Opinion ID: 814830
Heading Depth: 2
Heading Rank: 1

Heading: The Individual Directors

Text: We begin with the most straightforward case. Plaintiffs allege and defendants do not contest that Leslie Highley, Jr. is an insider with extensive ties to UBS AG affiliates. In addition to being a director of each Fund, Highley is an executive employee of both UBS Trust, where he is Managing Director and Executive Vice President, and UBS Financial, where he is Senior Vice President. For several years, Highley has also acted on behalf of UBS Trust as portfolio manager for several of the Funds. In other words, Highley is involved at a high level with both institutional defendants. The district court correctly held that these facts alone are sufficient to create a reasonable doubt that he could be disinterested and independent in evaluating plaintiffs' demand in this case. See Orman, 794 A.2d at 25 n.50. 7 Four directors – Highley, Ferrer, Ubiñas, and Roussin – are defendants in this suit in their individual capacity for alleged violation of section 20(a) of the Exchange Act. Though this personal liability claim might seem strong support for the proposition that they could not evaluate demand with disinterest and independence, the Delaware Supreme Court noted in Aronson that the mere threat of personal liability for approving a questioned transaction, standing alone, is insufficient to challenge either the independence or disinterestedness of directors. 473 A.2d at 815. Later decisions have interpreted Aronson to mean that only a substantial likelihood of personal liability is enough to establish demand futility. See, e.g., Wood, 953 A.2d at 141 n.11. Because we find there are significant alternative factual allegations to establish that a majority of the board was not independent and disinterested, we pass no judgment as to whether the allegations against the individual directors create a substantial likelihood of personal liability. -19-
Plaintiffs allege that Miguel Ferrer serves as both Chairman and President of the Board of Directors of each of the four Funds. At the time of the ERS bond offering, Ferrer was also the Chief Executive Officer of both UBS Trust and UBS Financial. Before the complaint was filed, Ferrer concluded his employment with both UBS Financial and UBS Trust, but he did not leave the UBS AG family. Instead, at the time the complaint was filed, Ferrer was the Chairman of yet another UBS-affiliated entity known as UBS International & Puerto Rico (UBS International). Though the district court was correct in its ultimate conclusion that plaintiffs had created a reasonable doubt about Ferrer's ability to objectively evaluate demand, it improperly considered Ferrer's circumstances at the time of the ERS bonds transaction. By contrast, Rales requires the court to consider the facts pleaded concerning each director's circumstances at the time the complaint was filed. See Rales, 634 A.2d at 933-34 ([A] court must determine whether or not the particularized factual allegations of a derivative stockholder complaint create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand. (emphasis supplied)). -20- Considering only the facts alleged concerning Ferrer's circumstances at the time the complaint was filed, we conclude that plaintiffs have established a reasonable doubt that Ferrer could have exercised his independent and disinterested business judgment in responding to a demand. Rales, 634 A.2d at 934. Even though Ferrer was no longer a full-time employee at UBS Trust and UBS Financial, his extensive past ties to both UBS Trust and UBS Financial are important factors in our analysis. See Krantz v. Fidelity Mgmt. & Research Co., 98 F. Supp. 2d 150, 156 (D. Mass. 2000) (citing with approval ten factors set out by the SEC relevant to determination of control over directors which included former business associations between the director and the controlling person); In re Trump Hotels S'Holder Deriv. Litig., Nos. 96 Civ. 7820, 8527, 2000 WL 1371317, at  (S.D.N.Y. Sept. 21, 2000) ([Director's] history of personally beneficial affiliation with Trump-controlled entities . . . diminishes the possibility that [he] had only the corporation's interests in mind when evaluating the transaction.). In particular, Ferrer's ability to leave his former UBS positions and assume a new role at a different UBS affiliate suggests that Ferrer has been able to leverage the relationships and goodwill he has built in the UBS family of companies into advancing his career. Given this history, we agree with the district court that plaintiffs have established a reasonable doubt that Ferrer could objectively evaluate the demand. -21-
According to the facts alleged in plaintiffs' complaint, Carlos Ubiñas is Vice Chairman of the Board of Directors and Executive Vice President of each of the Funds. Like Highley and Ferrer, Ubiñas serves in multiple executive positions at UBS AG affiliates. Since 2005, Ubiñas has been the President of UBS Financial, the institutional defendant that received substantial remuneration for its services as a financial advisor to ERS and shared in $27 million in underwriting fees for its role as lead underwriter for the $2.9 billion bond offering at the heart of this dispute. He is also currently the CEO of UBS International, the same UBS AG affiliate where his fellow director Ferrer is Chairman. As both president of defendant UBS Financial and a director of each Fund, Ubiñas's loyalties would necessarily be divided in evaluating plaintiffs' demand between his obligations to the Funds and his obligations to UBS Financial. See In re Verisign, Inc., 531 F. Supp. 2d at 1189 (Directorial 'interest' exists whenever divided loyalties are present. . . .). Similarly, as President of UBS Financial and CEO of another UBS AG affiliate, Ubiñas is beholden to the UBS defendants. See In re NutriSystem, Inc. Deriv. Litig., 666 F. Supp. 2d 501, 515 (E.D. Pa. 2009) (Delaware courts have found that directors . . . lack independence because of their substantial interest in retaining their employment.); In re The Student Loan Corp. Deriv. Litig., 2002 WL -22- 75479, at  & n.3 (concluding that directors who owe their livelihood to institutional defendant could not consider demand without ponder[ing] the effect affirmative action on a demand would have on [their] future); see also Rales, 634 A.2d at 937; Mizel, 1999 WL 550369, at  (finding directors lacked independence where they could not consider the demand on its merits without also pondering whether an affirmative vote would endanger their continued employment). The district court concluded that these facts were insufficient to establish a reasonable doubt that Ubiñas could evaluate demand objectively. We disagree. Viewing the facts alleged concerning Ubiñas's circumstances as a whole, we conclude that plaintiffs have created a reasonable doubt that Ubiñas could impartially consider [the] merits of bringing a lawsuit alleging that his employer, UBS Financial, engaged in an unlawful scheme without being influenced by improper considerations. Rales, 634 A.2d at 934.
Like Ubiñas, Stephen Roussin is a Director of each of the Funds and a full-time employee of UBS Financial, where he is the Managing Director. For the same reasons discussed in relation to Ubiñas, we conclude that plaintiffs have plead sufficient facts to raise a reasonable doubt as to Roussin's independence and disinterest in evaluating the demand. -23-
According to the allegations in plaintiffs' complaint, Mario Belaval's principal employer is Triple S, the largest managed care company in Puerto Rico, where Belaval is Vice Chairman. Belaval is also a director of twenty-three UBS-affiliated funds, including the four Funds at issue in this case. In the recent past, Triple S has enjoyed a lucrative relationship with UBS Financial and UBS Trust. In fact, in 2006, with the help of UBS Trust and UBS Financial, Triple S engaged in a transaction similar to the ERS bonds offering at issue in this case. In the 2006 transaction, UBS Financial served as the placement agent for a $35 million bond offering from Triple S. UBS Trust purchased this entire offering, and then re-sold the notes to several of the funds it advises, including Fund IV. In other words, Belaval is an officer of a company that benefitted significantly from the same affiliation that is at the heart of this case, using UBS Financial to sell Puerto Rican securities to UBS Trust for resale to its exempt funds. Plaintiffs allege that Triple S's previous use of the relationship between UBS Financial and UBS Trust gives Belaval reason to discourage scrutiny of any similar related-party transactions, such as the purchase of the ERS Bonds. In addition to Belaval's prior reliance on UBS Trust and UBS Financial to raise capital, plaintiffs allege that by remaining in the good graces of UBS affiliates, Belaval would receive -24- benefits including opportunities to use UBS captive funds to support [his] other business ventures. These opportunities are particularly valuable to businesses in Puerto Rico because UBS Trust is the largest asset manager in Puerto Rico, and UBS Trust and its alter ego UBS Financial are an unusually pervasive force in Puerto Rico's financial markets. In deciding that plaintiffs had not established a reasonable doubt about Belaval's independence, the district court failed to consider the facts alleged as a whole about Belaval's relationships with the institutional defendants. See In re Trump Hotels, 2000 WL 1371317, at  (noting that while one allegation standing alone is insufficient to raise a reasonable doubt[,] . . . the totality of the circumstances raises a reasonable doubt as to the director's independence). The district court should have considered Belaval's previous professional relationships with both institutional defendants and the possibility that Belaval will need the assistance of the UBS defendants in the future as a constellation of facts which, considered together, create a reasonable doubt about Belaval's independence. See, e.g., id. at  (Courts have considered the possibility of future influence or remuneration as a factor when weighing director independence.); Krantz, 98 F. Supp. 2d at 156 (listing factors relevant to determining whether a director is controlled including former -25- business associations between the director and the controlling person). Similarly, the district court incorrectly dismissed plaintiffs' characterization of Belaval's entanglements with the institutional defendants as conclusory allegations, and failed to make reasonable, common sense inferences from the facts alleged in the complaint. See In re Oracle Corp., 824 A.2d at 943 (reasoning that in assessing a director's independence the chancellor must necessarily draw on a general sense of human nature). The complaint depicts the institutional defendants as powerful actors in Puerto Rico's capital markets who play multiple roles in Belaval's life: employer, underwriter, investor, and gate-keeper to Puerto Rico's capital markets. For Belaval, deciding to bring plaintiffs' lawsuit would mean not only suing two institutions that are important to Triple S, but also accusing four of his codirectors – who are themselves prominent players in Puerto Rico's business community – of violating federal securities law. Considering all of these allegations together, we conclude that plaintiffs have established a reasonable doubt that a person in Belaval's position could evaluate demand in this case without ponder[ing] the effect affirmative action on a demand would have on [his] future. In re The Student Loan Corp., 2002 WL 75479, at . -26-
Finally, we examine the facts alleged concerning director Vincente Leon, which are nearly identical to those regarding Belaval. Leon is both a director of each of the Funds and a vicechairman of Triple S. He sits on the boards of many UBS Trust affiliated funds. Under these circumstances, Triple S's past use of the UBS affiliates' financial network in a transaction similar to the ERS bonds transaction, UBS Trust's significant past purchases and current holdings of Triple S notes, the power of the UBS defendants in Puerto Rico's financial markets and the likelihood that in the future Leon will need assistance from the UBS defendants in accessing the Puerto Rican markets, lead us to conclude that plaintiffs have plead sufficient facts to create a reasonable doubt that Leon could objectively consider the demand.