Chancery Provides Guidance on Rule 23.1 “With Particularity” Pleading Standard in Continuing Investors Bancorp Stock Awards and Options Dispute
Elburn v. Albanese, C.A. No. 2019-0774-JRS (Del. Ch. Apr. 21, 2020)
Finding that the stockholder plaintiff (the “Plaintiff”) had satisfied the Rule 23.1 “with particularity” pleading standard, the Court of Chancery declined to dismiss claims challenging an alleged quid pro quo arrangement between certain officers and the board of directors (the “Board”) at Investors Bancorp, Inc. (the “Company”) that had the effect of undoing and rendering meaningless the settlement (the “Settlement”) of a previous derivative action.
The Plaintiff brought a derivative action against the Company, the Board, as well as the CEO and COO (the “Executives”) (collectively, the “Defendants”) in 2016 (the “2016 Action”) alleging that the Board members had breached their fiduciary duties by approving certain stock awards (the “Awards”) benefitting all Board members, but primarily benefitting the Executives. The 2016 Action settled with the Executives’ portion of the Awards rescinded and the Awards granted to the non-executive Board members reduced (the “Settlement”). After the Settlement was approved by the Court of Chancery, the Board issued new awards to the Executives (the “Replacement Awards”). Plaintiff filed a new complaint alleging that the issuance of the Replacement Awards by the Board was a quid pro quo that allowed the non-executive Board members to enter into a Settlement permitting them to keep much of their Awards, while creating the pretense that the Executives had made substantial concessions. Plaintiff alleged that when entering into the Settlement, there was an understanding between the Board and the Executives, that after the Executives rescinded the Awards to facilitate the Settlement, the Board would simply issue Replacement Awards rendering the Settlement meaningless.
Defendants moved to dismiss, in part, under Rule 23.1, for failure to plead demand futility with particularity. Defendants argued that the Rule 23.1 pleading standard should be the same as the “particularity” standard for pleading fraud which, according to the Defendants, required Plaintiff to plead the “newspaper facts”—who, what, when, where and how. Plaintiff argued that a stockholder bringing a derivative lawsuit is not similarly situated to a plaintiff bringing a fraud claim, as the latter likely has direct knowledge of or was witness to the alleged wrongdoing.
Noting that courts have had “little occasion” to address what constitutes “particularized facts” in the Rule 23.1 context, the Court rejected Defendants’ argument that the Rule 23.1 particularity standard was the same as the “newspaper facts” pleading standard often applied to fraud claims. The Court noted that “derivative plaintiffs would be hard pressed” to plead “newspaper facts” when they were not in the boardroom or the direct targets of the alleged wrongdoing. Instead, the Court turned to Chancellor Allen’s decision in Kahn Brothers & Co., Inc. Profit Sharing Plan and Trust v. Fischbach Corp., 1989 WL 109406 (Del. Ch. Sept. 19, 1989), where the Court held that the plaintiff (who was pleading a fraud claim) needed to plead facts sufficient to inform “defendants of the precise transactions at issue” so as to place defendants “on notice of the precise misconduct with which they are charged.” The Court determined that this standard—higher than the Court of Chancery Rule 8(a) “notice pleading” standard but not as onerous as the “newspaper facts” standard—struck the right balance; requiring a derivative plaintiff to plead facts sufficient to provide defendants with adequate notice, while recognizing that a derivative plaintiff might not have access to all of the “newspaper facts.”
Applying this standard, the Court found that Plaintiff had adequately pled the quid pro quo theory and denied Defendants’ motion to dismiss.