PREMO, J. —
This writ petition presents an issue of first impression concerning the demand futility pleading requirement in a shareholder derivative suit under California law. The question is whether a plaintiff alleging derivative claims in an amended complaint following the grant of leave to amend must plead demand futility with respect to the board of directors in place as of the filing of the amended complaint or the initial complaint, when the composition of the board of directors has changed in the interim.
Petitioners Apple Inc. (Apple), Timothy Cook, Millard Drexler, and Arthur Levinson (together petitioners) argue that fundamental principles of corporate law require the court to assess demand futility as to the board in place when the amended complaint is filed, consistent with the rule enunciated by the Delaware Supreme Court in Braddock v. Zimmerman (2006) 906 A.2d 776 (Braddock). Respondent Santa Clara County Superior Court declined to apply the Braddock rule, citing the absence of any published California authority on the issue. The superior court overruled petitioners' demurrer after finding that the amended complaint adequately alleged demand futility as to the board in place when the original action was filed. Plaintiffs and real parties in interest The Police Retirement System of St. Louis, John Krawczyk, II, and John Barto (together plaintiffs) argue that the court applied the correct rule and, in any event, that the amended complaint adequately pleads demand futility regardless of which board of directors is considered.
We conclude that Braddock is consistent in relevant respects with California law and that, under the circumstances of this case, the respondent superior court should have assessed the pleading of demand futility with respect to the board of directors in place at the time the amended complaint was filed.
The issues presented herein may be better understood in view of certain principles of corporate law and shareholder derivative suits. We begin with the summary of these principles set forth in Bader v. Anderson (2009) 179 Cal.App.4th 775 [101 Cal.Rptr.3d 821] (Bader).
In accordance with this purpose, California law requires the plaintiff who files a shareholder derivative suit to "allege[] in the complaint with particularity plaintiff's efforts to secure from the board such action as plaintiff desires, or the reasons for not making such effort, and allege[] further that plaintiff has either informed the corporation or the board in writing of the ultimate facts of each cause of action against each defendant or delivered to the corporation or the board a true copy of the complaint which plaintiff proposes to file." (§ 800, subd. (b)(2) (§ 800(b)(2)).) Demand futility under section
Bader explained that few California cases have delineated the circumstances constituting demand futility, but "given the requirement under section 800(b)(2) that allegations be made `with particularity,' it is clear that general averments that the directors were involved in a conspiracy or aided and abetted the wrongful acts complained of will not suffice.... [Citation.] Likewise, a general claim that there is nationwide structural bias common to corporate boards will not excuse the making of a demand before bringing a derivative suit. [Citation.] Rather, `the court must be apprised of facts specific to each director from which it can conclude that that particular director could or could not be expected to fairly evaluate the claims of the shareholder plaintiff.'" (Bader, supra, 179 Cal.App.4th at p. 790.)
These principles are not in debate here. But neither do they answer whether California law requires the plaintiff to reassert demand futility upon the filing of an amended derivative complaint when the composition of the board of directors has changed. In the absence of California authority, the parties dispute the applicability of Delaware case law addressing that scenario, as set forth in Braddock.
We consider Braddock's application under California law after reviewing the pertinent facts and detailed procedural history of this case.
Plaintiffs, who are Apple shareholders, bring this consolidated derivative action on behalf of nominal defendant Apple. The heart of plaintiffs' case is Apple's alleged pursuit and enforcement of anticompetitive agreements with other Silicon Valley companies to prohibit the recruitment or "cold calling" of each other's employees. Plaintiffs allege that certain current and former members of Apple's board of directors were aware of or tacitly approved of Apple's practices and breached their fiduciary duties by enabling or permitting these illegal agreements over many years.
The action at bar consolidates three individual shareholder derivative lawsuits filed in March, April, and July 2014. It follows the settlement of an action filed by the Department of Justice in 2010 against Apple, Adobe, Google, Intel, Intuit, and Pixar based on "`violations of the federal antitrust laws,'" which plaintiffs allege the Apple board never disclosed to shareholders in any proxy statement or regulatory filings, and several federal class action lawsuits brought by employees of Apple and other technology companies, which were consolidated under the caption In re High-Tech Employee Antitrust Litigation (N.D.Cal., Mar. 3, 2015, No. 11-CV-02509-LHK) 2015 U.S.Dist Lexis 26635 and settled in March 2015.
According to the operative complaint, top executives and directors at Apple beginning in approximately 2005 entered nonsolicitation agreements with executives at companies such as Adobe, Google, and Intel, which had the effect of regulating competition for talent and suppressing salaries and job mobility. Apple cofounder and former CEO Steve Jobs was passionate and outspoken about preventing companies who worked with Apple from poaching Apple's technical team members. Jobs "was vocal that companies working together should not hire each other's employees and that there should not be cross-fertilization of technical knowledge." Pressure tactics implemented by Jobs and reinforced at high levels eventually resulted in "similar anticompetitive agreements, policies, or practices" with "approximately twenty-five other companies," including several outside the technology sector.
Plaintiffs allege that Apple was particularly effective at driving these collusive agreements because it shared common directors and senior advisors with other companies. For example, plaintiffs cite a "Hands Off (Do Not Call List)" circulated among Apple employees in July 2009, which specified companies that were off-limits to recruitment, including several denoted as sharing a common board member, as well as deposition testimony allegedly confirming that certain defendants' respective positions at those companies brought the companies within Apple's "Do Not Call" policy. Plaintiffs allege that based on overlapping board memberships, close relationships between the companies, and Jobs's "vocal disapproval of employees changing companies, there can be no doubt that the entire [Apple] Board knew about the agreements and facilitated the unlawful conspiracy." Plaintiffs further impute knowledge of the agreements to the directors who served on the board's compensation committee. The committee was responsible for overseeing the
Plaintiffs' initial complaint named nominal defendant Apple and the same individual defendants (Cook, Campbell, Drexler, Schmidt, and Levinson) as the later, operative complaint. It alleged that when the original shareholder derivative suits were filed, Apple's board of directors had eight members: defendants Cook, Campbell, Drexler, and Levinson, and nondefendants Robert Iger, Albert Gore, Jr., Andrea Jung, and Ronald Sugar (hereafter the 2014 Board).
Plaintiffs generally alleged that any demand before filing the initial complaint would have been futile because the 2014 Board had proceeded "with eyes closed shut," abdicating its responsibility to ensure that business decisions complied with applicable laws and ignoring the significant liability exposure for the company and adverse effect that Apple's anticompetitive agreements had on attracting highly skilled employees. Plaintiffs specifically alleged demand futility as to defendants Campbell, Drexler, Levinson, Cook, and nondefendant Iger based on each directors' entrenchment in the company and personal and professional relationships with other members of the board, as well as their roles at several key companies that purportedly had entered into restrictive hiring agreements with Apple.
Petitioners
Plaintiffs then filed the amended complaint with causes of action for (1) breach of fiduciary duty and (2) indemnification and contribution. They alleged demand futility with respect to Apple's 2014 Board, in place when the original derivative actions were filed.
Petitioners demurred to the amended complaint. Although the notice of demurrer set forth two grounds for demurrer — failure to state facts sufficient
The superior court declined to apply Braddock, noting that Apple was a California corporation and petitioners had failed to cite "any California authority supporting" their argument that the relevant board was that in place as of the filing of the amended complaint. The court also sought to distinguish Braddock, noting that its order sustaining petitioners' prior demurrer to the initial complaint did not "`dismiss'" the action, but simply sustained the demurrer with express leave to amend.
The superior court nonetheless found that the amended complaint failed to state sufficient, particularized facts to excuse demand as to a majority of the 2014 Board. The court emphasized that general allegations of involvement in a conspiracy, based on the inference that a majority of the board expressly or tacitly approved the anticompetitive agreements and practices, are not sufficient to establish demand futility under California law. The court sustained the demurrer with leave to amend on that ground but overruled the demurrer on the alternative ground of failure to state facts sufficient to constitute a cause of action, noting it was "entirely unsupported" by any argument in petitioners' papers.
Plaintiffs filed the operative complaint in April 2016, again alleging demand futility with respect to the 2014 Board. Petitioners' demurrer to the operative complaint argued that plaintiffs had failed to allege demand futility with sufficient particularity and, based on the reasoning of Braddock, should have alleged demand futility with respect to the current board. Specifically, since the filing of the original actions and the amended complaint, Susan Wagner had replaced defendant Campbell, and James Bell had replaced defendant Drexler. Petitioners contended that the operative complaint failed to allege demand futility as to nondefendant directors Wagner, Bell, and Sugar, and alleged only conclusory facts regarding nondefendant directors Jung, Gore, and Iger. Petitioners maintained that the "lack of material allegations against six of Apple's eight" board members was "alone sufficient
In a detailed written order, the superior court overruled the demurrer to the first and fifth causes of action for breach of fiduciary duty and indemnification on the ground of demand futility and standing, but rejected the demurrer to those causes of action for failure to state a claim, noting it had overruled petitioners' prior demurrer on that ground for having failed to offer any argument in support. The court sustained without leave to amend the demurrer to the other three causes of action, finding the asserted claims were beyond the scope of the prior order granting leave to amend.
On the issue of demand futility, the court adhered to its earlier conclusion that demand futility is assessed as of the time a derivative action is filed, noting that petitioners "still cite no authority" applying Braddock under California law. The court found that plaintiffs had specifically alleged demand futility as to defendants Campbell, Cook, and Levinson. In a footnote, the court further found that particularized facts regarding defendant Drexler and nondefendant Iger supported a "reasonable inference" that demand was futile as to those two directors. Regarding the board generally, the court stated that "specific allegations of widely-known misconduct spanning many years and involving numerous Silicon Valley companies with shared board members, coupled with the direct evidence of knowledge and participation by some Apple board members, support an inference that a majority of the board knew of and condoned these agreements and establishes demand futility for purposes of demurrer." The court concluded that the operative complaint met the demand excusal requirement for at least half of the 2014 Board, allowing the first and fifth causes of action to proceed.
Petitioners sought writ relief from this court directing the respondent superior court to vacate its order overruling the demurrer and to enter a new order sustaining the demurrer as to the first and fifth causes of action. We issued an order to show cause and stayed the superior court proceedings, and requested briefing from the parties.
The standing requirements for a derivative action, including the demand requirement, "reflect the limited adverse relationship between the shareholder plaintiff and the corporation." (Patrick, supra, 167 Cal.App.4th at p. 1004.) It follows that while the corporation cannot "challenge the merits of a derivative claim filed on its behalf and from which it stands to benefit," it "may assert defenses contesting the plaintiff's right or decision to bring suit, such as asserting the shareholder plaintiff's lack of standing or the [special litigation committee] defense." (Id. at p. 1005, italics added.) Patrick outlines these dual avenues of recourse but says nothing about the availability of writ relief if the standing issue is wrongly decided. This distinction is important since appointment of a special litigation committee may presuppose that other members of the board are interested. (See Oakland Raiders, supra, 93 Cal.App.4th at p. 590 ["failure to appoint a special litigation committee to investigate the claims made in a derivative suit cannot raise an inference of demand futility because there is no necessity to appoint a special litigation committee if the board itself is disinterested"]; Desaigoudar v. Meyercord (2003) 108 Cal.App.4th 173, 184-185 [133 Cal.Rptr.2d 408] [the "common practice" in shareholder derivative suits alleging wrongdoing on the part of a majority of directors is for the board to appoint a special litigation committee of independent directors to investigate the challenged transaction].)
We review an order overruling a demurrer de novo, accepting as true all facts properly pleaded in the complaint in order to determine whether the demurrer should be overruled. (Casterson v. Superior Court, supra, 101 Cal.App.4th at pp. 182-183.) The settled rules for reviewing the sufficiency of a complaint apply: "`"We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. [Citation.] We also consider matters which may be judicially noticed." [Citation.] Further, we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context.'" (Bader, supra, 179 Cal.App.4th at p. 786, quoting Blank v. Kirwan (1985) 39 Cal.3d 311, 318 [216 Cal.Rptr. 718, 703 P.2d 58].)
Accordingly, we review de novo the allegations of the operative complaint against the particularized demand futility pleading requirement applicable to shareholder derivative litigation and with respect to the relevant board of directors at Apple.
Petitioners contend that the superior court erred in two ways: first, by declining to adopt the reasoning of Braddock and instead assessing demand futility with respect to the board of directors in place when the derivative litigation commenced; and second, by inferring that demand would have been futile as to an unspecified majority of the Apple board even though plaintiffs alleged particularized facts as to only three directors.
Plaintiffs respond that this court need not reach the issue of whether Braddock applies under California law, because (1) they have adequately alleged demand futility regardless of which board of directors is considered, and (2) the reasoning and factual circumstances of Braddock are distinguishable since that case involved "the existence of a new independent board of directors" (Braddock, supra, 906 A.2d at p. 786) following dismissal of the prior complaint, whereas in this case only two out of the eight members of
As a preliminary matter, we reject the argument that the writ petition may be denied because petitioners failed to establish the changes to Apple's board. Plaintiffs acknowledge that the superior court granted judicial notice of certain regulatory filings submitted in support of the demurrer.
While the truthfulness or proper interpretation of a judicially noticed document is disputable, we are not persuaded that such a dispute exists here.
The taking of judicial notice of Apple's SEC filings establishes only their existence and reported contents, and more closely resembles cases in which there is no factual dispute concerning the matter to be noticed. (See, e.g., StorMedia, supra, 20 Cal.4th at p. 457, fn. 10 [confirming allegations in the complaint by referencing a judicially noticed employee stock purchase plan that showed the "`exercise date' on which stock was sold to participants"]; Joslin v. H.A.S. Ins. Brokerage (1986) 184 Cal.App.3d 369, 375 [228 Cal.Rptr. 878] [trial court could consider facts that were disclosed by the judicially noticed deposition and were not disputed].) We therefore accept, for purposes of the writ petition, petitioners' showing that between the filing of the original derivative actions in 2014 and the filing of the operative complaint in April 2016, defendants Drexler and Campbell departed from the eight-member board of directors, and nondefendants Susan Wagner and James Bell joined the board.
Since the superior court determined that plaintiffs sufficiently alleged demand futility as to five of the eight Apple directors (Campbell, Cook, Levinson, Drexler, and Iger) based on the composition of the 2014 Board, but only three of these five directors remained on the board as of the filing of the operative complaint — constituting less than a majority — it is critical to identify which board is relevant for assessing demand futility.
But as Bader recognized, Delaware courts do not apply the Aronson test mechanically. Thus, where the challenged conduct did not arise from board action, the court applies the alternate test from Rales, which "inquires `whether the board that would be addressing the demand can impartially consider its merits without being influenced by improper considerations.'" (Bader, supra, 179 Cal.App.4th at p. 791, quoting Rales, supra, 634 A.2d at p. 934.) That test asks whether the allegations "`create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand.'" (Bader, supra, at pp. 791-792.) The Rales test highlights the specificity of the demand inquiry in relation to the nature of the conduct challenged and the board's alleged role, if any, in that conduct.
Braddock was a shareholder derivative action in which the plaintiff's first amended complaint was dismissed in its entirety, without prejudice, for failing to comply with the demand requirement of Delaware's Court of Chancery Rules, rule 23.1.
The court specified three conditions that "must exist to excuse a plaintiff from making demand ... when a complaint is amended after a new board of directors is in place: first, the original complaint was well pleaded as a derivative action; second, the original complaint satisfied the legal test for demand excusal; and third, the act or transaction complained of in the amendment is essentially the same as the act or transaction challenged in the original complaint." (Braddock, supra, 906 A.2d at p. 786.) Since claims that have been dismissed without prejudice and with leave to amend are "not validly in litigation," the Braddock court concluded that a plaintiff who files an amended complaint under those circumstances must comply with the demand requirement "by reference to the board in place at the time when the amended complaint is filed." (Ibid.)
Petitioners urge this court to adopt the rule set forth in Braddock as a matter of California law. They maintain that Braddock simply extended the general rule, followed in Delaware and in California, that a plaintiff bringing a derivative suit must make demand on the company's board to take legal action or show that it would have been futile to do so at the time the case was initiated. They argue that Braddock reinforces the policy behind the demand requirement, imposes no improper burden on plaintiffs, and ensures consistency with courts applying Delaware law and the laws of other states.
In response, plaintiffs dispute the relevance of Braddock — suggesting that Delaware cases do not reveal a clear doctrine as to the demand requirement
The narrow application of Braddock belies plaintiffs' claim that implementing its rule will allow corporate defendants to file seriatim demurrers with each amended complaint and require the court to revisit the threshold demand futility issue. To begin, a derivative plaintiff under California law already must make a demand on the company's board to take legal action or show that it would have been futile to do so at the time the case is initiated. (§ 800(b)(2).) If the suit is properly initiated and the derivative claims are validly in issue, the presuit demand requirement has been met; hence, the filing of an amended complaint arising from those same claims will not trigger reassessment of the demand requirement.
Only if the trial court has deemed the complaint inadequate — either for failure to state a claim or failure to meet the demand requirement, and the plaintiff reasserts the derivative claims in an amended complaint to avoid dismissal — will the rule apply. Braddock preserves this distinction by identifying the circumstances in which a plaintiff filing an amended derivative complaint need not make demand — or plead its futility — with respect to a new board. Under this rubric, a plaintiff who demonstrates that the original
Plaintiffs suggest that Braddock did not establish a clear doctrine for Delaware cases, which continue to gauge demand futility as of the time the original derivative complaint is filed. Even if we were to overlook that Braddock was decided by the Delaware Supreme Court, which "is of course the final arbiter on matters of Delaware law" (Feeley v. NHAOCG, LLC (Del.Ch. 2012) 62 A.3d 649, 663), the two unpublished cases that plaintiffs cite neither question nor contradict Braddock. One case is inapposite, as it addresses the pleading of demand futility at the subsidiary level in a double derivative action when the company obtained subsidiary status only after the plaintiff initiated the action (Belendiuk v. Carrión (Del.Ch. 2014) 2014 Del.Ch. Lexis 126, p. *8), and the other directly applies Braddock and, in fact, stands for the opposite proposition stated by plaintiffs. In that case, the court found the original derivative claims were not validly in litigation when the plaintiffs amended their complaint; thus the plaintiffs were required to make demand at the time they filed the second amended complaint, or to plead that demand would be futile at that time. (In re Affiliated Computer Services Shareholders Litigation (Del.Ch. 2009) 2009 Del.Ch. Lexis 35.) Furthermore, courts in jurisdictions that look to or follow Delaware law with respect to determining demand futility have consistently applied Braddock.
We believe this conclusion harmonizes with the California Supreme Court's consideration of standing in a somewhat related context involving continuous stock ownership in a derivative action. The high court considered whether the plaintiff in a derivative suit had standing to continue litigating the action after involuntarily losing his stock in the nominal defendant corporation due to a merger. (Grosset, supra, 42 Cal.4th at p. 1104.) The court observed that while the language of section 800, subdivision (b) "d[id] not clearly impose" a continuous ownership requirement, there were "other considerations" that supported or even compelled an interpretation of the statute to require continuous ownership. (Grosset, supra, at p. 1114.) These included "the statutory purpose to minimize abuse of the derivative suit" and "the basic legal principles pertaining to corporations and shareholder litigation." (Ibid.) The court reiterated that the authority to pursue a claim on a corporation's behalf rests with the board of directors. (Ibid.) A stockholder can seek to enforce the corporation's rights in a derivative suit, but "[t]he fact remains that a derivative claim belongs to the corporation, not to the plaintiff asserting the claim on the corporation's behalf." (Id. at p. 1118.) The court concluded that because the plaintiff no longer owned stock in the corporation, he did not have standing to continue litigating the derivative action. (Id. at p. 1119.)
We need look no further than the circumstances of this case for a suitable example of how Braddock's reasoning applies under California law.
As discussed earlier, the superior court sustained petitioners' demurrers to the initial complaint and amended complaint, finding as to each that plaintiffs had failed to adequately allege demand futility, and granted leave to amend. The court further noted that it was overruling the demurrer to the amended complaint on the ground of failure to state a cause of action. Plaintiffs contend based on this latter ruling that their derivative claims were validly in litigation when they filed the operative complaint. They argue that procedural differences between a sustained demurrer with leave to amend under California law, and the grant of a motion to dismiss under Delaware law, negate any application of Braddock here, and that Braddock applies only where there is a new and independent board in place that can consider a demand. These arguments are unavailing.
Contrary to plaintiffs' assertion that the superior court found plaintiffs' amended complaint had adequately pled causes of action for breach of fiduciary duty and unjust enrichment, the court stated only that it was overruling the demurrer on that ground, which was "entirely unsupported" by any argument in petitioners' papers. The effect of this ruling, according to the superior court, was to disqualify petitioners' later effort to demur to those two causes of action for failure to state a claim in the operative complaint;
Plaintiffs also seek to limit Braddock factually, based on the degree of board turnover between filings of the initial and amended complaints. They contend that Braddock only applies when there is the equivalent of "a new independent board of directors" to consider a demand. (Braddock, supra, 906 A.2d at p. 786.)
Plaintiffs cite several cases in support of the proposition that Braddock applies only when a majority of the board has changed. Two of these cases predate Braddock but are nonetheless consistent with its holding; in both, the
In sum, we conclude that the reasoning of Braddock is consistent with the governing and limiting principles of California law on derivative actions. Where, as here, an amended complaint alleges derivative claims that were previously deemed legally insufficient, the demand requirement must be assessed in relation to the board of directors in place when the amended complaint is filed.
Our conclusion that the reasoning in Braddock applies here, where an amended complaint alleges derivative claims that were not already validly in litigation, compels us to find that the superior court erred in overruling the demurrer to the operative complaint. The court should have analyzed plaintiffs' demand futility allegations with respect to the board of directors in
As the superior court noted in its order, plaintiffs' direct allegations of demand futility extend to defendants Campbell, Cook, and Levinson, based on evidence that they knew of and consented to or acted upon the nonrecruitment policies. Assuming without deciding that the allegations are adequate to establish demand futility as to these three individuals,
Petitioners maintain that plaintiffs cannot allege demand excusal with respect to these directors and instead resort to generalized allegations that are insufficient as a matter of law. They contend that the superior court improperly relied on generalized allegations to infer futility as to a majority of the Apple board, flouting the requirement that a plaintiff establish demand futility through particularized allegations on a director-by-director basis. Petitioners also challenge the notion that general knowledge of Apple's nonsolicitation practices — if such knowledge could be attributed to Iger, Gore, and/or Jung — renders the director incapable of fairly evaluating claims related to those practices. They argue that while nonsolicitation agreements between companies may implicate antitrust issues, knowledge of a unilateral policy by Apple to refrain from cold-calling (e.g., Apple's "Hands Off (Do Not Call List)") invokes no antitrust concerns.
Plaintiffs respond that the allegations of the operative complaint are sufficient to establish demand futility as to a majority of the 2016 Board, including Iger, Gore, and Jung. They argue that since knowledge can be
We independently review the sufficiency of the demand futility pleading. (Bader, supra, 179 Cal.App.4th at p. 786.) Plaintiffs' allegations focus substantially on the threatening force that Apple cofounder and former CEO Steve Jobs exerted in negotiating and enforcing nonsolicitation agreements with heads of companies, including many that appeared on Apple's "Hands Off" list and his "`tight control'" over the Apple directors and outspoken belief that companies in business relationships should not hire each other's technical people. Plaintiffs claim that particularized allegations showing that defendants Campbell, Levinson, and Schmidt knew about Apple's policies and practices, combined with Jobs's aggressive backing of the policies and sway over board members, are sufficient to establish knowledge on the part of the entire Apple board.
Plaintiffs further rely on allegations of the directors' close personal and business ties with Jobs, particularly as to Cook, Levinson, and Iger, who became Disney's CEO in 2005 and formed a relationship with Jobs around that time, when he approached Jobs (who was then Pixar's CEO) about a Disney/Pixar acquisition. Plaintiffs allege that Iger and Jobs maintained a close personal relationship thereafter, evidenced by Iger's willingness to keep secret Jobs's recurrence of cancer in 2006 despite his fiduciary duty to Disney to disclose matters material to Disney's Pixar acquisition. Plaintiffs contend that these allegations support the inference that the board knew about the anticompetitive policies and suggest the directors "could not be impartial in deciding to bring a lawsuit which would tarnish" Jobs's legacy.
We find these allegations, viewed in their context and in light of the complaint as a whole (Bader, supra, 179 Cal.App.4th at p. 786), insufficient to support an inference of lack of disinterest or independence, at least as to directors Gore and Jung. The allegations regarding Gore and Jung do not extend beyond each of their general roles as a director and member of the compensation committee. The facts alleged about the committee's activities are unremarkable (e.g., overseeing compensation programs, approving salary and merit increase budgets, soliciting market research on Apple's competitiveness in compensation programs, and seeking shareholder approval for increasing employee stock-based compensation) and do not suggest the committee was informed — either directly or indirectly — of the agreements.
For example, the allegations that plaintiffs claim support an inference that Gore "knew or was reckless in not knowing about the anticompetitive agreements and practices at Apple" include Gore's attendance at meetings in which recruiting and retention issues were discussed, e-mail correspondence in which Apple's vice-president for human resources informed the committee about the competitiveness of Apple's compensation and benefits programs and requested consent "`to increase our annual grant pool...,'" and Gore's presence at the May 2006 board meeting when Jobs informed the board of what the complaint calls the "Apple/Pixar (Disney) Agreement."
We also are not persuaded that knowledge of Apple's nonsolicitation practices and allegedly anticompetitive agreements with other companies can be imputed to Gore and Jung, for purposes of establishing demand futility, merely because they served on the board or the compensation committee alongside directors who are the subject of more direct allegations. Plaintiffs' reliance on a footnote in an unpublished Court of Chancery case for this proposition is unavailing. (See Saito, supra, 2004 Del.Ch. Lexis 205 at p. *33, fn. 68 [inferring that several directors' awareness of accounting irregularities "was communicated to the other" board members in connection with a merger].) Whereas here, the allegations pertaining to the compensation committee suggest standard activities to oversee and adjust Apple's compensation practices in a highly competitive industry, the allegations in Saito indicated that accounting practices amounting to "at least a $40 to $55 million problem" were discussed by the audit committee in the midst of merger negotiations and were conveyed to the board of the merger partner, which nonetheless failed to react. (Id. at p. *34.) In the absence of any facts to suggest the compensation committee was informed of Apple's nonsolicitation practices affecting recruitment and hiring, there is no basis to infer knowledge on the part of Gore or Jung.
To be clear, our conclusion regarding Gore and Jung is based on the absence of any particularized factual allegations to support an inference of even general knowledge about the purportedly anticompetitive agreements with other companies, let alone knowledge or involvement sufficient to disable them from fairly considering plaintiffs' claims. This is particularly true where Gore and Jung held no "overlapping" board positions with companies listed on Apple's "Hands Off" list, are not alleged to have had close personal or business relationships with individuals directly implicated by plaintiffs' allegations, and are not alleged to lack independence or to suffer "`a substantial likelihood'" of liability in connection with the anticompetitive conduct.
Thus, particularized allegations of pervasive and continued corporate misconduct can support an inference of board knowledge and intentional disregard for purposes of assessing demand futility, particularly where the conduct relates to a product or policy "critical to a company's success" or "of special importance to it." (Rosenbloom v. Pyott (9th Cir. 2014) 765 F.3d 1137, 1154.) The Ninth Circuit Court of Appeals, interpreting Delaware case law, recently reaffirmed this principle in Rosenbloom, which the superior court cited as support for its conclusion that direct allegations regarding knowledge of Apple's nonrecruitment practices and agreements on the part of a few directors supports a pleading stage inference that the other board members "knew of and condoned" the agreements. But whereas "a battery of particularized factual allegations" in Rosenbloom suggested that the board of the nominal defendant pharmaceutical company approved a strategic plan premised on the unlawful promotion of off-label sales of the drug Botox and closely monitored the increase in off-label sales over a period of years (id. at p. 1152), plaintiffs' allegations in this case do not support an inference of either centralized action or conscious inaction on the part of the Apple board. At most, we concur with the superior court's inclination that particularized allegations regarding director Iger — based on his relationship with Jobs and on the testimony of Apple's vice-president for human resources, which suggested the timing of Apple's nonsolicitation agreement with Pixar was linked with Disney's acquisition of Pixar and Jobs's "`coming on the board at Disney'" — supported a "reasonable inference" that Iger "knew of the
Since the operative complaint does not allege that demand would have been futile as to directors Sugar, Wagner, and Bell, and we have found the allegations insufficient to disqualify directors Gore and Jung from fairly exercising "`independent and disinterested business judgment in responding to a demand'" (Bader, supra, 179 Cal.App.4th at p. 797), we conclude that plaintiffs have failed to adequately plead excuse from the demand requirement (§ 800(b)(2)) as to a majority of Apple's eight-member board of directors. Consequently, petitioners' demurrer to the operative complaint must be sustained.
We cannot conclude on the record before us, however, that there is no reasonable possibility that plaintiffs can allege demand futility as to the required number of Apple board members. (Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 39 [77 Cal.Rptr.2d 709, 960 P.2d 513] [leave to amend must be granted where "there is a reasonable possibility that the defect can be cured by amendment"].) Given the procedural posture of the case and the superior court's early indication that it would assess demand futility as of the time the original derivative actions were filed, plaintiffs were never directed to the correct point of reference for their pleading.
We take guidance on this point from our Supreme Court, which has explained that while "[d]enial of leave to amend is not unusual following writ review of an overruled demurrer, ... [citation] ..., leave to amend is properly granted where resolution of the legal issues does not foreclose the possibility that the plaintiff may supply necessary factual allegations. [Citation.] If the plaintiff has not had an opportunity to amend the complaint in response to the demurrer, leave to amend is liberally allowed as a matter of fairness, unless the complaint shows on its face that it is incapable of amendment." (City of Stockton v. Superior Court, supra, 42 Cal.4th at
Let a peremptory writ of mandate issue directing respondent superior court to vacate its order of October 5, 2016, overruling petitioners' demurrer to the first and fifth causes of action of the second amended consolidated shareholder derivative complaint, and to enter a new order sustaining the demurrer as to those causes of action, with leave to amend. The temporary stay order is vacated. Costs in this original proceeding are awarded to petitioners.
Elia, Acting P. J., and Grover, J., concurred.
Composition of Apple's Board of Directors As of the original Sugar Jung Gore IgerCampbell Drexler Levinson Cook derivative actions: As of the operative Sugar Jung Gore Iger Wagner BellLevinson Cook complaint:
So too, when parties dispute whether California or Delaware law governs a derivative action, courts may find it unnecessary to resolve the choice of law dilemma because the outcome under both is the same. (See, e.g., Schuster v. Gardner (2005) 127 Cal.App.4th 305, 312 [25 Cal.Rptr.3d 468] [deeming complaint a derivative action "under either California or Delaware law"].) Our Supreme Court took this approach in analyzing a shareholder's standing to pursue derivative claims on behalf of a Delaware corporation that was based in San Diego. (Grosset, supra, 42 Cal.4th at pp. 1104, 1106-1107.) The court found it unnecessary to resolve the dispute over the application of Delaware or California law, concluding "that California law, like Delaware law, generally requires a plaintiff in a shareholder's derivative suit to maintain continuous stock ownership throughout the pendency of the litigation." (Id. at p. 1119.)
