Court Opinion

ID: 626539
Source: CourtListenerOpinion
Date Created: 2012-04-02 20:17:01+00
Date Added: 2024-06-11T17:51:16.034839
License: Public Domain

NOT FOR PUBLICATION

                    UNITED STATES COURT OF APPEALS                               FILED
                            FOR THE NINTH CIRCUIT                                APR 02 2012

                                                                           MOLLY C. DWYER, CLERK
                                                                            U.S. COURT OF APPEALS

SANJAY ISRANI,                                   No. 10-16726

              Plaintiff - Appellant,             D.C. No. 3:09-cv-0467-ECR-RAM

  v.
                                                 MEMORANDUM*
ROBERT A. BITTMAN; et al.,

              Defendants - Appellees.

                    Appeal from the United States District Court
                             for the District of Nevada
                     Edward C. Reed, District Judge, Presiding

                      Argued and Submitted October 13, 2011
                            San Francisco, California

Before: HUG, KLEINFELD, and W. FLETCHER, Circuit Judges.

       Appellant Sanjay Israni, stockholder of International Game Technology

(IGT), appeals the dismissal of his derivative complaint for failure to allege

particularized facts establishing demand futility. We affirm.

        *
             This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
      As a preliminary matter, we address Appellees’ motion to strike Appellant’s

Additional Excerpts of Record. The motion to strike is granted because Appellant

never filed or submitted the relevant documents to the court below. See Fed. R.

App. P. 10(a); Kirshner v. Uniden Corp. of Am., 842 F.2d 1074, 1077 (9th Cir.

1988).

      A shareholder bringing a derivative action to enforce a right of the

corporation must either make a demand on the corporation’s directors to take

corrective action, or state with particularity reasons why demand would be futile.

Fed. R. Civ. P. 23.1. We look to the law of the state of incorporation to determine

when demand would be futile. In re Silicon Graphics, Inc. Sec. Litig., 183 F.3d

970, 990 (9th Cir. 1999). IGT is incorporated in the State of Nevada, so Nevada

law defines demand futility here. Nevada courts look to Delaware law for

guidance on requirements for pleading demand futility. See Shoen v. SAC Holding

Corp., 137 P.3d 1171, 1184 (Nev. 2006). This Court reviews a district court’s

dismissal of a shareholder derivative suit based on failure to make a demand or

                                        -2-
properly allege demand futility for an abuse of discretion.1 Potter v. Hughes, 546

F.3d 1051, 1056 (9th Cir. 2008).

      Under Delaware law, demand futility is established when the complaint

pleads particularized facts demonstrating “(1) in those cases in which the directors

approved the challenged transactions, a reasonable doubt that the directors were

disinterested or that the business judgment rule otherwise protects the challenged

decisions; or (2) in those cases in which the challenged transactions did not involve

board action or the board of directors has changed since the transactions, a

reasonable doubt that the board can impartially consider a demand.” Shoen, 137

P.3d at 1184. The nine members of IGT’s board of directors at the time the

underlying lawsuit was filed, who therefore would have been charged with

considering a demand, were directors Bittman, Burt, Hart, Mathewson, Matthews,

Miller, Rentschler, Roberson, and Satre. Here, the complaint pleaded director

interest based on: (1) director approval of a revised employment agreement for Mr.

      1
         We question whether abuse of discretion review is appropriate. The
Second and Ninth Circuits recently expressed doubt about the propriety of
applying an abuse of discretion standard to a motion to dismiss for failure to
sufficiently allege demand futility but declined to reach the issue because it was
not dispositive in the case. Scalisi v. Fund Asset Mgmt., L.P., 380 F.3d 133, 137
n.6 (2d Cir. 2004); Laborers Intern. Union of N. Am. v. Bailey, 310 Fed. Appx.
128, 130 n.1 (9th Cir. Jan. 23, 2009). However, a de novo standard of review
would not change the outcome of this case so it is therefore currently unnecessary
to decide this issue.

                                         -3-
Matthews, IGT’s former CEO and chairman of IGT’s board of directors; (2) high

director compensation; (3) director membership on IGT’s Audit and Governance

Committees; (4) director employment with IGT; and (5) alleged insider trading by

three IGT directors.

      Appellant argues that certain directors were incapable of objectively

evaluating a demand because they approved Mr. Matthews’ employment contract.

Appellant’s theory is that these directors were advancing Mr. Matthews’ interests

in an effort to have their own compensation increased. Appellant’s conclusory

argument is insufficient to raise a reasonable doubt that the directors were

disinterested because the complaint does not include facts to explain how approval

of Mr. Matthews’ salary would influence the compensation of other directors.

Brehm v. Eisner, 746 A.2d 244, 257 (Del. 2000). Additionally, Appellant did not

raise a reasonable doubt that the directors’ actions were the valid exercise of

business judgment because “[i]t is the essence of business judgment for a board to

determine if a particular individual warrants large amounts of money.” Id. at 263

(quotation and brackets omitted). Thus, the district court properly found that the

allegations relating to Mr. Matthews’ revised employment agreement do not

establish demand futility.

                                         -4-
      The district court also properly found that demand is not excused based on

the directors’ fees. A director’s receipt of compensation alone does not excuse

demand, and the complaint did not provide sufficient factual allegations to show

the fees here were unusual or uncustomary. Orman v. Cullman, 794 A.2d 5, 29

n.62 (Del. Ch. 2002). Appellant alleges that four IGT directors each received total

compensation between $384,498 to $419,498 for 2008. Appellant alleges IGT

directors’ total compensation is larger than IGT officers’ base salary, but offers no

information about IGT officers’ total compensation. Appellant alleges average

IGT director compensation in 2008 was higher than the average director

compensation paid at nineteen of the top twenty Fortune 500 companies.

However, Appellant offers no comparison to the compensation of directors in

companies in IGT’s industry. While we do not believe an industry-specific

comparison of director compensation is always required to raise a reasonable doubt

about director independence, we conclude no such “reasonable doubt” is raised

here, given the differences between IGT’s industry and those of the cited Fortune

500 firms. Appellant also does not compare the responsibilities of IGT directors to

the responsibilities of directors at the referenced Fortune 500 companies.

Additionally, Appellant does not explain how acceding to a shareholder demand

would jeopardize the directors’ positions. Without more, we cannot conclude that

                                         -5-
the director compensation here is “so lavish that a mechanical application of the

presumption would be totally at variance with reality.” Grobow v. Perot, 526 A.2d

914, 923 n.12 (Del. Ch. 1987) aff’d, 539 A.2d 180 (Del. 1988).

      The district court properly found demand is not excused based on committee

membership because the complaint failed to plead facts regarding what information

the committee members saw and failed to act on.2 In re Caremark Intern. Inc.

Derivative Litig., 698 A.2d 959, 971 (Del. Ch. 1996). Additionally, the complaint

does not contain particularized facts showing that the committee members engaged

in “intentional misconduct, fraud or a knowing violation of the law,” as required

under Nevada law. NEV. REV. STAT. § 78. 138(7); In re Amerco Derivative Litig.,

252 P.3d 681, 700-01 (Nev. 2011). The district court also properly found demand

is not excused based on IGT employment of directors because the complaint did

not allege the insider directors were beholden to an interested party. In re

NutriSystem, Inc. Derivative Litig., 666 F. Supp. 2d 501, 515 (E.D. Pa. 2009)

(“Under Delaware law, merely being employed by a corporation is not, by itself,

sufficient to create a reasonable doubt as to the independence of a director.” )

      2
         One possible exception is the allegation that Mr. Burt participated in
insider trading while serving on the Governance Committee. However, this claim
is not determinative in deciding whether demand would have been futile.

                                         -6-
(citing In re Walt Disney Co. Deriv. Litig., 731 A.2d 342, 356 (Del Ch. Ct. 1998),

aff’d in pertinent part, Brehm, 746 A.2d 244).

      Finally, the complaint alleged that directors Burt, Bittman, and Matthews

engaged in insider trading of IGT stock, and therefore a demand on them regarding

these activities would have been futile. The district court declined to address the

sufficiency of this allegation because it had denied all other demand futility

grounds alleged and therefore the plaintiffs could not show that a majority of the

IGT board was not impartial even if demand were excused with respect to these

three defendants. For the same reason, it is unnecessary for us to consider this

allegation.

      AFFIRMED.

                                         -7-