MEMORANDUM OPINION

GLASSCOCK, Vice Chancellor.

A stockholder directs her attorney to investigate her corporation's activities, then sends the board of directors a demand letter stating that, in the opinion of the stockholder, the corporation is violating the law. The corporation takes action in response, arguably working a benefit on all stockholders. Is the stockholder entitled to have her attorneys' fees reimbursed under the corporate benefit doctrine?

Our law provides that if the actions of the board of directors were such that, at the time a demand was made, a suit based on those actions would have survived a motion to dismiss, and a material corporate benefit resulted, the attorneys' fees incurred by the stockholder may be recovered despite the fact that no suit was ever filed. If, on the other hand, the stockholder has simply done the company a good turn by bringing to the attention of the board an action that it ultimately decides to take, she is not entitled to coerced payment of her attorneys' fees by the stockholders at large. Finding that the demand at issue here falls into the latter category, I decline to shift fees onto the corporation and its stockholders.

I. FACTS

1. The Parties

Astoria Financial Corporation ("Astoria," or the "Company") is a publicly-traded Delaware corporation engaged primarily in the operation of its wholly-owned subsidiary, Astoria Federal, whose business includes "attracting retail deposits from the general public and businesses and investing those deposits, together with funds generated from operations, principal repayments on loans and securities and borrowings, primarily in one-to-four family, or residential, mortgage loans, multi-family mortgage loans, commercial real estate mortgage loans and mortgage-backed securities"1—in other words, banking.

The Plaintiff in this action is the custodian of Astoria common stockholder Malka Raul UTMA, NY.

2. Dodd-Frank and "Say On Pay"

In July 2010, "in response to the worst financial crisis since the Great Depression,"2 Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"). Targeted at regulation of the financial services industry, ostensibly "in an attempt to restore responsibility and accountability in our financial system,"3 Dodd-Frank imposed broad new regulation of approval and disclosure of corporate executive compensation decisions. Of importance in the present action, Section 951 of Dodd-Frank amended the Securities Exchange Act of 1934 to include Section 14A, governing shareholder approval of executive compensation. Section 14A provides, in part:

In other words, the so-called "Say On Pay" provisions under Dodd-Frank require companies to submit to their stockholders non-binding votes (1) to approve the compensation arrangements of company executives (the "Say-On-Pay Vote"), and (2) to determine whether future stockholder advisory votes on executive compensation should occur every one, two, or three years (the "Frequency Vote").

In addition to requiring that a company hold a Say-On-Pay Vote and Frequency Vote, Dodd-Frank requires companies to make certain disclosures with respect to those votes once completed. Two such disclosures are at issue in this litigation, including (1) a requirement that the company disclose in its Form 8-K the results of the Frequency Vote, as well as its decision, in light of that vote, on how frequently future Say-On-Pay Votes will be held, and (2) a requirement that the company disclose in its proxy statement whether, and if so, how, its board considered the results of the Say-On-Pay Vote when making compensation decisions.

Specifically, Form 8-K, Item 5.07(b) requires a company to "state the number of votes cast for each of 1 year, 2 years, and 3 years," while Item 5.07(d) provides that:

Further, Regulation S-K, Item 402(b)(1)(vii) requires disclosure, in a company's proxy statement, of:

The parties dispute whether Astoria's board satisfied those disclosure requirements following the Company's 2011 annual meeting.

3. Astoria's 2011 Annual Meeting

Less than a year after the July 2010 enactment of Dodd-Frank, on May 18, 2011, Astoria held an annual meeting. In connection with that meeting, on April 11, 2011, the Astoria board submitted a proxy statement (the "2011 Proxy Statement") informing stockholders of the Company's intention to hold the Company's first Say-On-Pay Vote and Frequency Vote. The 2011 Proxy Statement described the executive compensation packages for which the Company sought approval, and included the Astoria board's recommendations that the stockholders (1) vote to approve the executive compensation packages, and (2) vote to hold future Say-On-Pay Votes annually.

At the May 18, 2011 annual meeting, approximately 65% of stockholders voted to approve Astoria's executive compensation, and roughly 74% of stockholders voted to hold future Say-On-Pay Votes annually, in both cases as the board had recommended. After receiving the results of those votes, Astoria filed a Form 8-K. Pursuant to Item 5.07, the Company disclosed:

Despite the Defendant's contention that the italicized language above sufficiently informed Astoria's stockholders of the results of the Frequency Vote, according to the Plaintiff, the language cited above was insufficient to meet the disclosure requirements articulated in Item 5.07.

4. Astoria's 2012 Annual Meeting

Several months later, on April 6, 2012, as its next annual meeting approached, Astoria disseminated a second proxy statement (the "2012 Proxy Statement") to its stockholders. As in 2011, the 2012 Proxy Statement sought the Astoria stockholders' non-binding approval of Astoria's executive compensation pursuant to a new 2012 Say-On-Pay Vote. In addition, as in the preceding year, the 2012 Proxy Statement described the compensation packages at issue, as well as the board's recommendation that the stockholders approve Astoria's executive compensation arrangements. The Plaintiff contends, however, that the 2012 Proxy Statement did not disclose whether, and if so, how, the Astoria board considered the results of the prior 2011 Say-On-Pay Vote in making its executive compensation decisions.

5. The Plaintiff's Demand

Ten days after Astoria disseminated its 2012 Proxy Statement, on April 16, 2012, the Plaintiff sent a demand letter (the "Demand") to the Astoria board. In that Demand, the Plaintiff asserted that, "[i]n violation of Securities and Exchange Commission (`SEC') regulation disclosure standards and the Astoria Board's duty of candor," the Astoria board "concealed material and required information concerning the Company's executive compensation policies and practices in the 2012 Proxy Statement"8 by failing to disclose "whether, and if so, how, the Astoria Board considered the results of the 2011 say-on-pay vote."9 Further, the Plaintiff explained that, "[i]n violation of SEC rules, the Company has failed to disclose how frequently it has decided to hold future say-on-pay votes."10 In his Demand, the Plaintiff summarized his position as follows:

Accordingly, the Plaintiff demanded that the board (1) issue corrective disclosures, (2) adopt stronger protocols regarding disclosures, and (3) amend the Company's Compensation Committee Charter to require that Committee to consider the results of future Say-On-Pay Votes when making executive compensation decisions. The Demand did not request that the Company conduct any litigation.12

Astoria responded to the Plaintiff's Demand by letter dated May 3, 2012. That response explained:

The Company's May 3 letter also assured the Plaintiff that:

In fact, on September 19, 2012, Astoria's Compensation Committee did amend its Charter as requested by the Plaintiff.15

6. This Litigation

Following a denied request that Astoria pay attorneys' fees in connection with investigating and mailing his April 16, 2012 Demand, the Plaintiff filed his Complaint in this action on December 17, 2013, "seeking an equitable assessment of attorneys' fees,"16 and alleging that the Plaintiff's efforts to remedy the disclosure violations identified in his Demand conferred upon Astoria a benefit justifying an award of fees. On February 11, 2014, Astoria moved to dismiss the Complaint. I heard oral argument on that Motion on May 6, 2014.

In support of its Motion to Dismiss, Astoria contends that the Plaintiff is not entitled to an award of attorneys' fees under the corporate benefit doctrine, as the Plaintiff never (1) presented a meritorious claim to the Astoria board or (2) conferred any benefit on the corporation. In response, the Plaintiff contends that under the corporate benefit doctrine, the Plaintiff is entitled to recover attorneys' fees for the successful resolution of his Demand, as it presented a meritorious claim for breach of fiduciary duty, and conferred a benefit on the Astoria stockholders by bringing the Company into compliance with applicable law.

II. STANDARD OF REVIEW

Under Court of Chancery Rule 12(b)(6), this Court must deny a motion to dismiss for failure to state a claim upon which relief may be granted where "the well-pled factual allegations of the complaint would entitle the plaintiff to relief under a reasonably conceivable set of circumstances. . . ."17 In considering such a motion, I must "accept the well-pleaded allegations of fact in the complaint as true and draw all reasonable inferences that logically flow from those allegations in the plaintiff's favor."18 I am not required, however, to "blindly accept conclusory allegations unsupported by specific facts," or to "draw unreasonable inferences in the plaintiffs' favor."19

III. ANALYSIS

The Plaintiff here seeks recovery of attorneys' fees and costs in connection with his pre-suit investigation and Demand. Under the corporate benefit doctrine as it applies to moot claims, a plaintiff may receive attorneys' fees where "(i) the [underlying cause of action] was meritorious when filed; (ii) the action producing benefit to the corporation was taken by the defendants before a judicial resolution was achieved; and (iii) the resulting corporate benefit was causally related to the lawsuit."20 Our Courts have understood the requirement that an underlying claim be "meritorious when filed" to mean only that when presented to the board, the underlying cause of action asserted by the plaintiff was meritorious; a plaintiff need not have filed an underlying action in the Court of Chancery to recover fees.21

The corporate benefit doctrine, an exception to the American Rule under which each side bears its costs, is premised on the idea that, "where a litigant has conferred a common monetary benefit upon an identifiable class of stockholders, all of the stockholders should contribute to the costs of achieving that benefit."22 Where applicable, the corporate benefit doctrine promotes private enforcement of fiduciary breaches; through this fee-shifting mechanism, our legal system incentivizes private actors to police corporate misconduct where, in the absence of such a mechanism, "there [would] be less shareholder monitoring expenditures than would be optimum [for] the shareholders as a collectivity."23 But, "[o]f course, [private enforcement] itself suffers from deep agency problems,"24 and the requirement that there exist a meritorious claim when filed, and not merely a corporate benefit, operates to further protect stockholder interest under our corporate model, in which the board, not the stockholders, are responsible for managing the corporation.25

Under this model, our Courts adjudicate corporate wrongdoing, not directors' exercise of their discretion. The availability of cost-shifting for a corporate benefit conferred, unrelated to a meritorious claim, was closely considered nearly twenty years ago by then-Chancellor Allen in Bird v. Lida. That scholarly and thoughtful analysis cannot be improved upon here. I add only that where a volunteer stockholder (or non-stockholder, for that matter) notifies directors, not that they are in breach of their duties, but simply that they have missed a corporate opportunity or should avoid a corporate loss, the consideration of such a notification is a board, not a Court, affair. If the board takes action resulting in a corporate benefit, such that it believes the stockholders at large would have consented to paying the volunteer for his investigation ex ante, the directors may have an incentive to reward the volunteer ex post, and may thereby promote not only equity but efficient levels of volunteer-monitoring in the future, as the directors find appropriate. It is only where a benefit results from a demand to address corporate wrongdoing under Rule 23.1, however, that it is appropriate for the Court to intervene in the equitable distribution of the costs among all stockholders, consistent with the Court's role as an adjudicative body. Consider a stockholder who investigates and provides notice of leaking drums of chemicals stored at a corporate site. Assume that the circumstances are such that no actionable breach of duty has taken place by a corporate director or officer in connection with the leaks. The stockholder through his attorney files a demand with the board that action be taken to correct the situation, after which the corporation investigates and rectifies the leak, saving the corporation loss of product and potential legal liability. The board may decide to reward the stockholder, in its discretion. But the stockholder would not be able to cause the Court to force the corporation to reimburse his costs, legal or otherwise, because he was a mere volunteer, presumably acting in his own interest. The sharing of that stockholder's costs—as well as the resulting benefits—among the stockholders at large may appear efficient, or "fair," but this Court is not a general enforcer of either of those qualities outside the context of litigation within its purview. The costs of litigation may equitably be distributed by the Court, consistent with its jurisdiction; and equitable distribution of legal costs where a meritorious action is mooted before litigation commences is but a corollary of the equitable distribution of litigation expenses. But a general allocation of the costs incurred by good Samaritans untethered to a meritorious (actual or potential) cause of action would drastically expand the jurisdiction of this Court, and usurp a core function of the board of directors.

In that light, the stockholder in the hypothetical above would no more be entitled to compel payment of his costs than would a stockholder/treasure-hunter whose research enabled her to reveal to the board that a treasure trove was buried on the grounds of corporate headquarters. To hold otherwise would be to license each stockholder to decide how much oversight must be devoted to any given corporate activity, and, when a benefit results, shift the cost to the corporation. But, so long as the board acts consistent with its fiduciary duties,26 what resources to devote to oversight—whether for the inspection of storage containers or the search for buried treasure—is a core board function, and not a stockholder function. Only where the stockholder has acted on behalf of the corporation because those whose duty it is to act, the directors, have breached their fiduciary duties, will the stockholder be entitled to compel payment of fees and costs by the stockholders generally, via the equitable power of this Court.27

The state of our law remains as set forth by Chancellor Allen in Bird: the "presentation of a meritorious corporate claim by a shareholder" is a requisite element of a claim for reimbursement under the corporate benefit doctrine.28 In that regard, under our case law, "[a] claim is meritorious within the meaning of the rule if it can withstand a motion to dismiss on the pleadings if, at the same time, the plaintiff possesses knowledge of provable facts which hold out some reasonable likelihood of ultimate success."29

The Defendant here contends that the Plaintiff has failed to identify a meritorious underlying cause of action justifying a fee award under the corporate benefit doctrine. While the Plaintiff generally asserts that the Astoria board breached its fiduciary duties by failing to comply with the disclosure requirements under Dodd-Frank, he does not fully articulate the legal bases underlying any fiduciary breach. I assume, for purposes of this Motion to Dismiss only, that a corporate benefit has resulted from the actions of the Plaintiff.30 In the remainder of this Memorandum Opinion, I consider whether the underlying allegations contained in the Plaintiff's Demand and Verified Complaint state a meritorious cause of action for breach of the duty of candor, loyalty, or care. For the reasons that follow, I find that the Plaintiff failed to present to the Astoria board any meritorious cause of action for breach of fiduciary duty, and accordingly grant the Defendant's Motion to Dismiss.

1. Duty of Candor

Under Delaware law, directors owe a fiduciary duty to "fully and accurately disclose all material information to stockholders when seeking stockholder action,"31 which duty arises out of a director's duties of both loyalty and care.32 As under the federal securities laws, information is material if, in the context of the "total mix" of information, a reasonable stockholder would consider it important in deciding how to act.33 To survive a motion to dismiss, "a pleader must allege that facts are missing from the statement, identify those facts, state why they meet the materiality standard and how the omission caused injury."34

As noted above, the Plaintiff fails in briefing to articulate the basis of the underlying fiduciary duty claim asserted in his Demand, nor does his Complaint identify such a basis.35 The Plaintiff's Demand itself, however, asserted that, "[i]n violation of [SEC] regulation disclosure standards and the Astoria Board's duty of candor,"36 the Astoria board failed to satisfy the disclosure requirements contained in Item 5.07(d) of Form 8-K as well as 17 C.F.R. § 229.402(b)(1)(vii).37 In other words, the Plaintiff challenged the board's failure to disclose (1) how the board considered the results of the 2011 Frequency Vote, and (2) whether and how the board considered the results of the 2011 Say-On-Pay Vote. I do not accept, however, that the underlying allegations in the Plaintiff's Demand presented a meritorious claim for breach of the duty of candor under Delaware law.

The Plaintiff has identified two purportedly actionable omissions, neither of which, in my view, rise to a level of a breach of the duty of candor. First, the Plaintiff suggests that a failure to disclose to the Astoria stockholders how the board considered the results of the 2011 Frequency Vote constituted a breach of the duty of candor. However, it is unclear to me how that information would be material to a reasonable stockholder given that the board (1) recommended in the 2011 Proxy Statement that stockholders vote to hold annual Say-On-Pay Votes; (2) disclosed in a subsequent 8-K that "[b]ased on the vote indicated below, the results of the future advisory shareholder votes to approve the compensation of the Company's named executives is every year;"38 and (3) disclosed in the 2012 Proxy Statement its intent to hold a second Say-On-Pay Vote. With that information available to the Astoria stockholders, I find that the board did not omit material information in its initial 8-K by failing to explicitly inform the stockholders that the results of the 2011 Frequency Vote showed that the stockholders had voted to hold future Say-On-Pay Votes annually, as the board had recommended, and that the board had accepted those results.

Similarly, whether and how the board considered the results of the 2011 Say-On-Pay Vote cannot be material as a matter of Delaware law. The Plaintiff can point to no authority indicating that, as a matter of Delaware law, every consideration underlying a board's approval of executive compensation must be disclosed. The supplemental disclosure made after the Demand—which the Plaintiff points to as a corporate benefit—itself provided only the boilerplate information that the board "was aware of a variety of factors, including the outcome of the advisory vote, when it authorized the changes, but no single factor was determinative."39 Known to the stockholders, before the Plaintiff sent his Demand and the board supplemented the 2012 Proxy Statement, was that (1) the board recommended certain compensation packages in 2011; (2) the board planned to "take into account the outcome of the vote when considering future executive compensation;"40 (3) a majority of the stockholders voted in favor of the board's recommendation;41 and (4) the board implemented those compensation decisions it had recommended and the stockholders had blessed.42 The proxy supplement, though in compliance with Dodd-Frank, is devoid of further content, and the failure to include the additional disclosures in the Company's 2012 Proxy Statement does not, in my view, constitute a material omission sufficient to demonstrate a breach of the duty of candor.

2. Caremark Claim

As the underlying facts of the Plaintiff's Demand and Complaint do not state a claim for breach of the duty of candor, neither do they state a claim for breach of the duty of good faith under the standard articulated in Caremark. As that case explained, "a director's obligation includes a duty to attempt in good faith to assure that a corporate information and reporting system, which the board concludes is adequate, exists, and that failure to do so under some circumstances may, in theory at least, render a director liable for losses caused by non-compliance with applicable legal standards."43 However, "only a sustained or systematic failure of the board to exercise oversight—such as an utter failure to attempt to assure a reasonable information and reporting system exists—will establish the lack of good faith that is a necessary condition to liability."44 As the Plaintiff's Complaint concedes, the Company's May 3, 2012 response to the Plaintiff's Demand indicated that Astoria "regularly evaluate[s] the adequacy of [its] compensation-related disclosures and related policies and procedures."45 Further, Plaintiff's counsel agreed at oral argument that he "wouldn't view this through a Caremark lens."46 As neither the Plaintiff's Complaint nor his Demand provides any basis to infer that the Astoria board utterly failed to institute procedures aimed at ensuring the Company satisfies applicable disclosure laws, I conclude that the Plaintiff's Demand failed to present to the Company a meritorious Caremark claim.

3. Good Faith

The underlying facts of the Plaintiff's Demand and Complaint also fail to present a meritorious claim for breach of the duty of good faith independent of a Caremark claim. In addition to situations "where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties," a fiduciary may also act in bad faith by "intentionally break[ing] the law," or by "intentionally act[ing] with a purpose other than that of advancing the best interests of the corporation. . . ."47 Neither the Plaintiff's Demand nor his Complaint provides the Court any basis to infer that, assuming the Astoria board did in fact violate disclosure requirements under Dodd-Frank, it did so intentionally.48 Rather, at oral argument, Plaintiff's counsel suggested that a meritorious underlying claim for breach of the duty of good faith may have existed because, had the board chosen to disregard the Plaintiff's Demand, the Plaintiff then could "have filed a complaint that said that by refusing the demand, the board now knew the violation of the federal securities law that existed and refused to remedy it. That is a decision to continue to violate the law."49 Of course, the corporate benefit doctrine requires the actual existence of a meritorious claim at the time a cause of action is filed or presented to the board—not the theoretical existence of a meritorious claim under circumstances that never came to fruition— and that argument accordingly must fail. As a result, I find that the Plaintiff presented no meritorious underlying claim for breach of the duty of good faith.

4. Duty of Care

Finally, I find that the Plaintiff's Demand and Complaint do not allege facts sufficient to state a meritorious claim for breach of the duty of care. As an initial matter, Astoria's Certificate of Incorporation contains a provision adopted pursuant to 8 Del. C. § 102(b)(7) exculpating directors for breaches of the duty of care.50 As a result, only a claim for injunctive relief, and not money damages, could theoretically state a claim for breach of the duty of care that could survive a motion to dismiss. Such a claim would be problematic, as it is unclear what injunctive relief would be available to the Plaintiff in this Court,51 or how the Plaintiff could demonstrate irreparable harm.

At any rate, even if Astoria's 102(b)(7) provision did not prevent the Plaintiff from pursuing a duty of care claim against the Astoria board, his Demand and Complaint contain no allegations indicating that the Astoria directors acted with gross negligence—reckless indifference to their responsibilities—sufficient to constitute a breach of the duty of care.52 To the contrary, the Plaintiff has not suggested that any action of the board amounted to gross negligence, nor did the Plaintiff identify a breach of the duty of care in his Demand, which noted only that "[b]ased on the foregoing, the Astoria Board breached its fiduciary duty of loyalty (and candor and good faith)."53 As a result, I conclude that the Plaintiff failed to assert a meritorious claim for breach of the duty of care in his Demand or Complaint.

IV. CONCLUSION

For the reasons explained above, I conclude that the Complaint fails to state a claim for entitlement to attorneys' fees under the corporate benefit doctrine. Evaluating the allegations of the Complaint and the Plaintiff's Demand, the Plaintiff has presented no underlying meritorious claim for breach of fiduciary duty. Accordingly, the Defendants' Motion to Dismiss is granted. An appropriate Order is attached.

ORDER

AND NOW, this 20th day of June, 2014,

For the reasons stated in my Memorandum Opinion of June 20, 2014, the Defendant's Motion to Dismiss is GRANTED, and this action is DISMISSED. SO ORDERED: