The opinion of the court was delivered by: Louis Stanton, District Judge
Defendants SBC Communications, Inc. ("SBC") and its individual directors move pursuant to Fed.R. Civ. p. 12(b)(6) and 12(b)(1) to dismiss the complaint in this shareholders' derivative action. The complaint asserts a federal claim of distribution of a false and misleading proxy solicitation for SBC's 2002 Annual Meeting, in violation of § 14(a) of the Exchange Act, 15 U.S.C. § 78n(a), and cognate Rule 14a-9, 17 C.F.R. § 240.14a-9, and a state law claim of breach of fiduciary duties by awarding excessive compensation to SBC's directors and to Edward F. Whitacre, Jr., a director and SBC's Chief Executive Officer.
Defendants seek dismissal of the complaint for failure to make a pre-suit demand on the Board, and for failure to state a claim upon which relief may be granted.
The factual allegations in the complaint are accepted as true and all reasonable inferences from the facts are drawn in the plaintiffs' favor. Gant v. Wallingford Bd. of Educ., 69 F.3d 669, 673 (2d Cir. 1995). A complaint should not be dismissed for failure to state a claim unless "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Id. Merely conclusory assertions, however, will not suffice to defeat a motion to dismiss, and the proxy statement (and other documents integral to plaintiffs' claims) may be considered in connection with the motion. Faulkner v. Verizon Communications, Inc., 189 F. Supp.2d 161, 168 (S.D.N.Y. 2002)
Federal Claim for False or Misleading Proxy Statement
The purpose of requiring a demand upon the board of directors before proceeding with derivative litigation is to obtain the business judgment of the board on whether the litigation is in the best interests of the corporation and its shareholders. The requirement is appropriate, for example, where the litigation involves a transaction presenting questions of business judgment, where a court should be reluctant to substitute its judgment for that of the corporation's legitimate management.
That purpose has little bearing on a claim that a proxy statement makes a false assertion or an insufficient disclosure. Such questions are normally determined without particular need for business judgment, and the courts decide them as a matter of course. Whether a proxy statement properly omitted an item is regarded as a question of materiality, not one protected by the business judgment rule. Thus, in In re Tri-Star Pictures, Inc. Litig., Civ. No. 9477, 1990 WL 82734, at *8 (Del. Ch. June 14, 1990), the Delaware Chancery Court stated that subjecting proxy disclosure claims to a demand requirement
would be inconsistent with Delaware case law holding
that the business judgment rule does not apply to
". . . the question whether shareholders have, under the
circumstances, been provided with appropriate
information upon which an informed choice on a matter
of fundamental corporate importance may be made. . . ."
In In re Anderson, Clayton Shareholders' Litigation, 519 A.2d 669, 675 (Del. Ch. 1986), the Delaware Court of Chancery stated:
First, and most importantly, the question whether
shareholders have, under the circumstances, been provided
with appropriate information upon which an informed
choice on a matter of fundamental corporate importance
may be made, is not a decision concerning the management
of business and affairs of the enterprise (8 Del. C. §
141(a)) of the kind the business judgment rule is
intended to protect; it is rather a matter relating to
the directors' duty to shareholders who are technically
outside of the corporation. . . .
Less technically, decisions dealing with the quality of,
and the circumstances surrounding, disclosures are not
inherently of the kind which courts are ill suited to
treat on their merits.
Federal courts in this circuit apply the Delaware law. See Katz v. Pels, 774 F. Supp. 121
, 127 & n. 5 (S.D.N.Y. 1991); Estate of Detwiler v. Offenbecher, 728 F. Supp. 103, 150 n. 18 (S.D.N.Y. 1989) ("Plaintiffs correctly contend that the business judgment rule does not apply to allegations regarding misrepresentations or omissions in a proxy statement," citing In re Anderson.)
In Galef v. J.A. Alexander, 615 F.2d 51, 63-64 (2d Cir. 1980), the Second Circuit stated:
The role of management in educating the stockholder
sufficiently to allow him to cast an intelligent vote
is unique. Those managing the corporation have the
greatest access to relevant factual information. They
have most clearly in mind the corporation's long-range
plans. These factors and the directors' status as
fiduciaries usually cause stockholders to give
statements from management greater weight than they
accord to the statements of corporate dissidents.
Obviously the goal of § 14(a) that communications from
management be accurate and complete as to all material
facts is a vital one. Its achievement would be quite
clearly frustrated if a director who was made a
defendant in a derivative action for providing
inadequate information in connection with a proxy
solicitation were permitted to cause the dismissal of
that action simply on the basis of his judgment that
its pursuit was not in the best interests of the
corporation. The very premises which give life to a
derivative right of action to enforce § 14(a) must
save it from a premature death. In short, we conclude
that to the extent that a complaint states claims
against directors under § 14(a) upon which relief may
be granted, federal policy prevents the summary
dismissal of those claims pursuant to the business
judgment of those defendant directors.
Thus, under Delaware law and federal policy, there is no need for prior demand upon the board of directors with respect to the claim of misstatements and omissions in the proxy statement.
B. Merits of the Claim under Section 14(a)
The elements of a Section 14(a), Rule ...