UFCW LOCAL 1500 PENSION FUND v. MARISSA MAYER, et al.
Case No. 16-cv-00478-RS
UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA
October 19, 2016
RICHARD SEEBORG, United States District Judge
I. INTRODUCTION
This shareholder derivative action seeks to hold individual Yahoo, Inc. directors and officers liable on multiple theories, all predicated on Yahoo allegedly acting as an investment company without registering as such with the Securities and Exchange Commission (“SEC,” “Commission“), in violation the Investment Company Act of 1940 (“ICA“). Plaintiff UFCW Local 1500 Pension Fund also asserts one direct claim against Yahoo on the basis of the same allegations. All defendants move to dismiss plaintiff‘s complaint for failure to state a claim upon which relief can be granted. The individual director and officer defendants also move to dismiss the derivative claims for plaintiff‘s failure to make a pre-litigation demand on the board of directors.
Although demand would have been futile for all claims and is therefore excused, all of plaintiff‘s claims are nonetheless dismissed because they all depend on the faulty theory Yahoo operated illegally from 2013 through the present as an unregistered investment company. Defendants’ motions are therefore granted.
II. BACKGROUND
Back in the salad days of the dot-com boom, Yahoo made tidy profits from its internet
In the years since the SEC issued that exemption order, Yahoo‘s business has changed considerably. Most importantly, it invested $1 billion in Chinese e-commerce company Alibaba in 2005. Yahoo‘s investment assets have grown dramatically as a result of its stakes in Alibaba and Yahoo Japan (currently valued at about $27 billion and $7.4 billion, respectively), while the value of its operating business has dwindled rapidly. While in 2013, operations were responsible for 32.7 percent of Yahoo‘s net income, in 2014 that number plummeted to 1.2 percent. In 2015, Yahoo‘s operations lost over $4 billion, and all of its net income was attributable to its investments. On the basis of these figures, plaintiff alleges investments accounted for more than 90 percent of the value of Yahoo‘s total assets for the years 2013, 2014, and 2015, and that Yahoo‘s operating business is now worth “less than zero.”
As a result of these fundamental changes to Yahoo‘s business, and owing to the Alibaba investment, which plaintiff alleges was not made for a bona fide business purpose, plaintiff argues that Yahoo had lost the protection of its registration exemption by 2013. Thus, plaintiff argues Yahoo was required to register as an investment company under the ICA. Because Yahoo has never so registered, plaintiff alleges it has been operating illegally as an unregistered investment company since at least 2013. Therefore, plaintiff alleges the ICA forbids Yahoo from engaging in interstate commerce, and renders voidable contracts Yahoo has entered into since 2013. See
Plaintiff now brings five derivative claims on behalf of Yahoo (a Delaware corporation based in California) against: current Yahoo directors David Filo, Sue James, Thomas J. McInerney, H. Lee Scott, Jr., Jane E. Shaw, and Maynard Webb, Jr.; former directors Charles R. Schwab and Max R. Levchin; current officers Kenneth A. Goldman and Ronald S. Bell; former officer Henrique de Castro; and current CEO and director Marissa Mayer. The five derivative claims are: violation of section 47(b) of the ICA, breach of fiduciary duty of loyalty, unjust enrichment, violation of Delaware General Corporate Law section 124(2) (which prohibits ultra vires activities by corporate officers and directors), and violation of California‘s Unfair
Plaintiff seeks various forms of relief, including: an injunction preventing Yahoo from engaging in interstate commerce, performing any voidable contract, or selling any of its material assets; a declaration that plaintiff can maintain its five derivative claims under Delaware law and is an adequate representative of Yahoo; rescission of voidable contracts and disgorgement of compensation paid or payable under those contracts; statutory relief; disgorgement of any unjust enrichment and all profits obtained from the alleged misconduct; costs, expenses, and other fees; and other relief the Court deems proper.
Yahoo and the individual defendants raise a host of defenses to plaintiff‘s claims. Most importantly, defendants argue Yahoo‘s registration exemption has remained valid since 2000, meaning Yahoo has never been an unregistered investment company and that plaintiff‘s claims all fail as a matter of law. In addition to the exemption defense, the individual defendants also argue plaintiff has no standing to bring its derivative claims because it has not sufficiently demonstrated demand futility as required by
“A pleading that states a claim for relief must contain . . . a short and plain statement of the claim showing that the pleader is entitled to relief . . . .”
IV. DISCUSSION
A. Standing for Derivative Claims: Demand Futility
The individual defendants argue plaintiff‘s derivative claims all fail because plaintiff has not shown that its failure to make a pre-litigation demand upon Yahoo‘s board was excused for futility, as required by
Under the Rales test, “a court must determine whether or not the particularized factual allegations of a derivative stockholder complaint create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand.” Id. at 934. “Directorial interest exists whenever divided loyalties are present, or a director has received, or is entitled to receive, a personal financial benefit from the challenged transaction which is not equally shared by the stockholders,” id. at 933 (citations and internal quotation marks omitted), or when “a substantial likelihood of personal liability exists,” Wood v. Baum, 953 A.2d 136, 141 n.11 (Del. 2008). Plaintiff must show directorial interest with respect to a majority of the board in order to show demand futility. Rosenbloom, 765 F.3d at 1150 (citation omitted).2
Both parties state the Rales test in the disjunctive, as do the cases reciting it. See, e.g., Baca v. Crown, 458 F. App‘x 694, 697 (9th Cir. 2011) (“Directors, moreover, are deemed interested for purposes of demand futility when they receive a personal financial benefit from a
Because a director‘s personal financial interest alone can excuse demand, it may be excused for a claim that will ultimately fail on its legal merits. For instance, in Calma the Delaware Court of Chancery deemed demand excused for a waste of corporate assets claim predicated on alleged excessive compensation because the defendant directors had a personal financial interest in the challenged compensation. Id. Nonetheless, the Court of Chancery dismissed the claim because the plaintiff‘s conclusory allegations failed to state a claim for waste. Id. at 590-91.
The individual defendants’ arguments against demand futility primarily mirror their arguments on the merits for why plaintiff has failed to state any claims. If correct, defendants’ arguments naturally preclude plaintiff from showing that director-defendants face a substantial likelihood of personal liability. See infra Part IV.C (dismissing all claims on the merits). Defendants’ arguments, however, do not address the fact that plaintiff‘s claims all challenge
[In] a derivative challenge to director compensation . . . the law is skeptical that an individual can fairly and impartially consider whether to have the corporation initiate litigation challenging his or her own compensation, regardless of whether or not that compensation is material on a personal level. [I]n a derivative challenge to director compensation, there is a reasonable doubt that the directors who received the compensation at issue — regardless of whether that compensation was material to them on a personal level — can be sufficiently disinterested to consider impartially a demand to pursue litigation challenging the amount or form of their own compensation. . . . [T]his conclusion has even more force where, as here, the directors received equity compensation from the corporation because those individuals “have a strong financial incentive to maintain the status quo by not authorizing any corrective action that would devalue their current holdings or cause them to disgorge improperly obtained profits.”
114 A.3d at 576 (citations and internal quotation marks omitted). One way or another, each of plaintiff‘s claims challenges director compensation, thereby satisfying the Rales test and stating with particularity why demand should be excused.
Because plaintiff‘s § 47(b) claim charges that each director‘s contract is voidable and unenforceable, plaintiff has demonstrated reasonable doubt about the disinterestedness of the directors on the basis of personal financial benefits enjoyed by directors unequally from shareholders. Likewise, plaintiff‘s UCL claim is predicated in part on Yahoo allegedly entering into contracts with and compensating its officers and directors in violation of the ICA —
This makes intuitive sense. There is little reason to require shareholders to engage in the futile exercise of making a pre-litigation demand of the board of directors for claims predicated on, and seeking to recover, the directors’ compensation. Whether or not such claims are legally viable, the willingness of the implicated board of directors to address them is subject to more than reasonable doubt.
Defendants’ also make one demand-specific defense (in that it does not overlap with their merits defenses), which fails for similar reasons. Defendants argue plaintiff‘s breach of fiduciary duty of loyalty claim is actually an excessive compensation claim, and that plaintiff has failed to show interested directors because “directors are generally not considered interested under . . . Rales simply because they receive compensation from the company.” Calma, 114 A.3d at 576 (citations and internal quotation marks omitted). But again, defendants ignore the fact that Calma strongly supports finding interested directors when their compensation is directly implicated by a claim. See id. Moreover, plaintiff does not draw the directors’ disinterest into doubt merely by
B. Failure to State a Claim: ICA Exemption Defense
Although the SEC has never revoked Yahoo‘s exemption order, plaintiff argues the exemption is no longer valid — either because Yahoo does not qualify for the exemption, or because it violated a condition of its exemption by making an investment in Alibaba that was not for “bona fide business purposes.” Thus, plaintiff argues Yahoo was required to register as an investment company under the ICA. Because all of plaintiff‘s claims for relief turn on Yahoo‘s failure to register as an investment company when the ICA allegedly required it to do so, the overarching legal question in deciding this motion is whether a court is empowered to find, at the behest of a private litigant, that a company has lost the protection of a registration exemption. If not — if the exemption retains force of law until revoked by the SEC or the company chooses to register as an investment company — then plaintiff‘s claims must be dismissed for lacking the support of a cognizable legal theory. Navarro, 250 F.3d at 732.
For the purposes of the ICA, an “investment company” is any issuer of a security that:
(A) is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities;
(B) is engaged or proposes to engage in the business of issuing face amount certificates of the installment type, or has been engaged in such business and has any such certificate outstanding; or
(C) is engaged or proposes to engage in the business of investing, reinvesting, owning, holding, or trading in securities, and owns or proposes to acquire investment securities having a value exceeding 40 per centum of the value of such issuer‘s total assets (exclusive of Government securities and cash items) on an unconsolidated basis.
To determine whether a company is entitled to an exemption, the SEC ordinarily relies on the Tonopah factors. S.E.C. v. Nat‘l Presto Indus., Inc., 486 F.3d 305, 312-15 (7th Cir. 2007) (citing In re Tonopah Mining Co., 26 S.E.C. 426 (1947)). The Tonopah factors are “1) the company‘s historical development; 2) its public representations of policy; 3) the activities of its officers and directors; and, most important, 4) the nature of its present assets; and 5) the sources of its present income.” 26 S.E.C. 426.
Exemptions are not eternal, however. “Whenever the Commission, upon its own motion or upon application, finds that the circumstances which gave rise to the issuance of an order granting an application . . . no longer exist, the Commission shall by order revoke such order.”
Nonetheless, the ICA‘s language strongly indicates there is no role for the courts to find, in the first instance, that a company should be stripped of its exemption and therefore deemed an
A potentially separate question is whether a court can find that a company, at some point in the past, failed to comply with its exemption or qualify for an exemption, and thus operated illegally as an unregistered investment company. The ICA is silent on this sort of retrospective examination, presumably because its remedy for undeserved or violated exemptions is contemporaneous revocation by the SEC. If the SEC fails to revoke an exemption, the ICA makes no suggestion that the SEC‘s decision should be second-guessed by a court subsequently considering whether the exemption was undeserved or violated and therefore void. The plain language of the statute supports this interpretation. By definition, any company that the SEC “finds and by order declares to be primarily engaged in a business or businesses other than that of investing, reinvesting, owning, holding, or trading in securities” is not an investment company.
Plaintiff identifies no cases in which a court has either retrospectively or prospectively deprived a company of a registration exemption, and the only courts to consider their power to invalidate an SEC order in this domain have determined they have no such power. See Omni Fin. Corp. v. Cohen, No. 91-Civ. 6837 (RO) (THK), 1994 WL 97125, at *5 (S.D.N.Y. Mar. 22, 1994)
Plaintiff makes three counterarguments on this subject. First, plaintiff references two SEC documents it says show a registration exemption is void whenever the recipient company fails to comply with its terms and conditions, even if no formal revocation order has been issued. See Del. Invs. Dividend & Income Fund, Inc., et al., Release No. IC-27475; 812-12420, 2006 WL 2570218, at n.3 (Sept. 8, 2006) (“The Commission also reiterates that any exemption provided by an order issued under the Act is available only to a person that complies with the terms and conditions set forth in the application based on which the exemption was granted.“); Clearstream Banking, S.A.; Notice of Filing of Application to Continue an Existing Exemption from Clearing Agency Registration, Exchange Act Release No. 53851, 2006 WL 1438715, at *2 (May 23, 2006) (“The 1997 Exemptive Order was based upon representations and facts contained in Cedel‘s Form CA-1 and other information known to the Commission regarding the substantive aspects of Cedel‘s application, including the ownership structure and corporate governance. As a result, changes in the representations and facts as then existed and were presented to the Commission require a modification to the 1997 Exemptive Order.“). Although these documents support the notion that exemptions are not eternal, and are subject to the exempted company‘s compliance with their terms, they say nothing about the ability of private litigants to compel a court to find that a company has lost the protection of an exemption. If anything, they support the contrary
Second, plaintiff raises the somewhat indirect argument that Yahoo lost the protection of its exemption because it failed to seek “no-action” relief to determine if its exemption remained valid. The “no-action” process is a means by which a company can seek the SEC‘s opinion on whether a changed or changing circumstance will affect the status of an SEC order — like a registration exemption. See Donna M. Nagy, Judicial Reliance on Regulatory Interpretations in SEC No-Action Letters: Current Problems and A Proposed Framework, 83 Cornell L. Rev. 921, 929-43 (1998); Securities & Exchange Commission, No-Action Letters, https://www.sec.gov/answers/noaction.htm. The process is voluntary. Junis L. Baldon, Taking A Backseat: How Delaware Can Alter the Role of the Sec in Evaluating Shareholder Proposals, 4 Entrepreneurial Bus. L.J. 101, 125 (2009) (referencing the “voluntary nature” of the “SEC no-action letter process“); see Securities & Exchange Commission, No-Action Letters (“An individual or entity who is not certain whether a particular product, service, or action would constitute a violation of the federal securities law may request a ‘no-action’ letter from the SEC staff.“) (emphasis added). Nonetheless, plaintiff argues Yahoo cannot forego the “no-action” process and continue relying on an aging exemption because it would effectively be converting an exemption predicated on the existence of certain past circumstances into a permanent exemption. This argument seems to depend on the unstated premise that the SEC will invalidate a standing exemption only when incited to act by the filing of a “no-action” letter. Even if this premise were true (and it appears not to be, see Del. Invs. Dividend & Income Fund, 2006 WL 2570218), it would still not support the argument that a private litigant can call on a court to find a company‘s exemption void. Relying entirely on exempted companies to self-report the expiration of their exemptions through the filing of “no-action” letters, a suboptimal regulatory scheme to be sure, would not command the conclusion that there is a judicial role in policing the ongoing validity of
Finally, plaintiff claims two cases support the proposition that a district court can consider the validity of an SEC exemption order at the behest of a private litigant. Neither case is on point. See Tinney v. Geneseo Commc‘ns, Inc., 457 F. Supp. 2d 495 (D. Del. 2006) (holding, in a derivative suit challenging alleged short-swing trading, that an SEC clarification giving retroactive effect to SEC Rule 16b-3(d) was a valid “interpretive clarification,” rather than an administrative rule) (citing
Because the SEC never revoked Yahoo‘s registration exemption, Yahoo never operated illegally as an unregistered investment company, and plaintiff‘s claims all fail as a matter of law. Thus, plaintiff‘s claims are dismissed with leave to amend.
C. Failure to State a Claim: Claim-Specific Defenses
In addition to their overarching argument that Yahoo never operated as an unregistered investment company, defendants advance numerous arguments for why each claim should be dismissed. These mirror most of their arguments for why plaintiff has not sufficiently demonstrated demand futility. See supra Part IV.A (excusing demand). In several instances, they provide an independent basis for dismissal in addition to the ICA exemption defenses. See supra Part IV.B.
1. ICA § 47(b) Claim
Plaintiff brings a claim under ICA § 47(b), which deems any contract entered into in violation of the ICA unenforceable and subject to rescission.
a. Private Right of Action
Section 47(b) does not explicitly provide a private right of action, so plaintiff must show that one is “implied from the statute‘s language, structure, context, and legislative history.” Northstar Fin. Advisors, Inc. v. Schwab Investments, 615 F.3d 1106, 1115 (9th Cir. 2010) (citations omitted). Specifically relevant are: the presence of “rights-creating language,” the presence of private causes of action in analogous provisions implying “congressional intent not to create an implied cause of action” elsewhere, and “whether Congress designated a method of enforcement other than through private lawsuits.” Id. (citations and internal quotation marks omitted).
Relying on the fact that section 36(b) of the ICA explicitly provides for a private right of action (as did the original section 30(f)), and that sections 6 and 42 endow the SEC with broad investigatory and enforcement powers, the Ninth Circuit has held that no private right of action is implied in section 13 of the ICA. See id. at 1115-22 (citations omitted). Unlike section 13, however, section 47(b) of the ICA does contain rights-creating language. It makes contracts made in violation of the ICA unenforceable by either party unless a court finds that equity demands otherwise, and contemplates that parties will seek rescission of such contracts in court. Id. at § 80a-46(b). Nonetheless, it is inappropriate to find an implied right of action in section 47(b) when “thorough delegation of authority to the SEC to enforce the ICA strongly suggests Congress intended to preclude other methods of enforcement,” Northstar, 615 F.3d at 1116-17 (citing Alexander v. Sandoval, 532 U.S. 275, 290 (2001)), and when “it is evident from the text of the ICA that Congress knew how to create a private right of action to enforce a particular section of the Act when it wished to do so,” id. at 1117. Other courts have also reached the conclusion that
Plaintiff‘s argument that not reading a private right of action into section 47(b) would leave it superfluous is well-taken but ultimately unavailing because 47(b) relief may be available in an action brought under section 36(b). See
b. Statute of Limitations
The parties agree that if plaintiff is permitted to bring a claim under section 47(b), it is subject to a one-year statute of limitations. See Friedlob v. Trs. of the Alpine Mut. Fund Tr., 905 F. Supp. 843, 855-56 (D. Colo. 1995). Because plaintiff alleges Yahoo was acting as an unregistered investment company since “early 2013,” but did not file its original complaint until January 27, 2016, defendants argue plaintiff‘s claim is time-barred. In response, plaintiff argues its claim is preserved by the discovery rule, and by the fact that Yahoo is engaged in continuing violations of the ICA.
According to plaintiff, it was not possible to discern that Yahoo was acting as an unregistered investment company until it released its 2015 financial figures and cancelled the Alibaba spin-off, because without Alibaba Yahoo would not have been an unregistered investment company. These arguments are unavailing. For one thing, just because Yahoo‘s aborted spin-off of Alibaba could have remedied its alleged ICA violation does not mean plaintiff had no claim for relief until Yahoo abandoned the spin-off plan on December 9, 2015. Plaintiff‘s overarching legal theory is that Yahoo is and has been an unregistered investment company since at least 2013. Yahoo may have been close to correcting its alleged ICA violation with the Alibaba spin-off, but under plaintiff‘s theory of the ICA‘s registration requirement, Yahoo would have nonetheless been an unregistered investment company until it actually completed the spin-off. Thus, plaintiff did not learn of a previously unknown ICA violation from Yahoo‘s abandonment of the spin-off plan.
Moreover, plaintiff cannot argue both that Yahoo‘s 2013 financials show Yahoo was an unregistered investment company during that year, and that plaintiff could not recognize that Yahoo was an unregistered investment company for 2013 until after the release of Yahoo‘s even-more-investment-heavy 2015 financials. Plaintiff‘s entire argument is based on Yahoo allegedly having been an unregistered investment company since at least 2013. For plaintiff to show that “Yahoo‘s status as an investment company could not have been determined solely from the 2013 financials,” plaintiff must demonstrate that in 2015 it discovered something previously unknown or unknowable about Yahoo‘s 2013 financial figures, an attempt not reflected in its pleadings. Thus, the discovery rule does not preclude the application of the statute of limitations to plaintiff‘s claim. See also Blatt v. Merrill Lynch, Pierce, Fenner & Smith Inc., 916 F. Supp. 1343, 1353 (D.N.J. 1996) (concluding that the discovery rule does not apply to claims that a company was unregistered in violation of the ICA because “an investment company cannot conceal the fact that it is unregistered, and while it may misrepresent that it is properly registered, or that registration is not required, it cannot prevent an investor from discovering the true facts as to the lack of or requirement of its registration.“).
According to plaintiff, its claim is not-time barred because it is based on Yahoo‘s contracts with its directors and officers, and a new violation arose each time Yahoo entered into a new annual employment contract or materially amended such agreement. Defendant argues the continuing violation doctrine should not apply here because other courts have not applied it to failure-to-register claims, and that Yahoo‘s challenged contracts are merely a “continual ill effect” of Yahoo‘s alleged failure to register, as opposed to continuing violations.
If a company committed a violation of the ICA simply by failing to register as an investment company, the continuing violation doctrine likely would not apply to pure failure-to-register claims, because adopting it “would annul the application of a limitations period for nonregistration claims.” Id. at 1352. “Indeed, to consider an investment company‘s failure to register with the SEC as a continuing violation would ignore the whole purpose behind a statute of limitations and the importance of the policy of repose.” Id. An ICA violation, however, does not occur when an investment company fails to register under the ICA. See
2. Breach of Fiduciary Duty of Loyalty
Plaintiff alleges the individual defendants recklessly or intentionally breached their fiduciary duties of loyalty when they failed to register Yahoo under the ICA and acted in violation of Delaware law.4 Because the defendants’ activities do not amount to ultra vires acts supporting liability under Delaware law, see infra Part IV.C.4, and because Yahoo was not required to register under the ICA, see supra Part IV.B, this claim necessarily fails.5
Defendants also argue plaintiff fails to state a claim of breach of fiduciary duty of loyalty on behalf of any of the officer-defendants because it “fails to allege facts demonstrating that [they] took part in the challenged conduct, and . . . failed to demonstrate the due care attendant to [their] particular office in doing so.” In re Bridgeport Holdings, Inc., 388 B.R. 548, 573 (Bankr. D. Del. 2008). This is true of Officers Goldman and de Castro, because plaintiff has failed to allege
3. Unjust Enrichment
The parties agree plaintiff‘s unjust enrichment claim cannot succeed if plaintiff‘s breach of fiduciary duty of loyalty claim fails. See Taylor v. Kissner, 893 F. Supp. 2d 659, 674 (D. Del. 2012) (dismissing an unjust enrichment claim where the plaintiff had “not properly alleged any breach of fiduciary duty or any other theory providing a factual basis to conclude that the compensation received by each Defendant was paid without justification“); Calma, 114 A.3d at 591 (Del. Ch. 2015) (“At the pleadings stage, an unjust enrichment claim that is entirely duplicative of a breach of fiduciary duty claim — i.e., where both claims are premised on the same purported breach of fiduciary duty — is frequently treated in the same manner when resolving a motion to dismiss.“) (citation and internal quotation marks omitted). Because plaintiff‘s breach of fiduciary duty of loyalty claim should be dismissed, see supra Part IV.B.2, so too should this one.
Defendants argue there are additional reasons for dismissing this claim. First, they insist a claim for unjust enrichment cannot proceed when a contract governs the relationship between the parties. See BAE Sys. Info. & Elec. Sys. Integration, Inc. v. Lockheed Martin Corp., No. CIV.A. 3099-VCL, 2009 WL 264088, at *7 (Del. Ch. Feb. 3, 2009) (“If a contract comprehensively governs the parties’ relationship, then it alone must provide the measure of the plaintiff‘s rights and any claim of unjust enrichment will be denied.“). If, like here, the “validity of that agreement is challenged, however, claims of unjust enrichment may survive a motion to dismiss. . . . This may be the case where a plaintiff pleads a right to recovery not controlled by contract or where it is the [contract], itself, that is the unjust enrichment.” Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, No. CV 7906-VCG, 2014 WL 6703980, at *27 (Del. Ch. Nov. 26, 2014) (citation and internal quotation marks omitted) (alteration in original). Moreover, Delaware
Defendants also argue plaintiff‘s factual allegations are insufficient to plead an unjust enrichment claim — specifically that it has not alleged defendants received compensation without justification, against the “fundamental principles of justice or equity and conscience.” Fleer Corp. v. Topps Chewing Gum, Inc., 539 A.2d 1060, 1062 (Del. 1988). Plaintiff makes the conclusory allegation that defendants were compensated excessively for their services to Yahoo because Yahoo‘s revenues came overwhelmingly from investments, but never says why such compensation violates the “fundamental principles of justice or equity and conscience.” See, e.g., Am. Compl. ¶ 37. Because plaintiff fails to offer any facts indicating defendants’ compensation was unjustified, it has failed to plead an unjust enrichment claim.
4. Ultra Vires Claims under Delaware General Corporate Law § 124
Plaintiff advances an ultra vires claim directly against Yahoo under Delaware General Corporate Law section 124(1), which allows shareholders to “to enjoin the doing of any act or acts” that “the corporation was without capacity or power to do.”
Moreover, defendants argue ultra vires claims are available only for actions unauthorized
Plaintiff‘s cases primarily support the notion that illegal acts are void (as opposed to voidable), and can be described generally as ultra vires; these cases do not deal with section 124 claims either. See, e.g., Harbor Fin. Partners v. Huizenga, 751 A.2d 879, 896 (Del. Ch. 1999) (“Voidable acts are traditionally held to be ratifiable because the corporation can lawfully accomplish them if it does so in the appropriate manner. . . . In contrast, void acts are said to be non-ratifiable because the corporation cannot, in any case, lawfully accomplish them. Such void acts are often described in conclusory terms such as ‘ultra vires’ . . . .“).
Section 124 generally contemplates ultra vires acts as those “that the corporation was without capacity or power to do.” See
5. UCL Claim
Defendants argue plaintiff fails to state a claim under California‘s UCL,
Whether the UCL can support a shareholder derivative claim is a more difficult question. Plaintiff has identified no cases in which shareholders have been allowed to maintain a UCL claim in a derivative action, and defendant has identified no case in which they have not. Although one federal court has held that “dismissal of UCL actions is appropriate when the plaintiff is neither a competitor nor a consumer,” Dillon v. NBCUniversal Media LLC, No. CV 12-09728 SJO AJWX, 2013 WL 3581938, at *7 (C.D. Cal. June 18, 2013), its holding relied on an overly broad reading of a California decision holding that the UCL did not apply to contract claims involving neither competitors nor unwary consumers, see id. (citing Linear Tech. Corp. v. Applied Materials, Inc., 152 Cal. App. 4th 115, 135 (2007)). Nonetheless, in the absence of any authority for permitting a UCL claim to go forward in a shareholder derivative action, the California Supreme Court‘s pronouncement that the “purpose [of the UCL] is to protect both consumers and competitors by promoting fair competition in commercial markets for goods and services,” Kasky v. Nike, Inc., 27 Cal. 4th 939, 949 (2002), favors the conclusion that a UCL claim cannot be sustained in a shareholder derivative action, because shareholders are neither consumers nor competitors.
According to defendants, the exculpatory provisions of Yahoo‘s corporate charter require plaintiff to show his or her bad faith in order to state any claim against a director. See McMillan v. Intercargo Corp., 768 A.2d 492, 495 (Del. Ch. 2000) (“Because Intercargo‘s certificate of incorporation contained an exculpatory provision immunizing its directors from liability for due care violations, the plaintiffs may survive this motion only if the complaint contains well-pleaded allegations that the defendant directors breached their duty of loyalty by engaging in intentional, bad faith, or self-interested conduct that is not immunized by the exculpatory charter provision.“). According to defendants, plaintiff has made no such showing.7
Although Delaware law allows for the exculpation of breach of due care claims against directors,
7. Failure to State Claims Against Officer-Defendants by Pleading Only Biographical Information
Defendants argue plaintiff‘s complaint pleads only biographical information about officer defendants Kenneth A. Goldman (CFO since 2012), Ronald S. Bell (General Counsel and Secretary since 2012), and Henrique de Castro (COO from October 2012 until January 2014). According to defendants, plaintiff‘s “Amended Complaint . . . contains no allegations
As to officers Goldman and de Castro, defendants are correct. According to plaintiff, Goldman is “responsible for Yahoo‘s global finance functions including financial planning and analysis, controllership, tax, treasury, and investor relations,” and de Castro was “responsible for strategic operational management of Yahoo‘s sales, media, business development and operations worldwide.” Plaintiff does not allege facts showing Goldman or de Castro caused Yahoo to violate the ICA or had a duty to register Yahoo under the ICA. Thus plaintiff has alleged no facts supporting liability for Goldman or de Castro on any of its claims. Plaintiff‘s bare allegations that all individual defendants breached their duties to Yahoo and “caused Yahoo to violate the ICA,” see, e.g., Am. Compl. ¶ 2, do not “contain sufficient factual matter, [if] accepted as true, to state a claim to relief that is plausible on its face.” Iqbal, 556 U.S. at 678 (citation and internal quotation marks omitted).
As to Bell, however, defendants are incorrect. Plaintiff‘s allegation that Bell, as general counsel, “oversees the Company‘s worldwide legal compliance and legal operations” is sufficient factual content to state a claim for relief when all of plaintiff‘s claims depend on the theory that Yahoo was required to register under the ICA, and that defendants consciously disregarded that obligation by keeping Yahoo unregistered.
V. CONCLUSION
For the foregoing reasons, plaintiff‘s claims are dismissed. Although it is not immediately obvious how plaintiff‘s case could be saved by amendment, plaintiff is given leave to amend if, in good faith, it can advance a viable complaint. Any amended complaint shall be filed within 30 days of the issuance of this order.
IT IS SO ORDERED.
RICHARD SEEBORG
United States District Judge