Weinberg v. Gold et al

Filing 26

MEMORANDUM. Signed by Judge James K. Bredar on 3/12/12. (mps, Deputy Clerk)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
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ARNOLD WEINBERG,
Derivatively on behalf of
BIOMED REALTY TRUST, INC.
Plaintiff

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v.

CIVIL NO. JKB-11-3116
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ALAN D. GOLD et al.,
Defendants
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MEMORANDUM
Plaintiff Arnold Weinberg has brought this shareholder’s derivative suit on behalf of
BioMed Realty Trust, Inc., against various officers and directors of the company, alleging
issuance of a false and misleading proxy statement in violation of section 14(a) of the Securities
Exchange Act of 1934, breach of fiduciary duty, and unjust enrichment. (Compl., ECF No. 1.)
The complaint indicates the pivotal event leading to this lawsuit was a “say on pay” vote1 by the
shareholders on May 25, 2011, in which a majority of the shares voted rejected the 2010
executive compensation plan.

(Id. ¶ 4.)

The plan was formulated by a three-member

compensation committee of directors and approved by the board. (Id. ¶¶ 20-25.) Following the
shareholders’ vote, the board did not rescind its approval of the compensation plan. (Id. ¶ 6.)
Pending before the Court are two motions to dismiss for failure to state a claim. The first
motion (ECF No. 14) was filed by BioMed and seeks dismissal on the ground that Weinberg
failed to plead sufficient factual allegations to justify his filing suit without first making a
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“Say on pay” is a shorthand reference to a corporate mechanism for allowing
shareholders to voice their opinion on executive compensation. It was established in section 951
of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, 124 Stat.
1376 (2010), and is codified at 15 U.S.C. § 78n-1.

demand on the company to pursue this litigation. The second motion (ECF No. 15) was filed by
the individual defendants asserting the complaint fails to state a claim because no allegations
show that the executive compensation decision was reached contrary to the business judgment
rule, because no allegations show either a materially false statement or a material omission of
fact in the proxy statement, and because no allegations permit a conclusion that it would be
inequitable for BioMed’s executives to retain their 2010 compensation.

A hearing is

unnecessary. Local Rule 105.6 (D. Md. 2011). The first motion will be granted and the second
motion will be denied as moot.
I. Standard of Dismissal for Failure to State a Claim
A complaint must contain “sufficient factual matter, accepted as true, to ‘state a claim to
relief that is plausible on its face.’” Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (quoting Bell
Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). Facial plausibility exists “when the
plaintiff pleads factual content that allows the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged.” Iqbal, 129 S. Ct. at 1949. An inference of a
mere possibility of misconduct is not sufficient to support a plausible claim. Id. at 1950. As the
Twombly opinion stated, “Factual allegations must be enough to raise a right to relief above the
speculative level.” 550 U.S. at 555.
In addition to the governing standard of Rule 12(b)(6), Rule 23.1(b) sets forth pleading
requirements for a shareholders’ derivative suit. In pertinent part, Rule 23.1(b)(3) requires that
the complaint
state with particularity:
(A) any effort by the plaintiff to obtain the desired action from the
directors or comparable authority and, if necessary, from the
shareholders or members; and
(B) the reasons for not obtaining the action or not making the effort.
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II. Demand Futility
A. Legal Standards
Rule 23.1 only sets forth a pleading requirement and “does not create a demand
requirement of any particular dimension.” Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 95
(1991) (emphasis omitted).

At common law, the equitable invention of a shareholder’s

derivative suit was accompanied by a requirement “that the shareholder demonstrate ‘that the
corporation itself had refused to proceed after suitable demand, unless excused by extraordinary
conditions.’” Id. at 95-96 (citation omitted).
The purpose of the demand requirement is to “affor[d] the directors an
opportunity to exercise their reasonable business judgment and ‘waive a legal
right vested in the corporation in the belief that its best interests will be promoted
by not insisting on such right.’” Ordinarily, it is only when demand is excused
that the shareholder enjoys the right to initiate “suit on behalf of his corporation in
disregard of the directors’ wishes.” In our view, the function of the demand
doctrine in delimiting the respective powers of the individual shareholder and of
the directors to control corporate litigation clearly is a matter of “substance,” not
“procedure.”
Id. at 96-97 (alteration in original; citations omitted). Thus, the standard for excusing demand is
defined in a federal derivative action by the law of the State of incorporation. See id. at 108-09
(holding so in relation to derivative suit under Investment Company Act of 1940).
BioMed is a Maryland corporation with its principal place of business in California.
(Compl. ¶ 15.) Therefore, this Court must look to Maryland law to determine whether demand
should be excused in this case. The decision of the Maryland Court of Appeals in Werbowsky v.
Collomb, 766 A.2d 123 (Md. 2001), is the most recent, authoritative exposition of Maryland law
on the issue of demand futility.
The Werbowsky court reviewed at length the evolution of the standard for demand futility
both in Maryland and beyond. In Maryland, the issue remains governed by common law,
although a number of other jurisdictions have enacted the demand requirement and exception
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into statutory law. Moreover, the trend outside of Maryland has been either to eliminate the
exception or to define it in a way that appears aimed at reducing its availability. 766 A.2d at
137. But in considering the various standards for demand futility, the court declined to adopt
either the Delaware approach or the models proposed by the American Bar Association (“ABA”)
and the American Law Institute (“ALI”). Id. at 143.
The Delaware standard is formulated thusly:
[Whether] a reasonable doubt is created that: (1) the directors are disinterested
and independent and (2) the challenged transaction was otherwise the product of a
valid exercise of business judgment.
Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984), overruled on other grounds by Brehm v.
Eisner, 746 A.2d 244 (Del. 2000), quoted in Werbowsky, 766 A.2d at 139.
The ABA standard is contained in the Model Business Corporation Act:
No shareholder may commence a derivative proceeding until:
(1) a written demand has been made upon the corporation to take suitable
action; and
(2) 90 days have expired from the date the demand was made unless the
shareholder has earlier been notified that the demand has been rejected by
the corporation or unless irreparable injury to the corporation would result
by waiting for the expiration of the 90-day period.
ABA, Model Business Corporation Act, § 7.42, quoted in Werbowsky, 766 A.2d at 140.
The ALI standard is similar to the ABA standard:
(a) Before commencing a derivative action, a holder or a director should be
required to make a written demand upon the board of directors of the
corporation, requesting it to prosecute the action or take suitable corrective
measures, unless demand is excused under § 7.03(b). The demand should
give notice to the board, with reasonable specificity, of the essential facts
relied upon to support each of the claims made therein.
(b) Demand on the board should be excused only if the plaintiff makes a
specific showing that irreparable injury to the corporation would otherwise
result, and in such instances demand should be made promptly after
commencement of the action.
(c) Demand on shareholders should not be required.
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(d) Except as provided in § 7.03(b), the court should dismiss a derivative
action that is commenced prior to the response of the board or a committee
thereof to the demand required by § 7.03(a), unless the board or committee
fails to respond within a reasonable time.
ALI, Principles of Corporate Governance: Analysis and Recommendations § 7.03, quoted in
Werbowsky, 766 A.2d at 140.
As noted by the court, the ABA/ALI approach creates a universal demand standard that
effectively eliminates the futility exception, id. at 140-41, and is a “radical departure” from
Maryland common law; such an approach, opined the court, should be subjected to the
legislative processes rather than becoming the rule of law via judicial decision, id. at 143. The
Delaware standard was viewed by the court as “an exacting requirement,” id. at 139, that had
been criticized by others as unnecessarily injecting “‘a substantial measure of subjective judicial
discretion into the decision whether to excuse demand,’” id. at 141 (citing ALI, Principles, cmt.
d to § 7.03). Further, the court noted that few states had abandoned their existing law in favor of
the Delaware approach.
The Werbowsky court, although declining to adopt either of these standards, did make
several observations about the demand futility issue. First, the court noted it was unwilling to
excuse demand
simply because a majority of the directors approved or participated in some way
in the challenged transaction or decision, or on the basis of generalized or
speculative allegations that they are conflicted or are controlled by other
conflicted persons, or because they are paid well for their services as directors,
were chosen as directors at the behest of controlling stockholders, or would be
hostile to the action.
766 A.2d at 143-44.
Second, the court reaffirmed the importance of the demand requirement, which
recognizes the presumption that directors act properly and in a company’s best interests in
accordance with the business judgment rule. Id. at 144. Additionally, the court agreed with the
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ABA and the ALI “that, in most cases, a pre-suit demand on the directors is not an onerous
requirement.” Id. Such a demand gives a company’s directors “an opportunity to consider, or
reconsider, the issue in dispute.” Id. Noting that, in some cases, the demand may be the
directors’ “first knowledge that a decision or transaction they made or approved is being
questioned,” the court indicated directors might respond by seeking the advice of a special
litigation committee of independent directors or by acceding to the demand rather than risking
embarrassing litigation. Id. Further, the futility exception effectively prevents any opportunity
for “meaningful pre-litigation alternative dispute resolution.” Id. Finally, if a demand is refused,
then that decision can be reviewed in court under the business judgment rule standard.
Based on all of these considerations, the Werbowsky court concluded,
We adhere, for the time being, to the futility exception, but, consistent
with what appears to be the prevailing philosophy throughout the country, regard
it as a very limited exception, to be applied only when the allegations or evidence
clearly demonstrate, in a very particular manner, either that (1) a demand, or a
delay in awaiting a response to a demand, would cause irreparable harm to the
corporation, or (2) a majority of the directors are so personally and directly
conflicted or committed to the decision in dispute that they cannot reasonably be
expected to respond to a demand in good faith and within the ambit of the
business judgment rule.
Id.
B. Plaintiff’s Allegations
Weinberg has offered the following rationales for excusing demand on the board as a
whole prior to initiation of this lawsuit:
1. Each director was on the board when the executive compensation plan was approved by
the board and rejected by the shareholders, each director participated in the issuance of
the contested proxy statement, and each such director has been named as a defendant in
this action. (Compl. ¶ 62.)

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2. Each director is interested in the outcome of the litigation because each one faces a
substantial likelihood of liability. (Compl. ¶ 63.)
3. The “say on pay” vote rebuts the presumption that the directors exercised valid business
judgment. (Compl. ¶ 64.)
4. The board’s issuance of allegedly false statements indicating the executive compensation
policy was based on performance was not a valid business judgment. (Compl. ¶ 65.)
5. Directors have exhibited antipathy towards the relief sought by this lawsuit by
recommending approval of the compensation plan and then failing to rescind their
decision following the “say on pay” vote. (Compl. ¶ 66.)
6. The board has failed to seek a recovery for BioMed.
Weinberg has also asserted that demand is excused on each named director for the
following reasons:
7. Director Alan Gold is CEO of BioMed, he is not an independent director, and his
compensation is determined by the board’s compensation committee. (Compl. ¶ 68.)
8. Director Gary Kreitzer is the vice president and general counsel of BioMed, he is not an
independent director, and his compensation is determined by the board’s compensation
committee. (Compl. ¶ 69.)
9. Director Edward Dennis is chairman of the compensation committee. (Compl. ¶ 70.)
10.

Director Barbara Cambon is a member of the compensation committee. (Compl. ¶ 71.)

11.

Director Richard Gilchrist is a member of the compensation committee. (Compl. ¶ 72.)

12.

Director Margaret Wilson is a member of the board. (Compl. ¶ 73.)

13.

Director Theodore Roth is a member of the board. (Compl. ¶ 74.)

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C. Analysis
Keeping in mind Werbowsky’s clear statement that mere participation in or approval of
the challenged transaction by directors does not excuse demand, the Court concludes that reasons
one and nine through thirteen above are insufficient to justify application of the futility
exception. It is certainly arguable that the two directors who are officers of the company and are
beneficiaries of the compensation plan “are so personally and directly conflicted . . . that they
cannot reasonably be expected to respond to a demand in good faith and within the ambit of the
business judgment rule.” 766 A.2d at 144. But Gold and Kreitzer are only two out of seven
members of the board, which means that at least two more members of the board would have to
be personally disqualified before the Werbowsky standard is satisfied. Simply being members of
the board or the compensation committee and participating in the decision-making do not suffice.
Accord In re Regions Morgan Keegan Sec., Derivative & ERISA Litig., 694 F. Supp. 2d 879, 887
(W.D. Tenn. 2010) (applying Maryland law); Caston v. Hoaglin, No. 08-CV-200, 2009 WL
3078214, at *7-8, 12 (S.D. Ohio Sept. 23, 2009) (same).
Likewise, merely because directors are named in the instant suit does not mean that prior
to the suit, a demand would have been futile. The futility of pre-suit demand should not be
analyzed based on post-filing circumstances. Such circumstances are not mentioned by the
Werbowsky opinion as valid considerations. It must be remembered that Werbowsky specifically
affirmed the importance of the demand requirement for several good reasons, including the
opportunity to reconsider a decision and the opportunity to engage in meaningful pre-suit
alternative dispute resolution.

These important considerations would be nullified in every

shareholder’s derivative suit that named directors as defendants if simply naming them as parties
provided excuse for pre-suit demand. See also Seidl v. Am. Century Cos., 713 F. Supp. 2d 249,
260-61 (S.D.N.Y. 2010) (potential exposure by directors to liability did not excuse demand
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under Maryland law), aff’d, 427 F. App’x 35 (2d Cir.) (unpublished), cert. denied, 132 S. Ct. 846
(2011); Regions Morgan Keegan, 694 F. Supp. 2d at 887-88 (possibility directors might have to
sue themselves did not waive demand under Maryland law). Consequently, reason number two
does not establish the futility exception.
Reasons three and four, i.e., whether the directors’ actions were the product of valid
business judgment, go to the merits of the case, and Werbowsky implicitly disallows
consideration of the merits of the case in analyzing demand futility. 766 A.2d at 144 (standard
“focuses the court’s attention on the real, limited, issue—the futility of a pre-suit demand—and
avoids injecting into a preliminary proceeding issues that go more to the merits of the
complaint—whether there was, in fact, self-dealing, corporate waste, or a lack of business
judgment with respect to the decision or transaction under attack”).

Although it can be

reasonably argued that a “say on pay” vote provided the board an opportunity to reconsider its
decision regarding executive compensation, it should not be seen as the equivalent of a pre-suit
demand. A shareholder advisory vote is fundamentally different from a demand for litigation.
The former can certainly produce unfavorable publicity, but it does not inevitably result in a
lawsuit. The latter is much more likely to result in a lawsuit if the shareholder concerns are not
resolved. Although a “say on pay” vote may be reasonably considered as a factor in the demand
futility analysis, it is not conclusive in this case.
Weinberg cites a “say on pay” case from the Southern District of Ohio in which the court
found demand futile because the directors “devised the challenged compensation, approved the
compensation, recommended shareholder approval of the compensation, and suffered a negative
shareholder vote on the compensation,” thus establishing reason to doubt the challenged
transaction was the result of a valid business judgment. NECA-IBEW Pension Fund ex rel.
Cincinnati Bell, Inc. v. Cox, 2011 WL 4383368, at *4 (S.D. Ohio Sept. 20, 2011). It must be
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noted that this case was analyzed under Ohio and Delaware standards for demand futility, but
neither standard is comparable to the Maryland standard.

Under Ohio law, according to

Cincinnati Bell, demand is presumptively futile where the directors are involved in the
transactions attacked, id.; in Maryland, however, mere involvement by directors in the
challenged transaction does not excuse demand. The Delaware standard was previously noted to
focus on the merits of the transaction at issue, contrary to the standard set forth in Werbowsky,
which eschewed consideration of the merits in analyzing demand futility. 766 A.2d at 144.
Thus, the Cincinnati Bell case is unpersuasive.2
BioMed cites the “say on pay” case of Plumbers Local No. 137 Pension Fund ex rel.
Umpqua Holdings Corp. v. Davis, 2012 WL 104776 (D. Or. Jan. 11, 2012), adopted as the
district court’s opinion, 2012 WL 602391 (D. Or. Feb. 23, 2012), as an opinion favorable to its
position. This case also relied upon the Delaware standard. Notably, it discounted the argument
that the board members could not be considered disinterested because they allegedly faced a
substantial likelihood of liability in the derivative action. 2012 WL 104776, at *5. The court
opined its disagreement with the Cincinnati Bell case and found plaintiffs’ argument circular in
logic and, thus, unpersuasive. This Court agrees with that analysis. Further, the Plumbers Local
No. 137 decision found wanting plaintiffs’ additional argument that the “say on pay” vote was
prima facie evidence that the board’s decision on executive compensation nullified the
presumption of valid business judgment. Id. at *7. The court observed the board’s challenged
decision was not contrary to any company bylaw, any shareholder agreement, or any legally
mandated disclosure or reporting requirement; instead, plaintiffs there (as plaintiff does here)
contended the decision was contrary to a “pay for performance” policy, but, as the court noted,

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It was also, apparently, decided when the court lacked subject-matter jurisdiction,
belatedly discovered, according to later filings on the court’s docket.
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the policy did not establish a binding standard for compensation. Id. The court did note the
policy statement was not made until after the compensation decision was made, id., and it is
unknown in the present case when these two events occurred in relation to each other, but this
does not seem to be a critical difference between the two cases. The court concluded that
plaintiffs’ allegations failed to create a reasonable doubt that the board made the decision
honestly and in good faith, thereby failing to overcome the presumption of valid business
judgment. Id. This Court concludes the Plumbers Local No. 137 case sets forth a reasonable
analysis under Delaware law, but the Maryland standard is so different from the Delaware
standard that, in the end, the cited case does not alter the Court’s analysis, and the Court does not
rely upon it in deciding the instant case. That the two opinions arrive at the same conclusion
under different standards for demand futility is nevertheless noteworthy, however.
Reason number five alleges that the directors have exhibited antipathy towards the relief
sought by this lawsuit by recommending approval of the compensation plan and then failing to
rescind their decision following the “say on pay” vote. This is only a variation on the first
reason, that is, participation in the challenged transaction. It also falls within the category of
“generalized or speculative allegations” that the directors would be hostile to the action,
considered by Werbowsky as inadequate to excuse demand. 766 A.2d at 143-44.
The remaining reason, number six, is that BioMed has not sought recovery of the
amounts Weinberg believes ought to be recovered. This is only marginally different from the
allegation that the board has not rescinded its approval of the executive compensation plan or the
allegations that the board’s actions are not the result of a valid business judgment, neither of
which is sufficient to excuse demand under the Werbowsky standard.

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In sum, Weinberg does not offer sufficient allegations in his complaint to excuse demand
under the futility exception recognized by Maryland law. BioMed’s motion to dismiss for failure
to state a claim will be granted.
IV. Conclusion
Because BioMed’s motion to dismiss will be granted, the Court will deny as moot the
individual defendants’ motion to dismiss for failure to state a claim. A separate order will issue.
DATED this 12th day of March, 2012.

BY THE COURT:

/s/
James K. Bredar
United States District Judge

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