2. Wrongfulness of Refusal.
As an alternative basis for my decision, I also find that the plaintiff has failed to plead with particularity that the board's refusal of his demand was wrongful. In a shareholder derivative suit, in order to conform to the requirements of Rule 23.1, the shareholder plaintiff is required to allege with particularity "legally sufficient reasons to call into question the validity of the Board of Directors' exercise of business judgment." Allison, 604 F. Supp. at 1121; see also Levine, 591 A.2d at 211 (plaintiff must plead with particularity, in accordance with Federal Rule 23.1, facts creating a reasonable doubt that a board's decision is protected by the business judgment rule). The Second Circuit has commented that, under Delaware law, the directors' decision "will be shielded by the business judgment rule unless the shareholder plaintiff can carry the considerable burden of showing that the decision not to bring the lawsuit . . . was based on an unreasonable investigation." RCM, 928 F.2d at 1328. The RCM court noted that "few, if any, plaintiffs surmount this obstacle." Id.
Once the shareholder plaintiff makes a demand upon the directors before filing suit, he or she loses the ability to claim demand futility: "A shareholder plaintiff, by making demand upon a board before filing suit, 'tacitly concedes the independence of a majority of the board to respond. Therefore, when a board refuses a demand, the only issues to be examined are the good faith and reasonableness of its investigation.'" Levine, 591 A.2d at 212 (quoting Spiegel v. Buntrock, 571 A.2d 767, 777 (Del. Supr. 1990)). In this case, plaintiff does not dispute the good faith of the Citicorp board, but rather the reasonableness of Citicorp's investigation of his demand. In the Levine court's words, the standard of "reasonableness implicates the business judgment rule's requirement of procedural due care; that is, whether [the Citicorp board] acted on an informed basis in rejecting [Levner's] demand." Id. at 213.
Even assuming arguendo that plaintiff had made an adequate demand upon the Citicorp board, the issue becomes whether the board's refusal of that demand was wrongful. The only assertion of the amended complaint on this issue is that Citicorp's Executive Vice President of Legal Affairs "refused plaintiff's demand on the basis of a letter issued by Alwaleed's attorneys." (Amended Complaint P 18.) Plaintiff did not make any allegations as to what was in this letter, whether the board relied on the letter, or why any such reliance would be inappropriate. Thus, the amended complaint fails to assert with particularity that the board's refusal of the demand was wrongful. In addition, from the face of the amended complaint, it is evident that the Citicorp board did not make an uninformed decision to refuse to take action and, in fact, did initiate an investigation into this matter.
Even a charitable review of the allegations of the amended complaint fails to rebut the presumption that the refusal is protected by the business judgment rule. See Ryan v. Aetna Life Ins. Co., 765 F. Supp. 133, 139 (S.D.N.Y. 1991) (finding that the board's decision is subject to a gross negligence standard under Delaware law). Because the allegations of the amended complaint are insufficiently particular and fail to raise any legally sufficient reasons to doubt the adequacy of the board's investigation of Levner's demand, the motion to dismiss Counts II through IV alternatively is granted on this ground.
3. Leave to Replead.
Under Fed. R. Civ. P. 15(a), leave to amend "shall be freely given when justice so requires." Reasons to deny leave to amend include undue delay, bad faith, repeated failure to cure deficiencies by amendments previously allowed and futility of the amendment. See Foman v. Davis, 371 U.S. 178, 182, 9 L. Ed. 2d 222, 83 S. Ct. 227 (1962). Defendants argue that granting leave to amend in this case would be futile, and, therefore, should be denied.
Plaintiff attaches the proposed second amended complaint in support of its motion for leave to amend. (Affidavit of Sidney B. Silverman Sworn to on July 6, 1993 ("Silverman Aff.").) The proposed second amended complaint newly asserts that after receiving the demand refusal letter, "plaintiff discussed with defendant Citicorp's attorneys, the new claims asserted in the first amended complaint." (Proposed Second Amended Complaint P 20.) During these discussions, plaintiff allegedly disclosed confidential information that Alwaleed was acting on behalf of others. Id. Plaintiff allegedly also requested that "a demand be conveyed to defendant Citicorp" to take action with respect to the claims set forth in the amended complaint. Id. It is alleged further that Citicorp "agreed to consider plaintiff's demands," and on May 27, 1993, Citicorp informed plaintiff that his demand was denied in all respects. Id. The proposed second amended complaint next alleges that this refusal was wrongful because "demand was refused on grounds that made it clear that the directors did not, and could not have made an adequate investigation of the information given Citicorp by plaintiff's counsel as required by Delaware law." (Proposed Second Amended Complaint P 21.) Once again, however, the plaintiff fails to allege which "grounds" show that an inadequate investigation was made.
As stated above, bare conclusory allegations of wrongful refusal will not satisfy the pleading requirements of Rule 23.1. See Allison, 604 F. Supp. at 1122. Although the allegations in the proposed second amended complaint regarding wrongfulness of refusal are more lengthy than those contained in the amended complaint, they are no more particular. Instead, once again, the allegations are conclusory and not supported by specific facts sufficient to create a reasonable doubt that Citicorp acted in an informed manner. See, e.g., Levine, 591 A.2d at 213 (allegations arguably more particularized than those contained here found insufficient). Accordingly, I find that leave to amend would be futile; plaintiff's motion for leave to amend the complaint, therefore, is denied. See, e.g., Ruffolo v. Oppenheimer & Co., 987 F.2d 129, 131 (2d Cir. 1993) (court should deny leave to amend where the grant would be futile); Heineman v. Datapoint Corp., [1991-1992 Transfer Binder] Fed. Sec. L. Rep. (CCH) P 96,529, at 92,428 (Del. Ch. Dec. 23, 1991) ("to permit him 'another bite out of the apple' now would negate one of the purposes of Rule 23.1, which is to permit the Court to promptly dispose of meritless litigation").
B. Section 16(b) Claim.
Defendant Alwaleed moves for summary judgment on plaintiff's § 16(b) claim, 15 U.S.C. § 78p(b), which is contained in Count I of the amended complaint. Under Rule 56(c), summary judgment
shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.
Fed. R. Civ. P. § 56(c); see Anderson v. Liberty Lobby, 477 U.S. 242, 250, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986). The substantive law identifies those facts that are material. See Anderson, 477 U.S. at 250. The moving party has the burden of demonstrating that no genuine issue of fact exists. See Heyman v. Commerce & Indus. Ins. Co., 524 F.2d 1317, 1320 (2d Cir. 1975). In determining whether any genuine issue of material fact is presented, a court must resolve all ambiguities, and draw all reasonable inferences, against the moving party. See Gladstone v. Fireman's Fund Ins. Co., 536 F.2d 1403 (2d Cir. 1976); Walther v. Bank of New York, 772 F. Supp. 754 (S.D.N.Y. 1991).
Once the moving party demonstrates the absence of a material issue of fact, the burden shifts to the nonmoving party to come forward with "specific facts showing that there is a genuine issue for trial." Fed. R. Civ. P. 56(e). The nonmoving party "must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Electrical Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87, 89 L. Ed. 2d 538, 106 S. Ct. 1348 (1986). "Only when no reasonable trier of fact could find in favor of the nonmoving party should summary judgment be granted." Cruden v. Bank of New York, 957 F.2d 961, 975 (2d Cir. 1992).
Section 16(b) imparts strict liability upon a "beneficial owner" of common stock who realizes a profit from any purchase and sale, or any sale and purchase, of such stock within a period of less than six months.
Section 16(a) defines a beneficial owner as "every person who is directly or indirectly the beneficial owner of more than 10 per centum of any class of any equity security." In addition, one who has the right to acquire more than 10% of common stock, e.g., through a hypothetical conversion of presently convertible securities, is also deemed a beneficial owner. See 15 U.S.C. § 78c(a)(11); see, generally, Chemical Fund v. Xerox Corp., 377 F.2d 107, 111-12 (2d Cir. 1967); American Standard v. Crane Co., 346 F. Supp. 1153 (S.D.N.Y. 1972), rev'd on other grounds, 510 F.2d 1043 (2d Cir. 1974), cert. denied, 421 U.S. 1000, 44 L. Ed. 2d 667, 95 S. Ct. 2397 (1975); 17 C.F.R. § 240.13d-3(d), as amended by SEC Exchange Act Release No. 14692.
In this case, it is undisputed that Alwaleed owns 4.8% of Citicorp common stock. It is also undisputed that pursuant to the Purchase Agreement between Citicorp and Alwaleed, Alwaleed acquired 11.8 million depository shares in Citicorp each representing one/two-thousandth of a share of Citicorp's Series 12 convertible preferred shares, amounting to 5,900 shares of convertible preferred stock. Finally, it is undisputed that the 5,900 shares of preferred stock were convertible into 36,875,000 shares of common stock, representing approximately 9.2% of common stock. If converted, therefore, Alwaleed would be the beneficial owner of approximately 14% of Citicorp common stock.
Defendant argues that the terms of the Purchase Agreement and the legal requirement of prior approval of the Federal Reserve Board ("FRB") represent material contingencies preventing the Court from assuming that Alwaleed is the beneficial owner of the shares he would be entitled to own if these contingencies were satisfied. See, e.g., Transcon Lines v. A.G. Becker, 470 F. Supp. 356, 371 (S.D.N.Y. 1979) (exercise of right to beneficial ownership contingent on a future event and therefore defendant not deemed beneficial owner in context of § 13(d) claim).
Plaintiff contends that FRB approval pursuant to Board regulations
is required only to acquire convertible securities, but not for the right to convert the preferred into common. Therefore, plaintiff argues, because Alwaleed already had acquired the convertible stock, there was no material contingency preventing Alwaleed from converting his preferred stock.
Resolving this motion requires a review of the somewhat tangled factual history regarding Alwaleed's business transactions with Citicorp. On February 21, 1991, Alwaleed and Citicorp entered into the Purchase Agreement, pursuant to which Alwaleed purchased 11,800,000 depository shares. Under § 8 of the Purchase Agreement, Alwaleed covenanted, inter alia, that he would not acquire beneficial ownership of more than 10% of Citicorp common stock for the Standstill Period ("Standstill Agreement"). (Declaration of Thomas J. Pax, Ex. 1 ("Pax Decl.").) The Stand-still Period expires at the earliest of (a) five years, (b) the occurrence of any time at which dividends payable on the preferred stock are in arrears for two consecutive dividend periods (not less than 180 days), or (c) the occurrence of a Significant Event.
Immediately prior to February 21, 1991, Alwaleed's representatives discussed the above transaction with the staff of the Board of Governors of the Federal Reserve System (the "Board"). (Pax Decl., Ex. 5.) Alwaleed requested a determination by the Board that the acquisition of the convertible preferred stock would not require either Board approval or the prior filing of a Notice of Change in Bank Control, pursuant to 12 U.S.C. § 1817(j)) and 12 C.F.R. 225.41 ("Notice"). (Pax Decl., Ex. 6.) In making its determination, the Board considered the limitations placed on Alwaleed's actions pursuant to the agreement with Citicorp such that
the preferred shares are convertible only if, upon conversion, the shares, combined with any voting common stock of Citicorp owned by the holder, represent less than 10 percent of the voting common stock of Citicorp."