Court Opinion

ID: 2791318
Source: CourtListenerOpinion
Date Created: 2015-04-03 17:00:42.149462+00
Date Added: 2024-06-11T11:10:56.644524
License: Public Domain

14-1631
     Canty v. Day

                          UNITED STATES COURT OF APPEALS
                              FOR THE SECOND CIRCUIT

                                     SUMMARY ORDER
     RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED
     ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE
     PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A
     DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN
     ELECTRONIC DATABASE (WITH THE NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY ORDER MUST
     SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.

 1            At a stated term of the United States Court of Appeals
 2       for the Second Circuit, held at the Thurgood Marshall United
 3       States Courthouse, 40 Foley Square, in the City of New York,
 4       on the 3rd day of April, two thousand fifteen.
 5
 6       PRESENT: DENNIS JACOBS,
 7                DEBRA ANN LIVINGSTON,
 8                              Circuit Judges,
 9                GREGORY H. WOODS,*
10                              District Judge.
11
12       - - - - - - - - - - - - - - - - - - - -X
13       THOMAS CANTY, derivatively on behalf
14       of Lululemon Athletica, Inc.,
15                Plaintiff-Appellant,
16
17                    -v.-                                               14-1631
18
19       CHRISTINE McCORMICK DAY, DENNIS J.
20       WILSON, JOHN E. CURRIE, SHEREE
21       WATERSON, MARTHA A.M. MORFITT, MICHAEL
22       CASEY, ROBERT BENSOUSSAN, ROANN
23       COSTIN, WILLIAM GLENN, RHODA M.

                *
               Judge Gregory H. Woods, of the United States District
         Court for the Southern District of New York, sitting by
         designation.
                                                  1
 1   PITCHER, THOMAS G. STEMBERG, JERRY
 2   STRITZKE, EMILY WHITE,
 3            Defendants-Appellees,
 4
 5   LULULEMON ATHLETICA, INC.,
 6            Nominal Defendant-Appellee.
 7   - - - - - - - - - - - - - - - - - - - -X
 8
 9   FOR APPELLANT:               BRETT D. STECKER (with Jeffrey
10                                J. Ciarlanto, Christopher L.
11                                Nelson, on the brief), The
12                                Weiser Law Firm, P.C., Berwyn,
13                                Pennsylvania.
14
15   FOR APPELLEES DAY, CURRIE,   STEPHEN A. RADIN (with Joseph S.
16   WATERSON, MORFITT, CASEY,    Allerhand, Layne S.R. Behrens,
17   BOUNSOUSSAN, COSTIN,         Robert S. Ruff III, on the
18   GLENN, PITCHER, STEMBERG,    brief), Weil, Gotshal & Manges
19   STRITZKE, and WHITE, and     LLP, New York, New York.
20   NOMINAL DEFENDANT-
21   APPELLEE:
22
23   FOR APPELLEE WILSON:         Audra Soloway, Paul, Weiss,
24                                Rifkind, Wharton & Garrison LLP,
25                                New York, New York.

26        Appeal from a judgment of the United States District
27   Court for the Southern District of New York (Forrest, J.).
28
29        UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED
30   AND DECREED that the judgment of the district court be
31   AFFIRMED.
32
33        Thomas Canty appeals from the judgment of the United
34   States District Court for the Southern District of New York
35   (Forrest, J.), dismissing his complaint for failure to
36   satisfy the requirements of Federal Rule of Civil Procedure
37   23.1(b)(3). We assume the parties’ familiarity with the
38   underlying facts, the procedural history, and the issues
39   presented for review.
40
41        Canty filed a derivative action nominally on behalf of
42   Lululemon Athletica, Inc. (“Lululemon”), against several of
43   its officers and directors. The complaint, inter alia,
44   alleged that the directors learned before the public did
45   that Christine McCormick Day was resigning as CEO, and that

                                   2
 1   in the interval of one business day, while the resignation
 2   was inside information, then-Chairman Dennis J. Wilson sold
 3   a large bloc of his stake in the company. The district
 4   court granted the defendants’ motion to dismiss for failure
 5   to adequately plead either that Canty had made a demand on
 6   the Board of Directors or that demand was excused. Fed. R.
 7   Civ. P. 23.1. On appeal, Canty contends that his complaint
 8   adequately alleged that demand was excused by reason of
 9   futility.
10
11        We have stated that “[w]here ‘determination of the
12   sufficiency of allegations of futility depends on the
13   circumstances of the individual case, the standard of review
14   for dismissals based on Fed. R. Civ. P. 23.1 is abuse of
15   discretion.’” Halebian v. Berv, 590 F.3d 195, 203 (2d Cir.
16   2009) (quoting Scalisi v. Fund Asset Mgmt., L.P., 380 F.3d
17   133, 137 (2d Cir. 2004)). However, in review of legal
18   conclusions and the application of legal precepts to the
19   allegations of futility, “plenary review of the district
20   court’s choice and interpretation of those legal precepts is
21   appropriate.” Scalisi, 380 F.3d at 137. We need not, and
22   do not, address whether an abuse of discretion standard is
23   appropriate for dismissals based on the sufficiency of the
24   allegations of futility, because our decision would be the
25   same under de novo review. See id. at 137 n.6.
26
27        Rule 23.1 bars a derivative suit against a corporation
28   without a prior demand that the Board of Directors take
29   remedial action. Fed. R. Civ. P. 23.1(b)(3)(A). The
30   plaintiff can avoid this prerequisite only by pleading “with
31   particularity” his “reasons for . . . not making the
32   effort.” Id. R. 23.1(b)(3)(B); see Kamen v. Kemper Fin.
33   Servs., Inc., 500 U.S. 90, 101-02 (1991). When a plaintiff
34   opts to plead demand futility instead of making a demand,
35   “[t]he substantive law which determines whether demand is,
36   in fact, futile is provided by the state of incorporation of
37   the entity on whose behalf the plaintiff is seeking relief.”
38   Scalisi, 380 F.3d at 138. The relevant law is that of
39   Delaware, the state in which Lululemon is incorporated.
40
41        Under Delaware law, demand futility requires a
42   plaintiff to “allege with particularity that a majority of
43   the board lacks independence or is otherwise incapable of
44   validly exercising its business judgment.” Blaustein v.
45   Lord Baltimore Capital Corp., 84 A.3d 954, 958 (Del. 2014).
46   Those allegations must include “facts specific to each
47   director” to show that the director “could not have

                                  3
 1   exercised disinterested business judgment in responding to a
 2   demand.” Desimone v. Barrows, 924 A.2d 908, 943 (Del. Ch.
 3   2007) (emphasis omitted). Satisfaction of these “stringent
 4   requirements of factual particularity” is intended to be “a
 5   difficult feat.” Ryan v. Gifford, 918 A.2d 341, 352 n.23
 6   (Del. Ch. 2007).
 7
 8        A plaintiff can plead such futility “by alleging that
 9   the Board was disabled because of a substantial risk of
10   personal liability.” Wood v. Baum, 953 A.2d 136, 141 (Del.
11   2008). However, “the mere threat of personal liability
12   . . . is insufficient”; rather, “a reasonable doubt that a
13   majority of shareholders is incapable of considering demand
14   should only be found where ‘a substantial likelihood of
15   personal liability exists.’” Id. at 141 n.11 (quoting
16   Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984), overruled
17   on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del.
18   2000)).
19
20        Canty’s allegations of demand futility fall short of
21   Delaware’s stringent requirements. Some of the futility
22   allegations take aim at the directors of the Audit
23   Committee, which generally oversees related-party
24   transactions and public disclosures. Canty argues that his
25   litigation exposes those directors to personal liability
26   because they intentionally facilitated Wilson’s alleged
27   insider trading. However, Canty does not allege any
28   specific actions or omissions by the Audit Committee members
29   that give rise to a reasonable inference that the Audit
30   Committee did so. Nor has Canty made any other specific
31   allegations that demonstrate a substantial likelihood of
32   personal liability as to the Audit Committee. Accordingly,
33   demand cannot be excused on the basis of his allegations
34   regarding the Audit Committee.
35
36        Another allegation of demand futility is that the Board
37   is beholden to Wilson and thus cannot act independently.
38   The complaint cites Lululemon’s 2012 10-K, which concedes
39   that Wilson owns a large amount of stock and therefore “is
40   able to exercise significant influence.” Although this
41   allegation demonstrates that Wilson has an outsize role at
42   Lululemon, it does not justify an inference that the Board
43   is incapable of exercising its independent business
44   judgment.
45

                                  4
 1        The other principal arguments that Canty makes on
 2   appeal are specific to Wilson1 or Day, as to whom futility
 3   is immaterial in light of the capacity of the rest of the
 4   eleven-member Board to independently consider a demand.
 5
 6        For the foregoing reasons, and finding no merit in
 7   Canty’s other arguments, we hereby AFFIRM the judgment of
 8   the district court.
 9
10                              FOR THE COURT:
11                              CATHERINE O’HAGAN WOLFE, CLERK
12

         1
           Since the commencement of Canty’s suit, Wilson has
     left his position on the Board of Directors. This change
     does not affect our analysis, because a change in board
     composition after the filing of the complaint “does not
     require a derivative plaintiff to present a demand to the
     new board, or to allege facts that would excuse demand as of
     the time a plaintiff elects to amend his pleadings.” Harris
     v. Carter, 582 A.2d 222, 231 (Del. Ch. 1990).
                                  5