Binning v. Gursahaney: Demand Futility Analysis Fails to Persuade Court
In Binning v. Gursahaney, No. 10586-VCMR, 2016 BL 145556 (Del. Ch. May 6, 2016), the Delaware Chancery Court granted ADT’s CEO Naren Gursahaney, other board members, and investment management firm Corvex Management LP’s (collectively the “Defendants”) motions to dismiss ADT stockholder, Jeran Binning’s (“Plaintiff”) Verified First Amended Stockholder Derivative Complaint (“FAC”). The court held the FAC was not alleged under Court of Chancery Rule 23.1 that pre-suit demand was futile.
According to Plaintiff’s allegations, ADT’s Board of Directors made several decisions designed to appease activist investor Keith Meister following his purchase, through Corvex Management LP, of ADT’s outstanding stock. Meister allegedly used his stockholder position to encourage the Board to issue debt securities to fund stock repurchases, repurchase stock from Corvex for over $450 million, and execute a standstill agreement that ensured Meister a seat on the Board. Plaintiff claimed the members of the board entrenched themselves, perceiving a threat to their positions from Mesiter’s actions, instead of acting in stockholders’ best interests.
On January 27, 2015, Plaintiff filed suit against the Board under Court of Chancery Rule 23.1. Court of Chancery Rule 23.1 enables a stockholder plaintiff to bring a derivative action on behalf of the corporation. Under the rule, plaintiffs must allege that they made demand on the board or state with particularity why pre-suit demand was futile. Defendants alleged a failure to adequately allege demand futility. In addition, Defendants sought dismissal on the basis of stare decisis.
The stare decisis claim arose out of a suit “based on the same Board action” that had been previously dismissed. In Ryan v. Gursahaney, C.A. No. 9992-VCP, 2015 WL 1915911 (Del. Ch. Apr. 28, 2015), the Chancery Court dismissed the claim for failure to establish demand futility. The court found that the “non-conclusory allegations in the Complaint . . . do not raise a reasonable doubt as to the Director Defendants' disinterestedness or independence based on this entrenchment theory.” Moreover, the court found that the shareholder had not rebutted the presumption of the business judgment rule by alleging particularized facts demonstrating gross negligence.
The court in Binning agreed that the principle of stare decisis controlled the outcome of the decision. As the court noted, “the principle of stare decisis, therefore, counsels that Binning's Complaint should be dismissed absent a sufficient factual or legal distinction from Ryan.” The court examined the distinctions asserted by Plaintiff in the two suits and found them “insufficient to plead demand futility.” With respect to Plaintiff’s allegations of an ongoing SEC investigation, the court noted that plaintiff did not explain how the fact would support a finding of futility and that the case filed by the SEC had been dismissed.
The court found that without more information to support the additional allegations, Plaintiff’s claims failed under Rule 23.1. The court concluded that the new allegations were insufficient to alter the demand futility analysis already found in Ryan. Accordingly, the court granted Defendants’ motions to dismiss all claims based on Plaintiff’s failure to bring a pre-suit demand to the Board or to show the pre-suit demand was futile, as required by Rule 23.1.
The primary materials for this case may be found on the DU Corporate Governance website.