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Zucker v. Hassell, C.A. No. 11625-VCG (Del. Ch. Nov. 30, 2016) (Glasscock, V.C.), and Kops v. Hassell, C.A. No. 11982-VCG (Del. Ch. Nov. 30, 2016) (Glasscock, V.C.)

November 30, 2016

In these decisions, the Court of Chancery dismissed related stockholder derivative actions against certain current and former directors, officers, and employees of The Bank of New York Mellon Corporation (“BNYM” or the “Company”) pursuant to Rule 23.1, concluding that the plaintiffs had failed to plead adequately that the Company’s board of directors (the “Board”) had wrongfully refused their litigation demands.

According to the allegations in the plaintiffs’ complaints, BNYM purportedly misled its foreign exchange customers by representing that its “Standing Instruction Service” for non-negotiated trades followed “best execution standards” and offered “best rates” when, contrary to those representations, the Company “charge[d] its Standing Instruction clients ‘at or near’ the least favorable daily rate, and then retain[ed] the difference as profits.” The Company’s putative practices were eventually the subject of lawsuits and regulatory actions.  In connection with its $714 million settlement with the U.S. Department of Justice and the New York Attorney General’s office on March 19, 2015, the Company admitted, among other things, that it charged its “clients prices that were at or near the worst interbank rates reported during the trading day or session.”

Plaintiff Murray Zucker made a litigation demand on the Board on March 9, 2011, requesting an investigation relating to the Company’s foreign exchange practices. Thereafter, the Board formed a special committee (the “Committee”) to consider the litigation demand.  The Committee hired Cravath, Swaine & Moore LLP (“Cravath”) to assist it.  Following Cravath’s investigation, which included review of more than 10,000 documents and interviews of 13 current and former Company officials, the Committee found that there was no sound basis for any claim and that, regardless, litigation was not in the Company’s interest.  As such, the Committee recommended to the Board that it deny the demand.  The Board refused the demand by letter of December 14, 2011.  

Plaintiff Carole Kops made her litigation demand on the Board on May 24, 2012. The Committee met on May 30, 2012 to consider her demand, and recommended to the Board on June 12, 2012 that it deny the demand.  The Board refused the demand by letter of June 21, 2012.

After their litigation demands were refused, both of the plaintiffs pursued books and records demands and actions pursuant to 8 Del. C. § 220 seeking documents relating to the Board’s actions.  Following the conclusion of that litigation, the plaintiffs filed derivative complaints in the Court of Chancery.

On defense motions, the Court dismissed the plaintiffs’ complaints pursuant to Rule 23.1 for failure to plead adequately that the Board wrongfully refused their litigation demands. The Court explained that “a board’s decision to refuse a plaintiff’s demand is afforded the protection of the business judgment rule unless the plaintiff alleges particularized facts that raise a reasonable doubt as to whether the board’s decision to refuse the demand was the product of valid business judgment,” and stated that the pertinent “reason to doubt” is “not doubt about the propriety of the underlying conduct, nor is it doubt about whether the Board, in rejecting the demand, made a wise decision; it is doubt whether the Board’s action, wise or foolish, was taken in good faith and absent gross negligence.”  The Court held that the plaintiffs did not satisfy this pleading burden.

The Court first rejected the plaintiffs’ “res ipsa loquitur” argument that, in light of the subsequent settlements and admission of wrongdoing by the Company, Cravath’s failure to discover the misconduct could only be explained by gross negligence.  The Court reasoned that “[t]he fact that a Department of Justice investigation was able to extract a concession of liability . . . does not itself demonstrate that the Board was grossly negligent in rejecting Plaintiff’s demand.”  The Court further explained that “it is the Directors—not Cravath—who are charged with a duty of care, and our statute allows the Directors to rely on advisors,” and that, “[g]iven the scope of Cravath’s investigation, nothing in the facts pled indicates that it was unreasonable (let alone grossly negligent) for the Board to rely on that investigation or reach the conclusion it did in reliance on the investigation.”

The Court disagreed with the plaintiffs’ criticisms of Cravath’s investigative process and the Committee’s conclusion, explaining that “cavils about the types of documents reviewed, or the choice of persons to be interviewed, in an investigation will not support a finding of gross negligence,” and that “[t]he existence of one or a few troubling documents is insufficient for me to infer bad faith or gross negligence on the part of the Special Committee in reaching the decision not to proceed with legal action.” The Court also rejected the plaintiffs’ related contention that the presence of heavy redactions in the documents produced by the Company in connection with the plaintiffs’ books and records demands and actions suggested that the redacted information was “not consistent with the Special Committee’s conclusion,” because “[t]he place to have addressed [this issue] . . . was at the Section 220 phase of the litigation.”

The Court found that, contrary to plaintiffs’ assertion, an October 6, 2011 New York Times advertisement by the Company denying that it engaged in any wrongdoing did not imply wrongful refusal by the Board, reasoning that “[i]n a large and complex company such as BNYM, absent well-pled facts showing Board or Special Committee involvement, it is not reasonable to infer that the Defendants had sufficient involvement in this advertisement so that they considered its denial of wrongdoing binding on them.”

Finally, the Court rejected the plaintiffs’ argument that the Committee failed to revisit its conclusions in light of developments subsequent to the completion of Cravath’s investigation, reasoning that there is “no general duty for a board to revisit prior demands in perpetuity once conditions change,” and that, following receipt of the Kops demand, the Committee discussed and considered “whether any developments subsequent to [the Zucker] investigation might affect the validity of the Committee’s prior conclusions.”

Accordingly, the Court dismissed the plaintiffs’ complaints pursuant to Rule 23.1 for failure to plead adequately that the Board wrongfully refused their demands.

The full opinion is available here