Raul v. Astoria Financial Corporation involves the question of whether, under the corporate benefit doctrine adopted by Delaware courts, a stockholder can recover, from a corporation, attorneys’ fees incurred as a result of the stockholder’s attorney investigating the corporation’s activities. In this case, David Raul (“Raul”), as custodian of Malka Raul Utma, NY, a common stockholder of Astoria Financial Corporation (“Astoria”), filed a complaint against Astoria, seeking an equitable assessment of attorneys’ fees incurred in connection with the investigation of potential violations of “say-on-pay” disclosure requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Say-On-Pay Disclosure Requirements”).
The corporate benefit doctrine provides for an award of attorneys’ fees to a stockholder if (1) the stockholder presents a claim to the corporation such that, at the time the claim was presented, a suit based on the actions underlying the claim would have survived a motion to dismiss and (2) a material corporate benefit results.
In this case, Raul claimed that Astoria, a publicly traded corporation, failed to comply with the Say-On-Pay Disclosure Requirements in its 2011 and 2012 proxy statements. Following the dissemination of Astoria’s 2012 proxy statement, Raul sent a demand letter to the Astoria board of directors (the “Board”) asserting that Astoria failed to comply with the Say-On-Pay Disclosure Requirements by (1) not disclosing in the 2012 proxy statement whether, and if so, how, the Board considered the results of the 2011 say-on-pay vote and (2) failing to properly disclose, following the 2011 annual meeting, how frequently it has decided to hold future say-on-pay votes. As a result of these improper disclosures, Raul asserted, the Board violated its fiduciary duties of loyalty, candor, and good faith. Raul demanded that the Board issue corrective disclosures, adopt stronger protocols regarding disclosures, and amend Astoria’s Compensation Committee Charter to require that committee to consider the results of future say-on-pay votes when making executive compensation decisions. After receiving the demand letter, Astoria took the corrective actions requested and sent a letter to Raul informing him that such corrective actions have been taken.
Following a denied request that Astoria pay attorneys’ fees in connection with investigating and mailing his demand letter, Raul filed a complaint seeking recovery of attorneys’ fees under the corporate benefit doctrine, alleging that his efforts to remedy the disclosure violations by Astoria conferred upon Astoria a benefit justifying an award of fees. Astoria moved to dismiss the complaint, asserting that Raul failed to state a claim for which relief could be granted.
To recover attorneys’ fees under the corporate benefit doctrine, the plaintiff must show that “(i) the underlying cause of action was meritorious when filed; (ii) the action producing benefit to the corporation as taken by the defendants before a judicial resolution was achieved; and (iii) the resulting corporate benefit was causally related to the lawsuit.” United Vanguard Fund, Inc. v. TakeCare, Inc., 727 A.2d 844, 850 (Del. Ch. 1998). The requirement that the underlying claims be “meritorious when filed” means only that, when presented to the board of directors of a corporation, the underlying cause of action is meritorious. Thus, in order to recover attorney’s fees, a plaintiff need not have filed the underlying cause of action. A claim is “meritorious” within the meaning of the corporate benefit doctrine if it can withstand a motion to dismiss on the pleadings and the stockholder plaintiff possesses knowledge of provable facts which hold out some reasonable likelihood of ultimate success. In re Primedia, Inc. S’holders Litig., 67 A.3d 455, 478 (Del. Ch. 2013) (citing Chrysler Corp. v. Dann, 223 A.2d 384, 387 (Del. 1966)).
The Court granted Astoria’s motion to dismiss, finding that Raul’s complaint failed to state a claim for entitlement to attorneys’ fees under the corporate benefit doctrine. The Court held that, even assuming that a corporate benefit resulted from Raul’s actions, Raul only generally asserted that the Board breached its fiduciary duties of loyalty, candor, and care by failing to comply with the Say-On-Pay Disclosure Requirements. By failing to fully present the legal bases underlying any fiduciary breach, Raul presented no underlying meritorious claims for breach of fiduciary duty.