Seyfarth Synopsis: On November 30, 2016, The Delaware Court of Chancery dismissed two derivative suits filed on behalf of the Bank of New York Mellon (“BNYM”). The companion memorandum and letter opinions reaffirm the heavy burden a plaintiff faces to successfully plead that directors wrongfully refused its litigation demand.

Background

Plaintiff stockholders Murray Zucker and Carole Kops made separate litigation demands on BNYM’s board of directors on March 9, 2011 and May 24, 2012, respectively, requesting an investigation of alleged breaches of fiduciary duty stemming from BNYM’s foreign exchange practices. Shortly after receiving the Zucker demand, a Special Committee of independent directors hired counsel Cravath, Swain and Moore LLP to assist it in its investigation of the Zucker demand. On December 14, 2011, the Company issued its demand refusal letter to Zucker after the Special Committee recommended demand refusal and non-management directors adopted the Special Committee’s recommendations. Plaintiff Zucker first filed suit in New York state court in late 2011 alleging improper demand refusal and breach of fiduciary duties, which was dismissed without prejudice on October 1, 2013. Zucker then made a books and records demand pursuant to Section 220 seeking documents related to Cravath’s investigation and the Special Committee process, which was administratively consolidated with a similar action filed by Plaintiff Kops. Aided by information provided in the Section 220 actions, Zucker filed his derivative complaint in this action on October 20, 2015, and Kops ultimately filed her complaint on February 10, 2016. Both plaintiffs sought to recover from certain current and former directors, officers, and employees for losses arising from Bank of New York Mellon’s foreign exchange practices, which has resulted in fines and payments from lawsuits and regulatory actions of upwards of one billion dollars. The Court dismissed both actions for failure to adequately plead that the litigation demands were wrongfully refused on the basis of gross negligence or bad faith.

Takeaways

1. The Existence of and Size of Settlements with Government Agencies Standing Alone Does Not Raise an Inference of Directors’ Gross Negligence in Refusing a Demand. Plaintiff Zucker argued that BNYM’s 2015 foreign exchange settlements with government agencies are irreconcilable with the Special Committee’s 2011 conclusion that there was no actionable wrongdoing. Thus, plaintiff claimed it could only be explained by gross negligence on the part of the Special Committee in relying on Cravath’s investigation. The Court emphasized in rejecting this argument that “the applicable question here is not whether the conclusion of Cravath, the Special Committee or the Board was ‘wrong’; ‘the question is whether the Board was grossly negligent in failing to inform itself, or intentionally acted in disregard of the Company’s best interests in deciding not to pursue the litigation the Plaintiff demanded.’” Here, the Special Committee adequately informed itself in hiring Cravath to conduct an investigation that involved the review of over 10,000 documents, 13 interviews with current and former company officials, and several Special Committee meetings wherein the Committee reviewed Cravath’s work before presenting its ultimate conclusions to the board.

2. The Type or Number of Documents Reviewed by the Special Committee Does Not by Itself Support a Finding of Gross Negligence. Plaintiff Zucker complained that the Special Committee could not absent gross negligence have concluded there was no wrongdoing at BNYM because it reviewed only 28 documents, some of which Plaintiff alleged showed certain defendants knew that BNYM reaped benefits through the foreign exchange practices at issue. It further argued that no documents supported the conclusion that even assuming actionable wrongdoing it was nonetheless not in BNYM’s interests to pursue the demand. Plaintiff Kops likewise asserted that the Special Committee was not adequately informed. The Court reaffirmed that complaints about the types of documents reviewed or the choice of persons to be interviewed will not generally support a finding of gross negligence. Here, the existence of one or a few troubling documents was insufficient for the Court to infer bad faith or gross negligence on the part of the Special Committee in determining not to proceed with legal action. The Court noted that it is the Special Committee’s prerogative to evaluate all other work it and Cravath performed in addition to the troubling documents to reach its conclusion. The Court in rejecting a related argument that Plaintiff Zucker should receive an inference in his favor due to the fact that Cravath gave an oral presentation and not a written report reaffirmed that a written report is not required by Delaware law.

3. No Requirement that the Special Committee Revisit its Conclusions. Plaintiffs Zucker and Kops argued that even if the Special Committee’s decision to refuse the demand was reasonable when made, subsequent developments rendered it unreasonable and therefore require the Special Committee to revisit its conclusions. The Court found no general duty for a board to revisit prior demands in perpetuity.

4. Brevity of Special Committee Deliberations or Inconsistencies in Record Alone Do Not Establish Special Committee Failed to Act in Good Faith. Plaintiff Kops asserted that demand was wrongfully refused because the Special Committee relied wholly on the previous Zucker investigation and that there was no evidence that intervening developments were given consideration. However, the June 12, 2012 full-board meeting talking points and the June 21, 2012 demand refusal letter indicate that Cravath and the Special Committee discussed developments that have occurred since finishing the prior investigation. Plaintiff in response argued that there was an inconsistency in the record, since May Special Committee meeting minutes and talking points failed to include this description. Plaintiff additionally asserted that due consideration by the Special Committee was impossible because the meeting evaluating the demand lasted only around 30 minutes. The Court in rejecting Plaintiff’s argument found that the omissions in the May documentation did not create a reasonable inference that intervening events were not considered in light of affirmative language in contemporaneous documents. The Court likewise reaffirmed that brevity in directors’ deliberations alone does not imply gross negligence. At the time the decision was reached, the Special Committee had been constituted for over a year and had already become closely familiar with Cravath’s investigation.

For a full copy of the Zucker opinion, click here. For a full copy of the Kops opinion, click here.