Opinion ID: 3214863
Heading Depth: 3
Heading Rank: 2

Heading: Failure to Disclose Succession Plan

Text: Plaintiffs allege that the Defendant Directors failed to disclose their secret plan to replace Pedersen by Hales as CEO. But there is nothing wrongful about failing to disclose the nonexistent, and Plaintiffs did not adequately allege the existence of such a plan. According to Plaintiffs’ opening brief, the Director Defendants decided in December 2011 to remove Pedersen as CEO and Chairman and make Hales the CEO but they deliberately concealed this information because ZAGG had repeatedly informed investors that its success depended on Pedersen’s skill and experience. They allege that “the hiring of Hales was a direct response to Pedersen’s margin call situation, marking the initial step of the secret succession plan,” Aplt. Br. at 36, and that the plan was concealed in a press release of December 12, 2011, and a Form 8-K filed on December 16 which misleadingly stated that Hales would serve only as President and COO and that 23 Pedersen would continue as CEO and Chairman of the Board. In support of their secretplan theory, Plaintiffs point to the “temporal proximity” between the first margin call and Hales’s being named President and COO, Aplt. Br. at 36, and to Hales’s statement in August 2012 that from the outset he had worked with Pedersen to “identify and establish corporate objectives” and Pederson had “handed [over] much of the responsibilities for the day-to-day operations,” id. at 38 (internal quotation marks omitted). This theory is far-fetched. The complaint alleges no facts indicating that the Board knew of Pedersen’s margined stock before the first margin call, and that came nine days after ZAGG’s announcement that Hales would become president and COO, which certainly came only after serious discussions with Hales about assuming the positions. Plaintiffs’ temporal-proximity argument makes no sense if the alleged cause (knowledge of the margined stock) occurred after the effect (bringing in Hales to take over ZAGG). We also see nothing remarkable about Hales’s disclosure in August 2012 of the nature of his work when he took office at ZAGG in December 2011. No one should be surprised if the president/COO discusses corporate objectives with the CEO and Board chairman or if the president/COO takes over day-to-day responsibilities. And even if the Board knew of the margined stock before hiring Hales, Plaintiffs’ theory would ascribe very peculiar thinking to the Board members. Why would the Board decide to deal with Pedersen’s margined stock by looking for a successor rather than working on a plan for an orderly sale of that stock to avoid the bad publicity of a margin call? And after the publicity from the first margin call had damaged Pedersen’s favorable image, what would be the public-relations advantage of keeping him on as 24 CEO or the downside of disclosing the succession plan? Why court a further reputational blast from future margin calls, particularly if the Board was not going to make it a condition of Pedersen’s remaining as CEO that he eliminate his margin debt? Why wait until four months after Pedersen’s resignation to appoint Hales as permanent CEO if that had already been decided a year earlier? Someone might be able to conceive of answers to these questions, but Plaintiffs’ secret-plan theory is too speculative to support their futility claim. E. Lack of Independence Finally, Plaintiffs claim that they did not need to demand action by the Board before filing suit because there was not a Board majority independent of influence from interested persons. See Shoen, 137 P.3d at 1183 (“[D]irectors’ discretion must be free from the influence of other interested persons.”). The independence inquiry asks whether a board member was “incapable, due to . . . domination and control, of objectively evaluating a demand.” Brehm v. Eisner, 746 A.2d 244, 257 (Del. 2000). Plaintiffs contend that three ZAGG directors were not independent of each other or of Pedersen. Because Plaintiffs do not challenge the independence of the other three of the six board members, our inquiry is complete if their allegations against any of the three challenged directors are inadequate. See Beam, 845 A.2d at 1046 n.8 (Del. 2004) (demand is excused if there is not a majority of independent directors). In this case we need go no further than Defendant Larabee. Plaintiffs’ allegation of Larabee’s lack of independence fails on two grounds. First, were Larabee controlled by another, such control would compromise her ability to 25 consider a demand only if the person controlling her had an interest in the suit. See Brehm, 746 A.2d at 258 (because CEO was disinterested, it is irrelevant which directors were independent of him). But we have already ruled that none of the Director Defendants were interested in the suit because none faced a substantial likelihood of liability. That leaves Pedersen as the only potentially interested Defendant. Plaintiffs did not, however, allege that Pedersen controlled Larabee; as to Larabee, Plaintiffs argue only lack of independence from Hales.5 Second, the sole ground alleged for Larabee’s lack of independence from Hales is that they served on another company’s board together. This is hardly sufficient to establish the requisite control. Personal or business relationships may compromise objectivity but only if they are “of a bias-producing nature. Allegations of mere personal friendship or a mere outside business relationship, standing alone, are insufficient.” Beam, 845 A.2d at 1050. Although the Delaware Supreme Court has acknowledged “the structural bias common to corporate boards throughout America, as well as the other unseen socialization processes cutting against independent discussion and decision making in the boardroom,” Aronson, 473 A.2d at 815 n. 8, it nonetheless requires allegations of “specific facts pointing to bias on a particular board” to demonstrate demand futility. Id. For example, allegations that board members “moved in the same 5 The Complaint alleged that Larabee lacked independence because she received substantial compensation in her role as a board director and would not want that jeopardized. But because Plaintiffs do not pursue this allegation on appeal, we do not consider it. See Adler v. Wal-Mart, 144 F.3d 664, 679 (10th Cir. 1998). We also do not consider Plaintiffs’ assertion, raised for the first time in their reply brief and without any record support, that Hales and Larabee shared a longstanding friendship. See id. 26 social circles, attended the same weddings, developed business relationships before joining the board, and described each other as ‘friends’” are insufficient to excuse demand. Beam, 845 A.2d at 1051. Plaintiffs’ lesser allegation here—merely that Larabee served on a separate board with Hales—must also fall short. See also Orman v. Cullman, 794 A.2d 5, 27 (Del. Ch. 2002) (“The naked assertion of a previous business relationship is not enough to overcome the presumption of a director’s independence.”); Highland Legacy Ltd. v. Singer, No. Civ.A. 1566-N, 2006 WL 741939, at  (Del. Ch. Mar. 17, 2006) (rejecting allegation of lack of independence that was “based solely on the alleged facts that [defendant directors served together] on the boards of other companies”). Plaintiffs have failed to plausibly allege lack of independence.