SEAN DUGGAN v. JOHN J. DONAHOE, ET AL.

Case No.:  1-14-CV-264054

DATE:  November 7, 2014

TIME:  9:00 a.m.

DEPT.: 1

As an initial matter the Court in ruling on a demurrer or motion to strike considers only the pleading under attack, any attached exhibits (part of the “face of the pleading”) and any facts or documents for which judicial notice is properly requested and may be granted.  Any purported requests for judicial notice that do not comply with Rule of Court 3.1113(l) are denied.  The Court cannot consider extrinsic evidence in ruling on a demurrer or motion to strike.  Accordingly, the Court has not considered the declaration of Plaintiff Counsel Michael J. Nicoud.

Defendants’ request for judicial notice is GRANTED.

As eBay is incorporated in Delaware, California Courts apply Delaware law (specifically Del. Court of Chancery Rule 23.1) in determining if Plaintiff has established derivative standing by adequately alleging pre-suit demand futility.  See Charter Township of Clinton Police and Fire Retirement System v. Martin (2013) 219 Cal App 4^th 924, 934; Leyte-Vidal v. Semel (2013) 220 Cal App 4^th 1001. 1007 (6^th Dist.).

“‘In order to excuse the demand requirement, a derivative complaint must allege particularized facts creating a ‘reasonable doubt’ that: (1) the directors were disinterested and independent; or (2) the challenged transaction was the product of a valid exercise of business judgment.  . . .  If either prong is satisfied, then a plaintiff has met the demand futility burden and the demand requirement is excused.  If a plaintiff fails to satisfy the first prong of Aronson, there is a presumption that the board’s actions were the product of a valid exercise of business judgment.  Under the second prong of Aronson, ‘plaintiffs must plead particularized facts sufficient to raise (1) a reason to doubt that the action was taken honestly and in good faith or (2) a reason to doubt that the board was adequately informed in making the decision.’  Delaware pleading requirements are strict—‘general, conclusory facts are insufficient.’  . . . The proof must be of ‘facts specific to each director from which [the trier of fact] can [find a reasonable doubt] that that particular director could or could not be expected to fairly evaluate the claims of the shareholder plaintiff.’”  Charter Township, supra, at 934-935, internal citations omitted.

The Charter Township Court also noted that “‘the mere threat of personal liability for approving a questioned transaction, standing alone, is insufficient to challenge either the independence or disinterestedness of directors, although in rare cases a transaction may be so egregious on its face that board approval cannot meet the test of business judgment, and a substantial likelihood of director liability therefore exists.’  ‘Delaware law presumes that a corporation’s board of is disinterested and independent.  To rebut that presumption under the first prong of Aronson, Plaintiff must undertake a ‘director-by-director analysis’ showing that a majority of the Board was incapable, due either to a material personal interest or domination and control, of objectively evaluating a demand, if made.’”  219 Cal App 4^th at 936, internal citations to Delaware decisions omitted.

It is clear that Plaintiff’s current allegations (which are not director-by-director) do not meet this standard as to a majority of eBay’s 11 member board under either the first or second prongs of Aronson, and Plaintiff’s allegations that demand on the few directors discussed individually would have been futile because of their fear of personal liability are insufficient.  Defendants are also correct that one board member’s knowledge cannot be imputed to others under Delaware law and, of the current board, only Defendant Cook is specifically alleged to have participated in the “gentleman’s agreements.”  See Complaint at 49-51.

Plaintiff’s “reasonable inference” allegations fair no better under Rales v. Blasband (Del. 1993) 634 A.2d 927.  “The controlling legal standard for determining the sufficiency of a complaint to withstand dismissal based on a claim of demand futility under Court of Chancery Rule 23.1 is well established.  Two tests are available to determine whether demand is futile.  The Aronson test applies to claims involving a contested transaction, i.e., where it is alleged that the directors made a conscious business decision in breach of their fiduciary duties.  . . .  The second (Rales) test applies where the subject of a derivative suit is not a business decision of the Board but rather a violation of the Board’s oversight duties.  The Rales test requires that the plaintiff allege particularized facts establishing a reason to doubt that ‘the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand.’  To satisfy either test, a plaintiff must ‘comply with stringent requirements of factual particularity’ of Court of Chancery Rule 23.1.  . . .  Where directors are contractually or otherwise exculpated for certain conduct, ‘then a serious threat of liability may only be found to exist if the plaintiff pleads a non-exculpated claim against the directors based on particularized facts.’  Where, as here, directors are exculpated from liability except for claims based on ‘fraudulent,’ ‘illegal,’ or ‘bad faith’ conduct, a plaintiff must also plead particularized facts that demonstrate that the directors acted with scienter, i.e., that they had ‘actual or constructive knowledge’ that their conduct was legally improper.”  Wood v. Baum (Del. 2008) 953 A.2d 136, 140-141, internal citations omitted.

Accordingly, Defendant’s Demurrer to the entire Complaint on the ground that it fails to sufficiently allege pre-suit demand futility is SUSTAINED WITH TEN DAYS LEAVE TO AMEND.