Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera, C.A. No. 9503-CB (Del. Ch. July 13, 2015) (Bouchard, C.)
In this opinion, the Court of Chancery dismissed a purported derivative plaintiff’s complaint for failure to adequately plead demand futility and failure to state a claim upon which relief may be granted. In doing so, the Court held that a plaintiff does not establish demand futility by alleging that a board of directors caused the company to enter into a transaction with its controlling stockholder.
Incident to its initial public offering (“IPO”) in 2007, Orbitz Worldwide, Inc. (“Orbitz”) entered into a long-term services agreement with its then-parent, Travelport Limited (“Travelport”), pursuant to which Travelport provided online payment processing services to Orbitz. Following its IPO, Orbitz was majority owned by Travelport until mid-2013, when Travelport reduced its stake in Orbitz below 50%. In early 2014, Orbitz and Travelport entered into a renegotiated services agreement (the “Agreement”) that extended this arrangement for another five years, allegedly to ensure a successful IPO for Travelport later in the year. Pursuant to a provision in Orbitz’s charter governing related party transactions, Orbitz’s audit committee (the “Audit Committee”) reviewed and approved the terms of the Agreement.
Following disclosure of the Agreement in Orbitz’s securities filings, Plaintiff, Teamsters Union 25 Health Services and Insurance Plan, filed suit against Travelport, The Blackstone Group LP (Travelport’s former majority stockholder and owner of approximately 13% of Travelport at the time of the Agreement), and current and former members of Orbitz’s board of directors (collectively, “Defendants”) asserting derivative claims of unjust enrichment, aiding and abetting, and breaches of fiduciary duty. Plaintiff also brought a putative class claim based on the Orbitz board’s alleged violation of New York Stock Exchange (“NYSE”) rules regarding board independence. Defendants moved to dismiss the complaint pursuant to Court of Chancery Rules 23.1 and 12(b)(6).
The Court granted Defendants’ motion to dismiss the derivative claims pursuant to Rule 23.1 for failure to plead demand futility. “Under Delaware law, there are two tests for demand futility: (i) the test articulated in Aronson v. Lewis, which applies when a plaintiff challenges ‘a decision of the board upon which plaintiff must seek demand’; and (ii) the test set forth in Rales v. Blasband, which applies when a plaintiff does not challenge ‘a decision of the board in place at the time the complaint is filed.’” Despite alleging that the Audit Committee approved the Agreement and notwithstanding Orbitz’s charter requirement that related party transactions be approved by the Audit Committee, Plaintiff argued that the Aronson test applied because a reasonable inference could be made from the facts alleged that the full board must have approved the Agreement. The Court rejected this argument as speculative and concluded that the Rales test governed because only two of the nine members of the board at the time the demand should have been made (the “Demand Board”) approved the Agreement. The Court stated, however, that applying the Aronson test would produce the same result.
The Court held that Plaintiff did not meet the Rales standard, which required Plaintiff to show that there was a reasonable doubt as to a majority of the Demand Board’s ability to properly consider a demand. Initially, Plaintiff conceded the independence of four of the nine Demand Board directors; as such, it needed to raise a reasonable doubt that each of the five other directors could have impartially considered a demand. The Court found that one of those five directors, Kenneth Esterow, could have impartially considered a demand. The Court rejected Plaintiff’s argument that Esterow lacked independence from Travelport because he served as an executive at the company for 16 years, ending in 2011, and allegedly joined Orbitz’s board as a “loyalty appointment” by Travelport. The Court found that these allegations did not rebut the well-established presumption under Delaware law of director independence, as the allegations did not support an inference that Esterow would be “more willing to risk his . . . reputation than risk the relationship with the interested person.” The Court also rejected, as irrelevant, Orbitz’s failure to list one of the directors as an independent director on its 2013 proxy statement, noting that “a board’s determination of director independence under the NYSE rules is qualitatively different from, and thus does not operate as a surrogate for, this Court’s analysis of independence under Delaware law for demand futility purposes.”
The Court also rejected Plaintiff’s argument that demand was futile because the Audit Committee directors approved the Agreement in bad faith and therefore faced exposure to personal liability arising from Plaintiff’s complaint. Although demand futility may be shown where the board “face[s] a ‘substantial likelihood’ of personal liability,” Plaintiff did not meet the high pleading standard for bad faith because it did not allege any facts about the financial terms of the Agreement. As a result, the Court had “no informational basis from which [it] could conclude that the New Agreement was ‘so far beyond the bounds of reasonable judgment’ as to constitute bad faith . . . .”
Finally, the Court rejected Plaintiff’s argument that demand should be excused as a matter of law because the transaction allegedly was with a controlling stockholder. Relying on the Supreme Court’s decision in Beam v. Stewart, 845 A.2d 1040 (Del. 2004), the Court of Chancery rejected the notion that Travelport’s alleged controlling stake in Orbitz by itself overcame the presumption of director independence, and explained that, for a derivative plaintiff to rebut the presumption, it needs to plead particularized allegations that the directors who would have considered the demand were beholden to the putative controller. Plaintiff did not plead allegations here that called into question the impartiality of the board, which is the focus of the demand futility inquiry.
Plaintiff’s purported class claim alleged that the Orbitz board breached its fiduciary duties by causing the company to violate NYSE rules. However, Plaintiff only alleged that the board incorrectly determined the independence of three incumbent directors and that reporting this deficient determination in a proxy statement violated NYSE rules. The Court agreed with the United States Court of Appeals for the Third Circuit that there is no “private right of action for violation of a stock exchange rule.” Further, because Plaintiff did not allege that the NYSE had indicated that Orbitz violated exchange rules, the Court concluded it was “not reasonably conceivable that Plaintiff could establish that the [c]urrent [b]oard caused the [c]ompany to violate the NYSE rules.”
The Court therefore dismissed Plaintiff’s derivative claims pursuant to Rule 23.1 and dismissed Plaintiff’s class claim pursuant to Rule 12(b)(6).