to seek out the best value reasonably available to the stockholders.
¶13 The shareholders argue that the trial court improperly considered the section 102(b)(7) provision because it is an affirmative defense and under Washington procedure cannot support a CR 12(b)(6) motion to dismiss. While they acknowledge that Delaware law allows the provision to bar a claim for breach of the duty of care on a CR 12(b)(6) motion, they assert that this is a matter of Delaware
¶14 The shareholders mischaracterize the role of a section 102(b)(7) provision in a motion to dismiss as purely procedural. They rely on language in the Delaware court’s opinion in Emerald Partners v. Berlin discussing the business judgment rule, where the court noted that the rule is both “a procedural guide for litigants and ... a substantive rule of law.”
B. Allegations of Loyalty and Good Faith Violations
¶16 The shareholders do not point to the allegations that support a claim for breaches of the specific duties of loyalty and good faith, but assert generally that the directors breached all three fiduciary obligations by failing to auction for the best price and disclose adequate details of the negotiations with potential suitor companies, and by benefiting personally from employment or retention packages and accelerated stock vesting. They argue that the duties to disclose and maximize shareholder value implicate all three fiduciary duties of due care, loyalty, and good faith and assert that their allegations that the directors failed to do so establish a breach of all three duties. They further contend that the alleged conflicts of interest establish a breach of the duty of loyalty. We disagree.
¶17 To establish a breach of the duty of good faith, the shareholders must show that the director’s conduct is motivated by an actual intent to do harm, or occurs when directors “ ‘consciously and intentionally disregard [ ] their
¶18 “[T]he duty of loyalty mandates that the best interest of the corporation and its shareholders takes precedence over any interest possessed by a director . . . and not shared by the stockholders generally.”
¶19 To plead actionable disloyalty in a case involving a merger with a genuine third-party acquirer, the plaintiff must show that the materially self-interested board members either (1) constituted a majority of the board, (2) controlled and dominated the board as a whole, or (3) failed to disclose their interests in the transaction to the board and a reasonable board member would have regarded the existence of their material interests as a significant fact in the evaluation of the proposed transaction.
¶20 While breach of the duties to disclose and maximize value arise from all three primary fiduciary duties of due care, loyalty, and good faith, a breach of the duties to disclose and maximize value does not necessarily constitute a breach of all three fiduciary duties, as the shareholders suggest. In McMillan v. Intercargo Corp., the court dismissed similar claims based on nondisclosure and failure to maximize value when there were no allegations to support a claim for breach of the duty of loyalty or good faith and a section 102(b)(7) provision barred any due care claims.
¶21 Likewise here, there were no allegations of superior offers or that the nondisclosure agreement in fact prevented a bidder from presenting a superior offer. Nor were there allegations of any conduct “so far beyond the bounds of reasonable judgment” that it had to be attributable to bad faith. Thus, neither the duty of loyalty nor the duty of good faith is implicated by the complaint’s allegations of failure to disclose or failure to maximize value.
¶22 The only allegations implicating the duty of loyalty are that Loudeye CEO Brochu would receive a $325,000 severance package if terminated without cause following the merger, that Loudeye’s chief financial officers and head of Loudeye’s European operations would receive “similar golden parachutes,” and that Loudeye directors’ stock option vesting was accelerated as a result of the merger. But the existence of such severance packages alone does necessarily not present a conflict that would prevent the director from seeking the highest value for its shareholders. As in Lukens, the complaint alleges no facts establishing that Brochu dominated and controlled or misled the board.
¶23 The shareholders contend that the complaint establishes that Brochu dominated the board because he failed to bring an unsolicited offer to the board for consideration. But the complaint does not establish that Brochu failed to bring this offer to the board as the shareholders suggest; it simply states that the proxy statement does not disclose whether or not the board considered it.
¶24 Nor does the accelerated vesting of the stock options amount to an adverse or impermissible interest in the merger. Rather, as the directors note, the accelerated vesting establishes that the directors’ interests are actually aligned with the shareholders because they are both interested in maximizing the value of their shares.
¶25 Finally, as the directors point out, the situation that typically implicates disloyalty is when the directors in the acquired corporation also have interests in the acquiring corporation or when directors seek to entrench themselves in their positions of control.
II. Trial Court’s Consideration of Facts outside of the Complaint
¶26 The shareholders also contend that the trial court improperly considered facts outside of the complaint. Generally, in ruling on a CR 12(b)(6) motion to dismiss, the trial court may consider only the allegations contained in the complaint and may not go beyond the face of the pleadings.
¶27 The shareholders first assert that the trial court improperly considered the proxy statement relied on by the directors because it was outside the pleadings. But because the proxy statement was referenced in the complaint, it was not actually outside the pleadings and was properly considered by the trial court. The shareholders also challenge, as a matter outside the pleadings, the trial court’s consideration of the section 102(b)(7) exculpatory provision in Loudeye’s certificate of incorporation. But as the directors correctly assert, this was properly a subject of judicial notice because it was a matter of public record, “capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned,”
¶28 Indeed, Delaware courts have properly considered such provisions in ruling on similar motions to dismiss. In McMillan, the court took judicial notice of a similar exculpatory charter provision in resolving a motion addressed to
When the issue is confined to the legal effect of a Section 102(b)(7) charter provision, it is difficult to envision what discovery would be implicated. To be sure, in a due care case where a Section 102(b)(7) charter provision is invoked, a plaintiff could theoretically contest the validity of the charter provision. In such a case, the plaintiff must have a proper basis to claim that the Section 102(b)(7) charter provision presented by the defendants on the Rule 12(b)(6) motion is not authentic, was improperly adopted by the stockholders, or the like.[49]
There, the plaintiffs did not contest the existence or authenticity of the section 102(b)(7) charter provision and the court concluded that they “were not deprived of any important procedural right arising from the fact that the trial court considered [defendant company’s] 102(b)(7) charter exculpation provision” on a motion to dismiss.
¶29 Similarly here, the shareholders did not contest the existence or authenticity of the section 102(b)(7) provision. While they assert for the first time on appeal that the certificate of incorporation may not have contained this provision at times relevant to this action, we will not consider arguments not first raised below.
¶30 The directors also contend that the form 8-K Securities and Exchange Commission filings were properly
¶31 Finally, the shareholders contend that the trial court improperly considered the directors’ submission of evidence of three competing offers to acquire Loudeye for prices that were substantially lower than Nokia’s offer. The directors assert that because they were submitted in direct reply to the shareholders’ allegations that the directors refused to disclose competing offers, the shareholders were barred by the invited error doctrine from challenging the court’s consideration of them. We disagree.
¶32 The invited error cases cited by the directors do not address CR 12(b)(6) motions, and nothing in those cases suggests that the invited error doctrine applies in this context. Rather, they involve challenges to jury instructions by the party who proposed them, which do not apply here.
III. Denial of Leave To Amend
¶33 Finally, the shareholders challenge the trial court’s denial of leave to amend the complaint. A trial
¶34 The directors contend that because the shareholders failed to comply with the requirements for filing a motion for leave to amend, the motion was not properly before the trial court and there is nothing for this court to review. They note that the shareholders neither attached a proposed amended complaint nor explained how an amendment would correct the defects in the complaint. But the case upon which they rely, Washington Cooperative Chick Ass’n v. Jacobs, involved a complete failure to request leave to amend.
¶36 The directors assert that the apparent reason for the denial was futility of amendment, as evidenced by the ruling dismissing the complaint for failure to state a claim. We agree. As we have held, the shareholders failed to allege any facts to support a claim for breach of the duties of loyalty or good faith, and they fail to identify any additional facts that might support such claims. They simply argue that the purported defects in their complaint actually refer to inferences that should be drawn from the facts they have pled. Thus, absent any other showing that they could successfully plead these claims, an amendment would be futile. Denial of the motion for leave to amend was therefore within the trial court’s discretion.
¶37 We affirm the trial court’s dismissal of the complaint and denial of leave to amend.
(Alterations in original.)
Loudeye ultimately sold its United States-based assets to Muze, Inc., on May 1, 2006, for $11 million. That acquisition is not challenged in this lawsuit.
Del. Code Ann. title 8, § 102(b)(7).
Cutler v. Phillips Petroleum, Co., 124 Wn.2d 749, 755, 881 P.2d 216 (1994), cert. denied, 515 U.S. 1169 (1995).
State ex rel. Pub. Disclosure Comm’n v. 119 Vote No! Comm., 135 Wn.2d 618, 623, 957 P.2d 691 (1998).
Tenore v. AT&T Wireless Servs., 136 Wn.2d 322, 330, 962 P.2d 104 (1998), cert. denied, 525 U.S. 1171 (1999).
Id.
Haberman v. Wash. Pub. Power Supply Sys., 109 Wn.2d 107, 120, 744 P.2d 1032, 750 P.2d 254 (1987), appeal dismissed, 488 U.S. 805 (1988).
See Davis & Cox v. Summa Corp., 751 F.2d 1507, 1527 (9th Cir. 1985).
Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720 (Del. 1971).
Id.
Williams v. Geier, 671 A.2d 1368, 1376 (Del. 1996).
In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 71 (Del. 1995).
Malone v. Brincat, 722 A.2d 5, 10 (Del. 1998).
Del. Code. Ann. title 8, § 102(b)(7).
Malpiede v. Townson, 780 A.2d 1075, 1095 (Del. 2001).
In re Lukens Inc. S’holders Litig., 757 A.2d 720, 731 (Del. Ch. 1999) (citing Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993), modified, 636 A.2d 956 (Del. 1994), and quoting Paramount Commc’ns Inc. v. QVC Network Inc., 637 A.2d 34, 48 (Del. 1994)), aff’d sub nom. Walker v. Lukens, 757 A.2d 1278 (Del. 2000).
Id.
Id. (citing Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985)).
Malpiede, 780 A.2d at 1095.
787 A.2d 85, 90 (Del. 2001).
Id.
Id.
Id. at 91 n.35.
Lukens, 757 A.2d at 733. The shareholders also argue that section 102(b)(7) does not require dismissal because it bars only claims for damages, whereas here
See Benihana of Tokyo, Inc. v. Benihana, Inc., 891 A.2d 150, 191-92 (Del. Ch. 2005), aff’d, 906 A.2d 114 (Del. 2006).
In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 62 (Del. 2006) (emphasis omitted) (quoting In re Walt Disney Co. Derivative Litig., 825 A.2d 275, 289 (Del. Ch. 2003)).
In re J.P. Stevens & Co. S’holders Litig., 542 A.2d 770, 780-81 (Del. Ch. 1988).
Cede & Co., 634 A.2d at 361.
McMillan, 768 A.2d at 504 n.4.
In re Gen. Motors Class H S’holders Litig., 734 A.2d 611, 617 (Del. Ch. 1999).
McMillan, 768 A.2d at 504 n.54.
Id. (quoting Goodwin v. Live Entm’t, Inc., 1999 WL 64265, at *25 (Del. Ch.)).
757 A.2d 720 (Del. Ch. 1999), aff’d sub nom. Walker v. Lukens, 757 A.2d 1278 (Del. 2000).
Id. at 730. The directors also cite an unpublished opinion, In re Frederick’s of Hollywood, Inc. S’holders Litig., 2000 WL 130630, 2000 Del. Ch. LEXIS 19, where the court held that a duty of loyalty claim was insufficient when there was no allegation that the sole interested director dominated or controlled the board. GR 14.1(b) provides that unpublished opinions of other jurisdictions may be cited as authority “only if citation to that opinion is permitted under the law of the jurisdiction of the issuing court.” The directors fail to provide Delaware authority that permits citing unpublished opinions, so we will not consider this case in our analysis.
768 A.2d 492, 506 (Del. Ch. 2000).
Id.
Id. at 507 n.66 (quoting In re J.P. Stevens & Co., 542 A.2d at 780-81).
The complaint states, “[T]he Proxy statement mentions that ‘on July 26, 2006, Mr. Brochu received an unsolicited offer from a third party to acquire the capital stock of OD2,’ but there is no contention in the Proxy statement that this offer was ever considered by the board of directors.”
See Rales v. Blasband, 634 A.2d 927, 936 (Del. 1993).
See Krim v. ProNet, Inc., 744 A.2d 523, 528 n.16 (Del. Ch. 1999).
See Lukens, 757 A.2d at 728-29.
Brown v. MacPherson’s, Inc., 86 Wn.2d 293, 297, 545 P.2d 13 (1975) (“On a CR 12(b)(6) motion, no matter outside the pleadings may be considered, and the court in ruling on it must proceed without examining depositions and affidavits which could show precisely what, if anything, the plaintiffs could possibly present to entitle them to the relief they seek.” (citation omitted)).
See Berge v. Gorton, 88 Wn.2d 756, 763, 567 P.2d 187 (1977).
While no Washington case explicitly permits this, courts in the Ninth Circuit have allowed the trial court to consider such information. See, e.g., Branch v. Tunnell, 14 F.3d 449, 453-54 (9th Cir.), cert. denied, 512 U.S. 1219 (1994), overruled on other grounds by Galbraith v. County of Santa Clara, 307 F.3d 1119 (9th Cir. 2002); In re Stac Elees. Sec. Litig., 89 F.3d 1399, 1405 n.4 (9th Cir. 1996) (appropriate for trial court to consider other portions of a document referenced in a complaint in a motion to dismiss, and doing so does not convert the motion into one for summary judgment), cert. denied, 520 U.S. 1103 (1997). Applying this rule is logical here because the parties do not dispute the authenticity of the documents the court considered and they do not constitute testimony.
ER 201(b).
768 A.2d at 501 n.40.
780 A.2d 1075, 1092 (Del. 2001).
49 Id. at 1091-92 (footnote omitted).
Id. at 1092.
See RAP 2.5(a).
Respondents cite State v. Henderson, 114 Wn.2d 867, 870, 792 P.2d 514 (1990) and State v. Neher, 112 Wn.2d 347, 352-53, 771 P.2d 330 (1989).
Tagliani v. Colwell, 10 Wn. App. 227, 233, 517 P.2d 207 (1973).
Orwick v. Fox, 65 Wn. App. 71, 89, 828 P.2d 12 (citing Doyle v. Planned Parenthood of Seattle-King County, Inc., 31 Wn. App. 126, 132, 639 P.2d 240 (1982)), review denied, 120 Wn.2d 1014 (1992).
Tagliani, 10 Wn. App. at 233; Walla v. Johnson, 50 Wn. App. 879, 883, 751 P.2d 334 (1988). '
42 Wn.2d 460, 256 P.2d 294 (1953).
Id. at 466.
See Tagliani, 10 Wn. App. at 233 (noting that “ ‘[i]n the absence of any apparent or declared reason — such as . . . futility of amendment,’ ” an outright refusal to grant leave to amend without any justifying reason “ ‘appearing