Court Opinion

ID: 4106964
Source: CourtListenerOpinion
Date Created: 2016-12-13 21:01:10.1923+00
Date Added: 2024-06-11T09:20:52.649129
License: Public Domain

NOT FOR PUBLICATION                        FILED
                        UNITED STATES COURT OF APPEALS                    DEC 13 2016
                                                                       MOLLY C. DWYER, CLERK
                                                                        U.S. COURT OF APPEALS
                               FOR THE NINTH CIRCUIT

                                                   No.   14-56913
  CARMEN DI GIOVANNI, Derivatively
  on Behalf of Nominal Defendant
                                                   D.C. Nos.
  BRIDGEPOINT EDUCATION, INC. and
                                                   3:13-cv-2947-JM-JLB
  SHARON A. GRAIG-JOHNSTON,
                                                   3:13-cv-2950-JM-JLB
               Plaintiffs - Appellants,
                                                   MEMORANDUM*
    v.

  ANDREW S. CLARK; et al.,

               Defendants - Appellees.

                     On Appeal from the United States District Court
                         for the Southern District of California
                       Jeffrey T. Miller, District Judge, Presiding

                              Submitted November 9, 2016**
                                  Pasadena, California

Before: BERZON and NGUYEN, Circuit Judges, and ZOUHARY,*** District Judge.

         *
             This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
         **
             The panel unanimously concludes that this case is suitable for
decision without oral argument. See Fed. R. App. P. 34(a)(2).
         ***
            The Honorable Jack Zouhary, United States District Judge for the
Northern District of Ohio, sitting by designation.
      Appellants challenge the dismissal of their shareholder derivative suit for

failing to first make a demand on the board of directors under Federal Civil Rule

23.1. We affirm.

       The sole issue on appeal is whether the directors “[stood] on both sides” of

the proposed self-tender offer and were thus “interested” under Aronson v. Lewis,

473 A.2d 805, 812 (Del. 1984), overruled on other grounds by Brehm v. Eisner,

746 A.2d 244, 253 (Del. 2000), and its progeny. Delaware courts have repeatedly

held that a director participating in a transaction as a shareholder is not “interested”

when the director receives no benefit beyond that conferred on other shareholders.

See, e.g., Pfeffer v. Redstone, 965 A.2d 676, 690 (Del. 2009); Unocal Corp. v.

Mesa Petroleum Co., 493 A.2d 946, 958–59 (Del. 1985); Frank v. Arnelle, 1998

WL 668649, at *10 (Del. Ch. 1998).

      Appellants attempt to distinguish this line of authority by noting the cases do

not directly address the “on both sides of the transaction” language of Aronson and

its progeny. But it makes no difference whether the courts directly addressed this

language, because their holdings specifically addressed situations where directors

participated in self-tender transactions on the same terms as other shareholders.

Thus, they are controlling.

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      The Delaware Supreme Court’s interpretation of “on both sides of the

transaction” in Nixon v. Blackwell, 626 A.2d 1366 (Del. 1993), further supports

this conclusion. Nixon addressed whether the business-judgment rule protected a

board’s decision to adopt an employee stock-ownership plan (“ESOP”) and

purchase key-man life-insurance policies. Id. at 1375–76. The court held that

because “the defendants benefited from the ESOP and could have benefited from

the key man life insurance beyond that which benefited other stockholders

generally, the defendants [were] on both sides of the transaction.” Id. at 1375

(emphasis added).

      To the extent the Delaware Court of Chancery’s decision in eBay Domestic

Holdings, Inc. v. Newmark, 16 A.3d 1 (Del. Ch. 2010), is inconsistent with the

Delaware Supreme Court holdings in Redstone, Nixon, and Unocal, it is not

binding authority. Moreover, eBay is distinguishable because the transaction at

issue (not a self-tender offer) disparately affected the shareholder plaintiff and

involved control of the company. See 16 A.3d at 43.

      In any event, Aronson’s language about directors “appear[ing] on both sides

of a transaction” is not applicable to self-tender transactions like the one at issue

here. It has been applied in situations where the interests of directors and other

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shareholders are in conflict. These situations often, but not always, involve a

benefit conferred on directors beyond that which flows generally to all

shareholders. Orman v. Cullman, 794 A.2d 5, 25 n.50 (Del. Ch. 2002); see also In

re Freeport-McMoran Sulphur, Inc. S’holders Litig., 2001 WL 50203, at *3 (Del.

Ch. 2001) (holding that a merger between two companies with common directors

presents an inherent standing-on-both-sides conflict of interest).

      Where, as here, directors merely participate as shareholders in a transaction,

their interests are aligned with other shareholders. To say the directors

nevertheless are “interested” because they stand “on both sides of the transaction”

is to elevate form over substance.

   AFFIRMED.

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