Laborers' Dist. Council Constr. Indus. Pension Fund v. Bensoussan: Delaware Court of Chancery’s Preclusion of Demand Futility Arguments in Support of Derivative Actions
In Laborers’ Dist. Council Constr. Indus. Pension Fund v. Bensoussan, No. 11293-CB, 2016 BL 188507 (Del. Ch. June 14, 2016), two pension funds, Laborers’ District Council Construction Industry Pension Fund and Hallandale Beach Police Officers and Firefighters’ Personnel Retirement fund (“Plaintiffs”), asserted derivative claims against Lululemon Athletica, Inc. (Lululemon or Company) and eleven individuals who were or currently are Lululemon directors (“Defendants”). Defendants moved to dismiss the claims on the basis that an action in the United States District Court for the Southern District of New York (“New York Action”) precluded litigation of these issues. The Delaware Court of Chancery agreed with Defendants and dismissed the claims on the basis of both issue and claim preclusion.
According to the allegations, Dennis Wilson, the founder of Lululemon, entered into an agreement with Merrill Lynch, Pierce, Fenner & Smith in December 2012 to enact a trading plan to sell portions of stock in Lululemon. The trading plan was adopted pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934, which “permits insiders to implement written, pre-arranged stock trading plans when they are not in possession of material non-public information.” 17 CFR 240.10b5-1.
Under the plan, Wilson granted Merrill Lynch authority and exclusive discretion to execute trades of his shares between Jan 10, 2013 and June 30, 2014. A maximum of one million shares could be sold per month. On June 5, 2013, Christine Day, then Lululemon’s CEO, informed Wilson that she would be resigning from her position and, two days later, informed the board. On June 7, 2013, Merrill Lynch sold 607,545 of Wilson’s shares, maxing out the monthly allotment, resulting in over $49.5 million in proceeds. Day publically announced her resignation on June 10, 2013, which resulted in a 17% stock price drop the following day.
As a result of the “remarkable timing” of the sale of Wilson’s shares, two stockholders filed suit in a New York Action, alleging “Wilson breached his fiduciary duties as a director of the company under Brophy… by using material non-public information to sell stock for his personal financial gain.” In April 2014, the New York Action was dismissed for failure to establish demand futility. In July 2015, after obtaining records from the Company under 8 Del. C. § 220, Delaware Plaintiffs’ filed an action asserting “a breach of fiduciary duty claim against the members of the Company’s board … for failing to investigate and take any action against Wilson relating to that sale” in addition to a Brophy claim against Wilson. Defendants moved to dismiss on the basis that the claims were precluded based on the New York Action.
The Delaware court found that the claims were precluded based on both issue and claim preclusion. Two requirements must be met to invoke issue preclusion: (1) “the party seeking the benefit of collateral estoppel must prove that the identical issue was necessarily decided in the prior action and is decisive in the present action,” and (2) “the party to be precluded from relitigating an issue must have had a full and fair opportunity to contest the prior determination.” Three requirements must be met to invoke claim preclusion: the party seeking to invoke claim preclusion must demonstrate that (1) “the previous action involved an adjudication on the merits; (2) the previous action involved the plaintiffs or those in privity with them; and (3) the claims asserted in the subsequent action were, or could have been, raised in the prior action.”
With regard to issue preclusion, the court held that the New York Action had already decided the demand futility claim (i.e. “that [Director Defendants] are not independent because they face a substantial likelihood of liability) asserted by Plaintiffs. Additionally, Plaintiffs’ failed to demonstrate their burden that they were deprived of a full and fair opportunity to litigate in the New York Action. Not only was there privity between different stockholders in derivative actions, but representation was also adequate because, although the New York plaintiffs’ failure to utilize 8 Del. C. 220 to seek books and records was an imperfect legal strategy, management of the case did not rise to the level of deficient.
With regard to claim preclusion, the court found that the claims were barred because: (1) the Plaintiffs’ were in privity with the New York Action plaintiffs, (2) the New York Action was adjudicated on the merits because, although the case was dismissed without prejudice, the dismissal was conditioned on the premise that plaintiffs could not attempt to re-plead demand futility, and (3) the present claims arose out of the same transaction “that formed the basis of the claims asserted in the New York Action.”
For the above preclusion reasons, the Delaware Court of Chancery dismissed Plaintiffs’ derivative claims against Defendants.
The primary materials for this case may be found on the DU Corporate Governance Website.