Abrams v. Wainscott: Derivative Action Dismissed

In Abrams v. Wainscott, et al., Ruth Abrams (“Plaintiff”) filed a derivative action in federal district court against the board of directors of AK Steel Holding Corp. (collectively, “Defendants”).  No. 11-297-RGA, (D. Del. August 21, 2012).  

Plaintiff alleged that the proxy statement for AK Steel instructed stockholders that if they voted to reapprove the performance goals of the Long-Term Performance Plan (“LTPP”), the Stock Incentive Plan (“SIP”), and the amendment and restatement of the SIP, performance based compensation under the plans would be tax-deductible.  Plaintiff alleged that the compensation under the plans was not tax-deductible and that the disclosure was misleading.  Plaintiff brought four claims, including unjust enrichment, waste based on the payment of non-deductible compensation, breach of duties under the federal proxy rule, and breach of the duty of loyalty. 

Defendants moved to dismiss the complaint for the failure to make demand.  Plaintiffs asserted, however, that demand was excused as futile.  Under Delaware law, demand futility will be shown through allegations of particularized facts that create a reasonable doubt as to whether “(1) the directors are disinterested and independent and (2) the challenged transaction was otherwise the product of a valid exercise of business judgment.” Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984).

The court found that Plaintiff did not adequately allege that the Director Defendants were interested in the various plan matters submitted to shareholders for approval.  As a result, demand would be excused only if Plaintiff alleged particularized facts establishing “a reasonable doubt as to whether the protections of the business judgment rule” were available to the directors.   

Plaintiff asserted that the Compensation Committee of the Board had been responsible for the development and implemented the LTPP.  Moreover, the Committee had, “at various earlier times allegedly violated the express terms of then-existing LTPP.”  Because at least half the board sat on the Compensation Committee, according to Plaintiff, they could not claim the protection of the business judgment rule. 

 The court held that broad allegations of a violation of a compensation agreement was not sufficient to meet the second prong of the Aronson test.  Instead, shareholders had to include allegations of knowledge and intent with respect to the violations of the plan.  Plaintiff also alleged that demand was excused because the majority of the board violated public policy, the claim involved a disclosure issue, and the compensation at issue involves waste. The court summarily dismissed these arguments.

Plaintiff’s pleadings failed under both the first and second prongs of the Delaware test; thus, the court dismissed the case.  The court did so without prejudice in order to allow Plaintiff the chance to amend.

The primary materials for this case may be found on the DU Corporate Governance website.

Sarah Emery