In Copeland v. Lane, 5:11-CV-01058 EJD, 2012 WL 4845636 (N.D. Cal. October 10, 2012), the court granted four motions to dismiss posited by Hewlett-Packard Company’s (“HP”) Executive Chairman, Raymond J. Lane, members of the board (“Board”), and members of the executive management (collectively, “Defendants”) with leave to amend and denied the plaintiff’s motion to strike.
The plaintiff, A.J. Copeland (“Copeland”), an HP shareholder, claimed that Defendants violated Section 14(a) of the Securities Exchange Act of 1934 (“Exchange Act”) when HP issued its 2010 and 2011 proxy statements. The proxy statements sought the election and re-election of the Board and the retention of Ernst and Young LLP (“EY”) as HP’s auditor.
Copeland alleged that the proxy statements omitted material facts. Most relevant to this suit, the plaintiff alleged that the proxy statements did not reveal the extent to which the Board was responsible for the fines, restitution, and waste of company assets as a result of HP’s $2.3 billion acquisition of the company 3PAR. Copeland also alleged claims for breach of fiduciary duty and waste of corporate assets.
Copeland made pre-suit demand. The HP board responded by appointing a Special Committee. The Committee ultimately issued a report recommending that demand be rejected. The Board adopted the recommendation.
Defendants thereafter sought dismissal, alleging that the decision to reject plaintiff’s demand was protected by the business judgment rule. As the court noted, the only issue was whether the board acted “in an informed manner and with due care, and in a good faith belief that their action was in the best interest of the corporation.” In order to satisfy the “informed” requirement, a board must consider all material facts reasonably available and must not reach its decision “by a grossly negligent process.” In order for the board to act in good faith, the board must act independently and conduct a reasonable investigation. The court ruled that Copeland failed to assert facts sufficient to raise a reasonable doubt of the Board’s independence.
The court also addressed Copeland’s contention that some of the claims were direct and therefore not subject to the demand requirement. Copeland argued that the deprivation of his right to a fully informed vote caused him an injury not suffered by the corporation.
The court analyzed the claims using a two-part test from Tooley v. Donaldson, Luftkin & Jenrette, Inc. The test looked to: (1) “who suffered the alleged harm (the corporation or the suing stockholders, individually); and (2) who would receive the benefit of any recovery or remedy (the corporation or suing stockholders, individually).” The court determined that Copeland’s claim failed the second part of the test. Specifically, Copeland did not plead facts that showed that he would be able to receive any equitable remedy. The shareholder votes only elected the Board for one year, and because those Board members’ terms had already expired in 2012, the court determined that no equitable relief was available. All of the claims brought by Copeland were, therefore, derivative. As a result, the court granted the motion to dismiss. Because the requests for judicial notice were denied as moot, the motion to strike was also denied as moot.
The primary materials for this case may be found on the DU Corporate Governance website.