SS M&A Litigation Outlook - Flipbook - Page 15
Elburn v. Albanese, et al.,
C.A. No. 2019-0774-JRS (Del. Ch. April 21, 2020)
Why it is important
In this ruling, the Delaware Court of Chancery
clarified the pleading standard required to allege
“particularized facts” in a derivative action brought
under Rule 23.1. While the court noted that pleading
under Rule 23.1 requires more than notice pleading
under Rule 8(a), the court found it would be
inappropriate to require that a derivative plaintiff
meet the heightened Rule 9(b) requirements for
pleading fraud in order to satisfy Rule 23.1. Thus,
this case makes clear that plaintiffs bringing
derivative actions will not be required to plead
“newspaper facts” – that is, “who, what, where, when
and how” – given that their position as stockholders
often prohibits that level of insight. Ultimately, the
court held that the plaintiff’s allegations of a quid pro
quo regarding compensation awards were sufficient
to state a claim under Rule 23.1 and denied the
defendants’ motion to dismiss.
Summary
In 2015, Investors Bancorp, Inc., adopted an equity
incentive plan (EIP) pursuant to which the board
had discretion to make awards to board members.
The shareholders of Investors Bancorp approved
the EIP and, shortly thereafter, the board voted to
approve approximately US$51.6 million worth
of restricted stock awards and stock options for
board member compensation. The decision was
not presented to stockholders for ratification.
In 2016, stockholders challenged the awards,
alleging that the board breached its fiduciary duties
by approving the unfair and excessive award. The
Court of Chancery granted the board’s motion
to dismiss, but on appeal, the Delaware Supreme
Court reversed and remanded.
Before trial, the parties negotiated a settlement
that rescinded the CEO’s and COO’s awards and
substantially reduced the non-executive members’
awards. Before the court approved the settlement,
Investors Bancorp disclosed in its 2019 proxy
statement that the board was considering issuing
new awards to the CEO and COO. A month later,
the board approved the new awards, which were
substantially similar to the awards that would be
revoked by the settlement.
After the announcement, stockholders brought the
current action alleging that the board breached its
fiduciary duties by engaging in self-dealing in order
to obtain approval of the new awards. Specifically,
the complaint alleged that the CEO and COO
entered into a quid pro quo arrangement with the
non-employee directors wherein the executive
directors agreed to forfeit their awards in the
settlement agreement if the non-employee directors
would commit to approving new replacement
awards after the settlement was negotiated. The
stockholders alleged that the new awards were
intended to circumvent the settlement agreement
and again award the board members unfair and
excessive compensation.
The board moved to dismiss the complaint under
Rule 23.1 for failure to plead demand futility with
particularity. The defendants argued that the term
“with particularity” in Rule 23.1 must be construed
in line with the same language in Rule 9(b). The
court noted that under Rule 9(b), plaintiffs must
plead “so-called ‘newspaper facts’ – who, what,
when, where and how.” The stockholders argued
that because of the information asymmetry inherent
in a derivative action, such construction would
create an impossibly high bar for plaintiffs, even
with documents obtained under Section 220.
fraud by omission, courts generally ‘relax Rule
9(b)’s fraud pleading requirement.’” The court
found that while Rule 23.1 pleadings are “held to a
higher standard” than pleadings under Rule 8(a)
“courts have interpreted the ‘with particularity’
standard as requiring only that a plaintiff allege the
circumstances of the fraud with detail sufficient to
apprise the defendant of the basis for the claim.”
The Court of Chancery found that allegations that
a quid pro quo agreement between the executive
and non-employee board members had been made
at some point during settlement negotiations
were sufficient. The court reiterated that the
standard required only “detail sufficient to apprise
the defendant of the basis for the claim” and
denied the board’s motion to dismiss the wellpleaded complaint.
The court agreed with the plaintiffs, finding
that the “better paradigm in which to assess
particularity in the Rule 23.1 context is the one in
which courts contextually evaluate allegations of
fraudulent omission. Where the plaintiff alleges
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