Delaware Court of Chancery Interprets “Sufficient Particularity” Pleading Standard Under Rule 23.1
By Annette E. Becker and Frank J. Mazzucco
In Robert Elburn v. Robert Albanese et al. and Investors Bancorp, Inc.,C.A. No. 2019-0774-JRS (Del. Ch. Apr. 21, 2020), defendants moved to dismiss a complaint under Court of Chancery Rules 12(b)(6) and 23.1 for failure to state viable claims and failure to plead demand futility. The Delaware Court of Chancery (the “Court”) interpreted the “sufficient particularity” pleading standard under Rule 23.1, noting that demand futility was pled with sufficient particularity to raise doubt that the board of directors could act impartially in response to a litigation demand.
In 2015, the stockholders of Investors Bancorp, Inc. (the “Company”) approved an equity incentive plan (“EIP”) that had been adopted by the Company’s board of directors (the “Board”). Soon thereafter, the Board awarded itself certain restricted stock awards and stock options under the EIP (collectively, the “2015 Awards”). The Company’s CEO and COO, who each also served on the Board (collectively, the “Inside Directors”), were the two largest beneficiaries of such grants.
Soon thereafter, Robert Elburn (the “Plaintiff”) brought a derivative action alleging that, in approving the 2015 Awards, the Board breached its fiduciary duties. The parties eventually reached a settlement, pursuant to which the 2015 Awards to the Inside Directors were rescinded and the awards to the non-executive Board members were substantially reduced. However, in April 2019 — two months before the settlement was to be presented to the Court for approval — the Company filed its annual proxy statement and disclosed that the Board intended to consider the issuance of new awards to the Inside Directors under the previously approved EIP (the “Replacement Awards”). The Board approved Replacement Awards for the Inside Directors that were substantially similar to the 2015 Awards at issue in the litigation (i.e., that would be rescinded in the settlement). The Court approved the settlement in June 2019 and the Replacement Awards were granted one month later.
The Plaintiff filed a subsequent complaint against the Company and the Board (collectively, the “Defendants”), alleging breach of fiduciary duties and unjust enrichment in connection with the purported issuance of the Replacement Awards in a quid pro quo arrangement between the Inside Directors and the non-employee directors. In the Plaintiff’s contention, the Inside Directors purportedly agreed to forfeit all of their share of the 2015 Awards as part of the settlement so that the non-employee directors could pocket more of their own awards, in exchange for an agreement by the non-employee directors to issue the Replacement Awards after the settlement was approved by the Court. The Defendants moved to dismiss the complaint under Rule 23.1 for failure to plead demand futility with particularity, contending that the Plaintiff had failed to plead particularized facts sufficient to show that the Board was not capable of exercising its business judgment.
The Court noted that Rule 23.1 requires a plaintiff asserting a derivative action to plead “with particularity” the efforts, if any, made by the plaintiff to “obtain the action the plaintiff desires from the directors or comparable authority and the reasons for the plaintiff’s failure to obtain the action or for not making the effort.” In analyzing the question of what is required to plead a fact “with particularity” under Rule 23.1, the Court concluded that a plaintiff attempting to plead demand futility need not do so with the same degree of factual particularity required of a plaintiff attempting to plead fraud (i.e., under Rule 9(b)) and it is not necessary that a derivative plaintiff support a pleading with so-called “newspaper facts” (i.e., who, what, when, where, and how). In the Court’s view, it would be nearly impossible for a plaintiff to plead highly specific facts “about fiduciary wrongdoing when they were not in the boardroom and, unlike fraud, were not the direct targets of the wrongful behavior.” Thus, in denying the Defendants’ motion to dismiss, the Court concluded that, although the Plaintiff had not necessarily identified the specific discussions constituting the purported quid pro quo agreement, he had still described such agreement with “detail sufficient to apprise the defendant of the basis for the claim” under Rule 23.1.