Bartlinski v. Sanchez Energy Corporation et al
Filing
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ORDER GRANTING 15 Joint MOTION to Dismiss 1 Complaint , Terminating 17 MOTION Joinder In Joint Motion to Dismiss Plaintiff's Complaint. Case terminated on 8/8/2014.(Signed by Judge Gray H. Miller) Parties notified.(rkonieczny, 4)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
JOHN BARTLINSKI, derivatively on behalf of
SANCHEZ ENERGY CORPORATION,
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Plaintiff,
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v.
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ANTONIO R. SANCHEZ, III, A.R. SANCHEZ, JR., §
GILBERT A. GARCIA, GREG COLVIN, and
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ALAN G. JACKSON,
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Defendants,
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and
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SANCHEZ ENERGY CORPORATION,
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Nominal Defendant.
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CIVIL ACTION H-14-341
ORDER
Pending before the court is a motion to dismiss filed by defendants Antonio R. Sanchez, III,
Antonio R. Sanchez, Jr., Gilbert A. Garcia, Greg Colvin, and Alan G. Jackson (collectively, the
“Individual Defendants”). Dkt. 15. After considering the complaint, motion, response, reply, and
applicable law, the court is of the opinion that the motion should be GRANTED.
I. BACKGROUND
This is a shareholder derivative lawsuit. Plaintiff John Bartlinski is a shareholder of Sanchez
Energy Corporation (“Sanchez Energy”). Dkt. 1. Nominal defendant Sanchez Energy is a Delaware
corporation with its principal office in Houston, Texas. Id. The Individual Defendants are members
of Sanchez Energy’s board of directors. Id. On April 25, 2013, in anticipation of its annual
shareholder meeting, Sanchez Energy filed a proxy statement with the U.S. Securities and Exchange
Commission (“SEC”). Id. In the proxy statement, Sanchez Energy asked its shareholders to approve
an amendment to their certificate of incorporation to add a director exculpation provision. Dkt. 15,
Reed Aff., Ex. 1 (complete proxy statement). The proxy statement indicated that board members
“must be able to exercise independent business judgement without the fear of being second-guessed
by the courts and held liable for mistakes of judgement or ordinary negligence.” Dkt. 1. The
shareholders approved the proposed amendment. Id.
Bartlinski claims that the proxy statement contained materially false statements in violation
of sections 14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 14a-9 of
the SEC. Id. Specifically, he asserts that statement about “ordinary negligence” gave a false
impression that, if the exculpation provision were not approved, the board members faced a chance
of being held monetarily liable for ordinary negligence when under Delaware law the standard for
liability, even for a breach of the fiduciary duty of due care, is gross negligence. Id. Bartlinski filed
this lawsuit on February 22, 2014. Id. He requests a declaratory judgment indicating that the
shareholder vote was invalid. Id.
The Individual Defendants filed a motion to dismiss in which they request that the court
dismiss Bartlinski’s lawsuit pursuant to Federal Rules of Civil Procedure 12(b)(1), 12(b)(6), and 23.1.
Dkt. 15. The Individual Defendants argue that Bartlinski did not properly plead demand futility under
Rule 23.1 and that therefore the complaint must be dismissed under Rule 12(b)(1). Id. The
Individual Defendants also argue that Bartlinski has failed to plead a material misstatement in the
proxy statement and that his complaint must therefore be dismissed under Rule 12(b)(6). Id.
II. LEGAL STANDARDS
A.
Derivative Action
Under Federal Rule of Civil Procedure 23.1(b) a derivative action complaint must be verified
and must:
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(1) allege that the plaintiff was a shareholder or member at the time of
the transaction complained of, or that the plaintiff's share or
membership later devolved on it by operation of law;
(2) allege that the action is not a collusive one to confer jurisdiction
that the court would otherwise lack; and
(3) 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.
Fed. R. Civ. P. 23.1(b). “Because Federal Rule of Civil Procedure 23.1 does not identify applicable
substantive standards, the particularity of a plaintiff's pleadings is governed by the standards of the
state of incorporation, here, Delaware.”
Freuler v. Parker, 803 F. Supp. 2d 630, 636
(S.D. Tex. 2011).
B.
Demand Futility under Delaware Law
Under Delaware law, the decision to pursue a lawsuit on behalf of the corporation is left to
the board of directors, recognizing that “directors, rather than shareholders, manage the business and
affairs of the corporation.” In re Citigroup Inc. Shareholder Deriv. Litig., 964 A.2d 106, 120 (Del.
Ch. 2009) (internal quotation omitted). “[T]he right of a stockholder to prosecute a derivative suit
is limited to situations where the stockholder has demanded that the directors pursue the corporate
claim and they have wrongfully refused to do so or where demand is excused because the directors
are incapable of making an impartial decision regarding such litigation.” Rales v. Blasband, 634 A.2d
927, 932 (Del. 1993). The demand requirement requires shareholder derivative plaintiffs to first make
a demand on the board of directors in all but the most “extraordinary” of circumstances. See Kamen
v. Kemper Fin. Servs., Inc., 500 U.S. 90, 96, 111 S. Ct. 1711 (1991). Where, as here, the plaintiff
is arguing that the required demand would be futile or is excused, the courts must ask “whether,
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under the particularized facts alleged, a reasonable doubt is created that: (1) the directors are
disinterested and independent; [or] (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, Brehm v. Eisner, 746 A.2d 244 (Del. 2000). The burden rests on the plaintiff to show
that demand upon the board of directors at the time of the filing of the complaint would have been
futile. In re INFOUSA, Inc. Shareholder Litig., 953 A.2d 963, 985 (Del. Ch. 2007).
To be disinterested, a majority of “directors can neither appear on both sides of a transaction
nor expect to derive any personal financial benefit from it in the sense of self-dealing, as opposed to
a benefit which devolves upon the corporation or all stockholders generally.” Aronson, 919 A.2d at
812. “It should be noted, however, that in the absence of self-dealing, it is not enough to establish
the interest of a director by alleging that he received any benefit not equally shared by the
stockholders.” Orman v. Cullman, 794 A.2d 5, 23 (Del. Ch. 2002). “Such benefit must be alleged
to be material to that director.” Id. (citing Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 363
(Del. 1993)). “Materiality means that the alleged benefit was significant enough ‘in the context of
the director’s economic circumstances, as to have made it improbable that the director could perform
her fiduciary duties to the . . . shareholders without being influenced by her overriding personal
interest.’” Id. (quoting In re Gen. Motors Class H Shareholders Litig., 734 A.2d 611, 617
(Del. Ch. 1999)).
“Mere recitations of elephantine compensation packages and executive
perquisites . . . will rarely be enough to excuse a derivative plaintiff from the obligation to make
demand upon a defendant board of directors.” In re INFOUSA, 953 A.2d at 983 (“Successful
derivative plaintiffs, however, must focus intensely upon individual director’s conflicts of interest or
particular transactions that are beyond the bounds of business judgment.”).
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The second prong of Aronson requires a plaintiff to demonstrate a reasonable doubt that “the
challenged transaction was otherwise the product of a valid exercise of business judgment.” Aronson,
473 A.2d at 812. The business judgment rule “is a presumption that in making a business decision
the directors of a corporation acted on an informed basis, in good faith and in the honest belief that
the action taken was in the best interests of the company.” Id. To show that demand was futile under
the second prong, the plaintiff must plead particularized facts to demonstrate that the directors
breached their duty “to inform themselves prior to making a business decision, of all material
information reasonably available to them.” Id. “Having become so informed, they must then act with
requisite care in the discharge of their duties.” Id.
“‘[A]bsent particularized allegations to the contrary, the directors are presumed to have acted
on an informed basis and in the honest belief that their decisions were in furtherance of the best
interests of the corporation and its shareholders.’” Khanna v. McMinn, No. Civ. A 20545-NC, 2006
WL 1388744, at *23 (Del. Ch. May 9, 2006) (citation omitted). “It is not an easy task to allege that
a decision falls outside the realm of the business judgment rule because ‘[t]his Court will not
second-guess the judgment of a board of directors if it bases its decision on a rational business
purpose.’ ” Id. (quoting Kahn v. Roberts, No. C.A. 12324, 1995 WL 745056, at *4 (Del. Ch.
Dec. 6, 1995)). “Thus, ‘[t]he burden is on the party challenging the decision to establish facts
rebutting the presumption.’” Id. (quoting Aronson, 473 A.2d at 812).
III. ANALYSIS
A.
Disinterested and Independent Directors
In the complaint, Bartlinski states that he “has not made any demand on the present Board
to institute this action because such demand is excused.” Dkt. 1. He does not, however, provide
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further explanation as to why the demand was excused. In order for demand to be excused based on
the first prong of the Aronson test, Bartlinski must have pled particularized facts to demonstrate that
three of the five directors are interested parties or are not independent. See In re INFOUSA, 953
A.2d at 985. The Individual Defendants argue that Bartlinski’s complaint does not contain any
particularized facts that would create a reasonable doubt as to the ability of any Board member to
consider a demand. Dkt. 15. Bartilinski argues that the Individual Defendants are interested because
of the benefit of gaining immunity from claims for breach of the duty of care and that the directors
all benefitted financially from the exculpation provision. Dkt. 19. The Individual Defendants assert
that the burden rests on the plaintiff to demonstrate that demand upon the board is excused, that there
is nothing in the complaint addressing this except for the conclusory statement that it was excused,
and that the court cannot consider the statements made in Bartlinski’s response indicating that the
board was interested. Dkt. 20. The court agrees that it is limited to the actual content of the
complaint when determining whether a claim has been stated.
Bartlinski’s complaint asserts that Bartlinski did not make a demand because doing so was
“excused.” Dkt. 1. He alleges that
Each of the Individual Defendants face a substantial likelihood of
liability for issuing, causing to be issued, and participating in the
materially false and misleading statements to shareholders that were
contained in the Proxy. The Proxy contained materially incorrect
information concerning the liability that directors faced from serving
on the Board of the Company without the approval of the
Amendment. Individual Defendants were at least negligent in filing
the Proxy with these materially false and misleading statements.
Id. Bartlinski asserts that the Board’s sole purpose for the director exculpation amendment was to
shield itself from liability as the board members “continue[] to try and enrich themselves.” Id. While
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one may infer from these allegations that the Individual Directors were interested, there are no
particularized allegations indicating how the benefit was material. Bartlinski asserts that demand was
futile because the Individual Defendants face a substantial likelihood of liability for issuing the false
and misleading proxy. However, the potential liability associated with the allegedly misleading proxy
alone is insufficient to show independence or disinterestedness. Aronson, 473 A.2d at 815 (“[T]he
mere threat of personal liability for approving a questioned transaction, standing alone is insufficient
to challenge either the independence or disinterestedness of directors.”). Thus, Bartlinski fails to
satisfy the first Aronson prong.
B.
Valid Exercise of Business Judgment
For the second prong of Aronson, the court is required to determine whether Bartlinski has
alleged facts sufficient to render demand futile because the Board’s actions fall outside the business
judgment rule. Aronson, 473 A.2d at 814. The Individual Defendants argue that Bartlinski does not
identify any misrepresented fact and does not plead with particularity how the alleged
misrepresentation was material. Dkt. 15. The amendment stated that the Board “must be able to
exercise independent business judgement without the fear of being second-guessed by the courts and
held liable for mistakes of judgement or ordinary negligence.” Dkt. 1. Bartlinski contends that by
including the lower standard of “ordinary negligence” instead of the gross negligence standard that
applies to a company incorporated under Delaware law, the Board gave the shareholders a false
impression that the directors would face a greater chance of being held monetarily liable than they
actually would. Dkt. 1. Bartlinski did not, however, plead with particularity how he can overcome
the presumption that in making the decision to send out the proxy, the directors “acted on an
informed basis, in good faith and in the honest belief that the action taken was in the best interests of
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the company.” Aronson, 473 A.2d at 812. Bartlinski’s complaint does not create a reasonable doubt
that the Board’s actions were a valid exercise of business judgment. Therefore, demand is not futile
in this case.
IV. CONCLUSION
Because Bartlinski has not met the Rule 23.1 pleading requirements for demand futility, his
section 14(a) claim fails.
Accordingly, the Individual Defendants’ motion to dismiss under
Rule 12(b)(1) is GRANTED, and Bartlinski’s claims are hereby DISMISSED WITHOUT
PREJUDICE.1
Signed at Houston, Texas on August 8, 2014.
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Gray H. Miller
United States District Judge
1
Bartlinski did not move to amend.
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