the pleadings should have been granted the st issue with respect to the directors is dispositive the court committed a clear error of law by dismissing the claims against the directors following the demands utility order and that requires reversal of the twelve the six order when the district court held the demand was futile it held that the complaint adequately alleged the board's decision to stop the special committee investigation over the objection of outside advisors and without getting to the bottom of the wrongdoing was a quote conscious disregard for their responsibilities due to that conclusion the district court held that the complaint raised a reason to doubt that the board's decision was a valid exercise of business judgment so that excuse demand under the nd prong of the aaronson v lewis standard the term there's been some dispute in disagreement about the role of the concept of bad faith in the demands utility decision setting that aside the conduct conscious disregard for responsibilities that's a term of art under delaware law and it describes a type of conduct that the delaware supreme court has held is a violation of the duty to act in good faith so the underlying conduct that excuse demands states in nomics culpable claim for breach of duty sherry duty under delaware law stepping back from that clear principle for a moment it is also settled delaware law that when demand is excuse under the nd prong of aronsen the business judgment rules rebutted for the purposes of rule twelve b six we cite several cases that say that there is complete agreement under delaware law regarding that why does that matter to us our review of the twenty six dollars motions do novo correct yes that's correct so why does it matter what previous findings the district court made regarding the demand futility to us well your honor i would say that here pelleas are making the same argument that they made below which is that even though demand was futile because there was a doubt raised that the decision was a valid exercise of business judgment they should still be entitled to a business judgment presumption for rule twelve  and in fact the ryan v gifford case that we cite in our brief address the same exact argument and held that no in fact that is not the case once but the demand futility order is not before us so why why does that even because the holdings in the demand for utility order the district court was bound by its interpretation of the complaint in the district court was but were not right correct but if this court is reviewing six i guess to answer your question your honor i don't know that is would this court interpret the complaint under twelve b six review in a manner that conflicted with the district court six order and in a situation where demand was previously excused under rule twenty three point one under the nd prong of aronson there is no remaining in business judgment presumption available on rule twelve b six i think that's probably my answer the question  padding case that both both parties rely on for different things explains the way these standards and concepts interact with each other very clearly i submit that case it was a derivative action involving allegations that demand was futile due to a board decision to engage in a corporate transaction the plaintiff alleged that the board had reviewed enough information the court held the dollar court of chancery held that the board hadn't reviewed enough information it was grossly negligent in approving the transaction so there was a question that there was a reason to doubt that the decision was a valid exercise of business judgment but as to the conduct that raised the reason to doubt it was gross negligence and that's a scope of conduct under delaware law a law requires us to actually say that your claims against heart and nelson were futile based on the demand demand utility order since they didn't take part in the decision not to continue with the internal must occasion they were officers not directors so your honor the demand futility order doesn't address separately whether demand would be futile as to the underlying conduct regarding the directors in the twelve b six order the district court characterized the demand futility order is doing that but a reading of the decision shows that it's not addressed so the court didn't grant the twenty three dollars motion as to hearten else and it also didn't deny it clearly as them what it held though was that demand was futile because quote the board knowingly decided not to get to the bottom of the executives expenses or find out if a crime being committed and that was referring to the board with respect to heart the futility analysis is the same because we're in a situation where let's say that demand is futile as to the board but that it's required as to the officers to the underlying conduct were in a situation where demand was excused because the board refuse to conclude the sec's this investigation into the expenses and then with shareholders required to make a demand to the board to investigate the expenses that it just terminate an investigation into in circumstances where the court said that it was a reason to question business judgment so it's sort of a doesn't make any sense as a coherent outcome our view is that under the demand futility order demand has to be excused as to that conduct of the officers because that's what the board was investigating when it terminat the investigation of the conscious disregard to its duties and you're saying that with respect to back it it would have been futile not necessarily the demand futility order addressed especially is that correct correct i would say that it have no standing to sue based on activities alleged before that time is that correct disclosed the whistleblower complaint was many months later the board had not been notified of it based on the record we have in front of us so we purchased the stock the nd amount of complaint which is the complaint that was it issue alleged that the last of these nevada parties that hart took nelson and others on was in says september two thousand and fourteen the underlying documents the work of the forensic accountant showed that the expenses were incurred on the th of september two thousand and fourteen we don't know at this point without any discovery what sort of expense reimbursement regime ident it was running we don't know if he'd submitted these expenses for reimbursement by the time plaintiff purchased the stock we don't know when they were repaid you've got a weekend actually as it happens in id to late to the degree the impact of these alleged activities occurred after the purchase of the stock on the twenty four perhaps i grew with you but even though it was known and admittedly were the twelve b six stage i don't see how you can argue that to the degree the financial impact to the company occurred before the date the stock was purchased that your client would have standing what your argument to the contrary well i want argument to the contrary which is there's also an on going wrong exception we try to address this in our proposed amended complaint and that actually brings me to why we should have been permitted to amend our complaint i will concede that contemporaneous ownership from our perspective is the debatably potentially proper reason to dismiss the complaint under rule twelve b six our view is that the other reasons are clearly improper under delaware law however if contemporaneous ownership requirement is the basis for a twelve b six grant we've submitted this proposed amended complaint that alleges chapter and verse of how this conduct continued for over a year after playing to purchase stock groups it bites type of transaction to show that it was a course of conduct and i'll say that in this so for that reason the unison can i can make a decision to terminate the investigation so how is it bad fa when the company spent three million dollars of parenting on the investigation which only uncover one hundred and sixty thousand dollars worth of non business expenses why how is that not a reasonable decision to make well so your honor of course you're aware that we're not appealed there's not that decision is not at issue here at the district court so many tell the decision not the board's decision excuse me the district court's decision finding that there was a conscious disregard by the board when it stopped this investigation but our position on that was is continues to be you have an international auditing firm that is repeatedly imploring the board that it can't render an audit opinion the board has allowed this investigation is complete you have an outside counsel saying they haven't been permitted to ascertain whether a crime was committed and then the board says oh no no we think there's been enough investigation we don't want to find out investigation and in a situation where of an auditor saying we can't say the reasonable likelihood of a criminal penalty without a conclusion this investigation i would submit that the duty of loyalty to the corporation is to conduct the investigation well how would that benefit the corporation that the further there would be of further investigation and maybe criminal charges how's that benefits the corporation well the directors for you sherry duty is to protect the corporation and so ascertaining what happened and then taking appropriate action against the wrongdoers hopefully before there is some kind of other sanction would seem to be the appropriate use of a moral benefit but i don't see what the actual business benefit is well directors are required to be informed in their discharge their f iary duties and so being informed in the discharge of your future duties means when you have outside my view of it is and i think the law supports me is that when you have outside advisors telling you we think that there is likely criminal conduct here you need to investigate it it's important to investigate it in one of the other disney cases that was in delaware court of chancery the opinion held that when a board takes an ostrich like approach and tries not to find out what the risks are but a decision is going to make that's acting on an informed basis in well i would agree that that should be a factor but there's all these other factors involved in that decision like the the cost and what the you know when to submit it outside of going for the designation would you agree i would agree that he and heart still employed by this company i do not believe that i do not believe that they are doesn't judge point merits of consideration you can have accounting and auditing cost you could be staggering and if you have shall i say a comparatively de minimus actual cost that seems questionable but it seems to me you're saying that if there is potential criminal liability that overrides everything is that correct the words it is a potential criminal liability they must investigate regardless of the cost that bear no your honor i would not make a rule about criminal conduct i would say that dell records place tremendous emphasis on the opinions of outside advisors outside advisors are a safety valve against many of the corporate wrongs and conflicts that occur and here the record is very clear that the outside advisors were screaming from the rooftops effectively we need you in order for us to discharge our responsibilities we need you to investigate this and the border fused and that's why so suppose they of them right i'm sorry i think the board is responsible for running the company both in a manner that is legal and complies with all applicable regulations i know that mr varian represents mr hart is going to address the to novo review or not of the twenty three point one decision in force so i'll defer that to him but our understanding of the law of the case and the way this all before judge briar is the only claim that survive the demand futility review the only claim that could be asserted and evaluate in the nd minute complaint was the alleged premature terminations of the special committee investigation that was it think he took a very deliberate deep look at the case things out of time corrections and that he made it clear in there and took pains in the st four pages of his order to distance that finding explain why he had picked up bad faith language from the plainest repeated it in his to me in futility order thought better of it thought that that was he had not in fact made findings of good faith or bad bad  and that's why he proceeded to evaluate the conduct at issue the conduct alleged in connection with terminating the investigation and determine that it at best rose to the level of gross negligence which because of the presence of the exculp questioning where was his student board i think a cost benefit analysis in terms of deciding to stock the investigation over the advice of its advisors well i think that there's been some rhetoric at the podium this morning and i would invite i can't prove a negative by saying something's not in the record but i would submit that screaming from the rooftops over of the objections oncet fighters and that's fine is not accurate right my understanding is and their determination they were confronting a reality where they had probably in may when this report surfaced a potential problems with improper expenses being submitted for reimbursement hired a major outside law firm and a major big four accounting firm to come in and evaluate it over four months they reviewed a one million dollars worth of expenses submitted over two years i believe down to the ten dollars an over ten dollars level and at the end of the day the board was looking at a fraction of that as potentially problematic which they might need to remediate and thinking wow we just burned through three million dollars of this guy but he's valuable resources to plumb this and they made the determination at that point they've seen no evidence of intentional or conduct and there's nothing in the record that the law from ever advised that they thought conduct was illegal or likely illegal the only input from the law firm advisor was there are potential additional investigative steps you could cost benefit analysis with that board and the powers they delegated to that special committee and so either advisor had to ask you a question right or that in your thirty seven seconds ok where is it and where is it in the record of the c f o so all of that was part of what the special committee arrived at after spending three million dollars and decided that was enough pain and go with this problem they were ready to improve their internal controls move on they promptly got brand new auditors they've never missed a public filing their focus was the business and that's within their business judgment think you're on the right think you can do this next the court nicole ryan a counsel for the appellee brian nelson who is former chief financial officer of identify your honor is there are four independent reasons that the action was correctly dismissed against mr nelson any one of which in this case all of which are sufficient to affirm the judgment the st is that the chord the district  found in its original demand futility order which has not been appealed here today that the only claim for which demand was futile was the claim against the board for terminating the special  investigation that is unquestionably not a claim that was asserted against mr nelson who is not a member of the board so simply the law is clear that you can only proceed on claims for which demand is futile that claim  so the claim against the only claim that's futile is the claim not against mr nelson should and about her but in any event secondly the court's decision was clearly correct demand must be addressed claim by claim basis and the suggestion by counsel that simply because a claim may relate in some way to a claim for which to me and is futile does not make that claim futile and there is no law that supports that and the cases are clear you look at them in futility against the claims against the officers here there isn't and did a separate analysis and in fact is the court clearly recognized within the complaint itself both in the  complaint so this was the plaintiff's rd complaint as well as in the proposed rd amended complaint there is not a single allegation not even a conclusory allegation that demand was futile for the claim against mr nelson the only claim was the demand was futile because the board wasn't in a position to sue themselves so there were no allegations whatsoever that demand would be futile against mr nelson and that's a distinct claim the claim against him was that he didn't adequately prevent these reimbursements that he essentially turned a blind eye then the rd reason though is lack of standing in this was an end which is one point to note on the lack of demand futility on that point that actually is an abuse of discretion standard and clearly the court district court did not abuse its discretion in finding a lack of demand futility for the claim against mr nelson and the  point is the lack of state and there is no sort of standing there is either standing or not standing and there is simply no allegations in the complaint against mr nelson saying that he engaged in any wrongdoing after the time in which the plaintiff became a shareholder and so that's a lack of standing that's an independent basis that the court correctly dismissed it plaintiffs suggested that they should have gotten leave to amend but in the proposed amended complaint there were still no allegations specific to mr nelson for anything he did after september th and also the other point which is counsel doesn't know it is of course even if somehow they had cured the standing problem which they did not as to mr nelson of course that does not in any way affect the just court's decision that there was no demand futility as to mr nelson they didn't add a single allegation  proposed amended complaint they didn't change that so clearly that reason no matter what it stands and the last reason which the court didn't address because it didn't need to address since it dismissed on for two other reasons is that the complaint take action in the face of a known duty to act in the allegations just are not fair so for each of those reasons the claim against mister and was properly dismissed and is addressed the lack of leave to him and this was the th chance the plaintiffs presented their proposed complaint so there was no question what it would say it didn't fix the demand futility probe problem it didn't fix the standing problem to my client point good morning your honour's robert ferrie and for jason hart i'd like to go straight to what i see as the heart of the matter with respect to the claims against mr hart and there really are two bases on which the district court decision should be affirmed one is the demand futility point which is what i'd like to emphasize and the other one is the point about standing and the nd amended complaint doesn't allege that there was any shareholder ownership this is undisputed during the period in which the acts that would give rise to liability on behalf of mr hart occurred but the the key point i think you're maybe going to get to this but i want to be sure you address the so called ongoing misconduct concept that your opponent raises in terms of the standing issue a measure makes any difference honor i think that the court addressed it the district court obviously on the twelve the six motion and i think that analysis was very sound and he went through it in great detail judge pryor who's very careful thoughtful judge and sometimes may change his mind that happens as we all know but i'd really like to go straight to the heart if i may of the demand utility issue now there's no doubt what the rule twenty three  demand futility order said it's very very clear it says at the conclusion and there are other places where it's clear as well as well it has created a reasonable doubt that the board acted in good faith in its decision to end the special committee investigation that's it and that's after a very thorough analysis of all the claims that related to things that were subject to the investigation so very clear in that order itself that you have to make  investigation very clear but if it weren't clear for some reason it was explicitly clear at least twice more and i can read this i don't think it's all that helpful it's in the record but in the trial b six motion the court says under a heading that talks about the demand futility order says that brings the claims against heart in nelson to a conclusion false stop and it explains why and then again in the order on the motion for leave to amend and to add a new plaintiff he says again it would be futile because the demand futility order determined that the plaintiff doesn't have standing to assert these claims very clear so where does that leave us this happens all the time this is not a novel situation so you need to make or excuse a demand you have a ruling from a district court that says you didn't make a demand and demand is not excused as to the claims against mr hart very clear and reiterated twice and i can read it repeatedly absolutely clear so at that point as counsel you can make a demand that happens fine ok i'll make a demand and if it isn't acted on or accepted then i'll file a demand refuse to action which happens all the time or or if you decide not to do that you can appeal the twenty three dollars ruling and of course that could have been done and i think it's pretty clear that was not done deliberately for tactical reasons because mr oswald counseled like some things that are in the twenty three point one ruling and they want to put their arms all around that and embrace it not appeal it that's a choice they're free to make but it leaves them in a very clear place as a matter of law no question about it you could either make a demand or excuse it to me and you didn't make a demand clear ruling repeated three or four times demand is not excused as the claims against heart claim by claim defendant by defendant basis transaction by transaction the only thing that's left that you have standing and i say standing in the sense of rule twenty three point one because the courts talk about that the claims belong to the corporation as a shareholder you have no standing or a legal right to assert them unless you make or excuse a demand very uncontroversial stuff you're running out of t re rethought the demand futility order after it was issued do you think what he did had the legal of the active changing it or is that something that needs to be sent back to him so that he can be officially  going to answer that question directly i don't want to say st that it doesn't matter which way that comes out for purposes of the claims against mr hart monday absolutely clear ok i think what happened and i was in the middle of all this all the way through and i've been in front of judge bryer many times i think that i can speculate about a lot of things but i think he thought more carefully as mr mcgrath said about all of the facts and circumstances and often times judges rethink things in a new context and i think that's exactly what he did and to his credit he didn't try to blow past it he put it right in front of everybody in his order and said i need to talk about the demand futility order and its impact on this trial be six motion and he explained exactly what he did and why maybe he changed his mind maybe he had a different law clerk who had a different slice through things there are a lot of possibilities but judges are entitled to do that and that's what he did i think it's very clear so anything officially formally needed to be changed for him to carry out what he stated he was going to do no absolutely not your honor not and i've been in the situation i'm sure all of  experienced judges have seen it many times judges change their minds they interpret their own orders they can go back and think through things more carefully you know is the district court and that's clearly what happened here and there's no reason it's not st of all appealed but there would be no reason to send it back to him under any circumstances in my view all right thank you  i just would like to point out that while judge bryer clearly appears to have changed his mind we nevertheless are in the situation where the inferences on the twenty three point one order and the twelve b six order should be consistent under delaware law that is that they cannot be opposite of each other and so to the extent that we're stuck living with the demands utility order we're in a situation where we're looking at you think we're bound by his inference the twenty three point one north i believe so on the rule twelve b six order especially well with respect to the directors to the extent that there's already an order in the case that holds that they the complaint alleges they acted with conscious disregard for their duties