NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION This opinion shall not "constitute precedent or be binding upon any court." Although it is posted on the internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R.1:36-3.
SUPERIOR COURT OF NEW JERSEY APPELLATE DIVISION DOCKET NO. A-1241-15T2
PAUL MEMO, derivatively on behalf of PRUDENTIAL FINANCIAL, INC.,
Plaintiffs-Appellants,
v.
JOHN R. STRANGFELD, JR., RICHARD J. CARBONE, PETER B. SAYRE, THOMAS J. BALTIMORE, JR., GORDON M. BETHUNE, GASTON CAPERTON, GILBERT F. CASELLAS, JAMES G. CULLEN, MARK B. GRIER, CONSTANCE J. HORNER, MARTINA HUND-MEJEAN, KARL J. KRAPEK, CHRISTINE A. POON, JAMES A. UNRUH and JON F. HANSON,
Defendants-Respondents,
and
PRUDENTIAL FINANCIAL, INC.,
Defendant. ________________________________________________
Submitted March 7, 2017 – Decided August 21, 2017
Before Judges Messano, Espinosa and Suter. On appeal from the Superior Court of New Jersey, Chancery Division, Essex County, Docket No. C-191-13.
Kantrowitz, Goldhamer & Graifman, PC and The Weisier Law Firm, PC, attorneys for appellants (Gary S. Graifman, on the brief).
Wong Fleming, and Edwin G. Schallert (Debevoise & Plimpton, LLP) of the New York Bar, admitted pro hac vice, attorneys for respondents (Daniel C. Fleming, on the brief; Mr. Schallet, of counsel and on the brief).
PER CURIAM
This appeal requires us to consider application of the
business judgment rule, which "is embedded in American corporate
law[,] . . . [and] 'protects a board of directors from being
questioned or second-guessed on conduct of corporate affairs
except in instances of fraud, self-dealing, or unconscionable
conduct.'" In re PSE & G S'holder Litig., 173 N.J. 258, 276-77
(2002) (quoting Maul v. Kirkman, 270 N.J. Super. 596, 614 (App.
Div. 1994)). "One recognized infringement on director autonomy
is [a] shareholder-derivative action." Id. at 277; N.J.S.A. 14A:3-
6.2. Before commencing such an action, the plaintiff must serve
"a written demand . . . upon the corporation to take suitable
action." N.J.S.A. 14A:3-6.3(a); see also R. 4:32-3 (setting forth
prerequisites for filing a shareholder derivative complaint,
including pre-suit demand by a plaintiff for the "desired" "action"
by "managing directors or trustees").
2 A-1241-15T2 In response to such a demand, the defendant managing directors
and board members "may appoint a special litigation committee
[(SLC)] to investigate whether the suit is in the best interest
of the corporation." PSE & G, supra, 173 N.J. at 283 (citing
Zapata Corp. v. Maldonado, 430 A.2d 779, 786 (Del. 1981). "Based
on the committee's findings, the corporation may move for dismissal
of the suit, although the corporation has the burden of proving
the 'independence,' 'good faith,' and 'reasonableness' of the
committee's investigation." Ibid. (quoting Zapata, supra, 430
A.2d at 788). Regardless whether an SLC is formed or not, our
Court has adopted
a modified business judgment rule that imposes an initial burden on a corporation to demonstrate that in deciding to reject or terminate a shareholder's suit the members of the board (1) were independent and disinterested, (2) acted in good faith and with due care in their investigation of the shareholder's allegations, and that (3) the board's decision was reasonable. All three elements must be satisfied.
[Id. (emphasis added) (citing In re PSE & G S'holder Litig., 315 N.J. Super. 323, 335 (Ch. Div. 1998)).]
In 2012, plaintiff Paul Memo, a shareholder of Prudential
Financial, Inc. (Prudential), sent a pre-suit demand letter to
John R. Strangfeld, Jr., Chairman of Prudential's Board of
Directors (the Board) and its Chief Executive Officer (CEO),
3 A-1241-15T2 asserting Prudential's management had breached their fiduciary
duties. Plaintiff demanded the Board commence an independent
internal investigation and bring a civil action against members
of its management team. On March 12, 2013, the Board appointed
three of its members to a "special evaluation committee" (SLC) to
investigate plaintiff's allegations. The SLC interviewed two law
firms, and chose Day Pitney, LLP (Day Pitney), to serve as its
counsel.
On September 10, 2013, plaintiff filed a shareholder
derivative action against Strangfeld, Richard J. Carbone,
Prudential's Chief Financial Officer (CFO), Peter B. Sayre, its
Principal Accounting Officer, and directors Thomas J. Baltimore,
Jr., Gordon M. Bethune, Gaston Caperton, Gilbert F. Casellas,
James G. Cullen, Mark B. Grier, Constance J. Horner, Martina Hund-
Mejean, Karl J. Krapek, Christine A. Poon, James A. Unruh and Jon
F. Hanson (collectively, defendants). Among other things,
plaintiff asserted ten months had passed since he served the demand
letter without any substantive response. Plaintiff further
claimed the Board's inaction was a functional refusal of his demand
and defendants breached their fiduciary duties to Prudential's
shareholders.
Day Pitney notified plaintiff's counsel of the ongoing
investigation. On March 24, 2014, the SLC issued its report.
4 A-1241-15T2 Shortly thereafter, defendants moved to dismiss the complaint
pursuant to Rule 4:6-2(e), but the court permitted limited
discovery before ruling on the motion. See PSE & G, supra, 173
N.J. at 286 (permitting access to corporate records and discovery
"limited to the narrow issue of what steps the directors took to
inform themselves of the . . . demand and the reasonableness of
its decision" (quoting PSE & G, supra, 315 N.J. Super. at 337)).
In April 2015, plaintiff filed opposition to defendants' motion.
After considering oral argument, Judge Thomas Moore granted
defendants' motion for reasons placed on the record in a
comprehensive oral opinion. Judge Moore's October 6, 2015 order
dismissed plaintiff's complaint with prejudice, and this appeal
followed.
Plaintiff contends there were material factual disputes
regarding the independence of the SLC members, particularly in
light of a Day Pitney memo dated the same day the SLC issued its
report. Plaintiff also argues Judge Moore erred in concluding as
a matter of law that Day Pitney acted independently and the SLC's
investigation was reasonable. Having considered these arguments
in light of the record and applicable legal standards, we affirm.
I.
We briefly summarize some background to place plaintiff's
claims in proper context.
5 A-1241-15T2 Prudential provided financial management services and sold
various investment products to the public, including life
insurance policies and annuity contracts. In 2009, Verus
Financial, LLC (Verus) notified the company that it would be
examining Prudential's unclaimed property practices and compliance
procedures on behalf of thirteen states.1 In public filings,
Prudential acknowledged the "audit may result in additional
payments of abandoned funds to [United States] jurisdictions and
to changes in the Company's practices and procedures for the
identification of escheatable funds, which could impact claim
payments and reserves, among other consequences."
In June 2011, the Board held a meeting that was attended by
three members of the subsequently-formed SLC, during which the
directors were given updates on the progress of the Verus audit.
In November 2011, Prudential issued a press release announcing it
increased its reserves by an additional $139 million, the lion's
share of which was an acknowledgment of the company's decision to
change its procedures for identifying deceased policy and contract
holders, and the potential liability that might result. In
December 2011, Prudential entered into a Global Resolution
Agreement (GRA) with Verus, adopting modifications to its business
1 The number of states continued to grow over ensuing years to a total of thirty-three.
6 A-1241-15T2 practices and requiring Prudential to "identify and locate the
beneficiaries" of all "policies and contracts active at any time
since January 1, 1992 through December 31, 2010." Under the GRA,
if a beneficiary could not be located, Prudential would remit all
proceeds to the particular jurisdiction as unclaimed property
subject to escheat.
Plaintiff claimed Prudential inappropriately held unclaimed
property, resulting in the company posting stronger earnings than
it should have. The disclosure of these irregularities resulted
in significant decreases in the stock price.
Three directors, Baltimore, Hund-Mejean and Poon, comprised
the SLC, with Poon elected as chair. All had extensive business
experience, were more recent additions to the Board and had no
direct involvement with managing the company. Each member
completed a questionnaire consisting of twenty-five questions.
The SLC report described a number of factors intended to ensure
the committee's members were independent and personally
disinterested in plaintiff's complaint.
The SLC concluded Prudential should take all appropriate
actions to dismiss plaintiff's complaint, stating:
Contrary to the claims in the Shareholder Letter and Shareholder Complaint, the SLC found that the Board and executive officers acted on an informed basis, with the input and advice of competent advisors, and in the good
7 A-1241-15T2 faith belief they were acting in the best interests of the corporation and its shareholders, generally and with respect to the periodic financial reports at issue. It found there existed reasonable systems for the flow of information to the Board and senior management, including with respect to the claims asserted in this matter. It found no evidence that the Board acted in other than good faith and in the best interests of the corporation and its shareholders, or that it consciously failed to oversee the operations of the Company or disregarded any red flags.
II.
Defendants moved to dismiss plaintiff's complaint for failure
to state a claim for relief, Rule 4:6-2(e). The Rule plainly
provides:
If, on a motion to dismiss based on the defense numbered (e), matters outside the pleading are presented to and not excluded by the court, the motion shall be treated as one for summary judgment and disposed of as provided by R. 4:46, and all parties shall be given reasonable opportunity to present all material pertinent to such a motion.
[R. 4:6-2.]
In this case, after limited discovery regarding the appointment
of the SLC, its counsel and its investigation, Judge Moore
considered the issues presented by applying the standards set
forth in Rule 4:46.
We consider the grant of summary judgment de novo, using the
"same standard as the motion judge." Globe Motor Co. v. Igdalev,
8 A-1241-15T2 225 N.J. 469, 479 (2016) (quoting Bhagat v. Bhagat, 217 N.J. 22,
38 (2014)).
That standard mandates that summary judgment be granted "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 challenged and that the moving party is entitled to a judgment or order as a matter of law."
[Templo Fuente De Vida Corp. v. Nat'l Union Fire Ins. Co., 224 N.J. 189, 199 (2016) (quoting R. 4:46-2(c)).]
Our "task is to determine whether a rational factfinder could
resolve the alleged disputed issue in favor of the non-moving
party." Perez v. Professionally Green, LLC, 215 N.J. 388, 405-06
(2013).
An opposing party must "do more than 'point[] to any fact in
dispute' in order to defeat summary judgment." Globe Motor Co.,
supra, 225 N.J. at 479 (quoting Brill v. Guardian Life Ins. Co.
of Am., 142 N.J. 520, 529 (1995)). If the opposing party
offers . . . only facts which are immaterial or of an insubstantial nature, a mere scintilla, "fanciful, frivolous, gauzy or merely suspicious," he will not be heard to complain if the court grants summary judgment, taking as true the statement of uncontradicted facts in the papers relied upon by the moving party, such papers themselves not otherwise showing the existence of an issue of material fact.
9 A-1241-15T2 [Id. at 480 (quoting Brill, supra, 142 N.J. at 529) (quoting Judson v. Peoples Bank & Trust Co., 17 N.J. 67, 75 (1954)).]
Our review is limited to the record before Judge Moore. Lombardi
v. Masso, 207 N.J. 517, 542 (2011).
We also review the trial court's decision to dismiss
plaintiff's complaint under the modified business judgment rule
de novo. PSE & G, supra, 173 N.J. at 287. Because defendants
bear the burden of proof, we "must view the record with all
legitimate inferences drawn in the [plaintiff]'s favor and decide
whether a reasonable factfinder could determine that the
[defendants] ha[ve] not met [their] burden of proof." Globe Motor,
supra, 225 N.J. at 481. In other words, we must decide whether
"the evidence is so one-sided that . . . [defendants] . . . must
prevail as a matter of law." Brill, supra, 142 N.J. at 540
(quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252, 106
S. Ct. 2505, 2512, 91 L. Ed. 2d 202, 214 (1986)).
We review issues of law de novo and accord no deference to
the trial judge's legal conclusions. Nicholas v. Mynster, 213
N.J. 463, 478 (2013). In this regard, we note that shortly after
the SLC was formed in this case, on April 1, 2013, the Legislature
enacted N.J.S.A. 14A:3-6.5, which "details various alternative
procedures for the corporation to make an independent decision as
to whether the derivative proceeding is in the best interests of
10 A-1241-15T2 the corporation." Assembly Commerce and Economic Development
Committee, Statement to A. 3123 (September 24, 2012); Senate
Commerce Committee, Statement to A. 3123 (January 14, 2013).
N.J.S.A. 14A:3-6.5 permits a corporation, prior to seeking
dismissal of a shareholder derivative action, to form a "committee
. . . of one or more independent directors appointed by a majority
vote of independent directors[,]" N.J.S.A. 14A:3-6.5(2)(b), and
defines who is an independent director. N.J.S.A. 14A:3-6.5(7).
The statute further provides that
a derivative proceeding shall be dismissed by the court on motion by the corporation if the court finds that . . . [such a committee] has determined in good faith, after conducting a reasonable inquiry upon which its conclusions are based, that the maintenance of the derivative proceeding is not in the best interests of the corporation[.]
[N.J.S.A. 14A:3-6.5(1)(a).]
Importantly, if the corporation follows such procedures, in
certain circumstances, the statute shifts the burden of proof to
the plaintiff. N.J.S.A. 14A:3-6.5(4) and (6).
In this case, neither party argued the statute applied, nor
did Judge Moore discuss the statute. Neither party has cited the
statute in its appellate brief. We assume, therefore, that it
does not apply.
11 A-1241-15T2 Moreover, for the present, we are bound by the Court's
guidance as to how we should consider the impact, if any, that the
formation of an SLC and its subsequent report to the Board has
upon the modified business judgment standard. Although the issue
was not squarely before it in PSE & G, supra, the Court said, "as
a general framework for analysis, we will 'not differentiate
between cases where a shareholder litigation committee
investigated the demand and cases in which demand was refused by
the board.'" 173 N.J. at 283 (quoting, PSE & G, supra, 315 N.J.
Super. at 329 n.1). As a court of intermediate appellate
jurisdiction, we defer to the Court's authority to adopt a
different standard, particularly in light of the enactment of
N.J.S.A. 14A:3-6.5. Riley v. Keenan, 406 N.J. Super. 281, 297
(App. Div.), certif. denied, 200 N.J. 207 (2009).
III.
We provide some additional context as we consider plaintiff's
specific arguments.
In its report, the SLC detailed the selection process for its
three members, which took into account, among other things: the
SLC members' positions on the Board and Audit Committees, the
"lack of any personal financial gain distinct from other
shareholders from the activities alleged in the Shareholder Letter
and Shareholder Complaint," the lack of personal interest in the
12 A-1241-15T2 litigation and the lack of personal liability for the alleged
activities. Counsel for the SLC reviewed additional information
regarding relationships between SLC members, their families and
affiliated organization, and Prudential, other directors and
senior management.
The questionnaires completed by the SLC members contained two
questions that focused on whether the member was involved in any
discussions, prior to November 2011, as members of the "Audit
Committee or Corporate Governance and Business Ethics Committee,"
regarding the company's treatment of unclaimed death benefits,
escheatment and establishment of reserves (question 24), or
whether the member was involved in the approval or review of
Prudential's response to Verus' audits (question 25). All three
SLC members answered in the negative. Day Pitney conducted face-
to-face interviews with Hund-Mejean and Baltimore, but not Poon.
On March 24, 2014, the day the SLC filed its report, a Day
Pitney intra-office memorandum indicated that during the
investigation, SLC members "became aware of materials and
information" showing "the Board . . . and the Audit Committee
received updates from management regarding . . . the . . .
Company's response to the Verus audit." The memo specifically
cited questions 24 and 25 of the questionnaire, and stated "the
13 A-1241-15T2 SLC members affirmatively wish to update their responses . . . to
acknowledge and reflect these developments."
All three members of the SLC were deposed. Under oath, Poon
specifically stated she did not want to update her answers on the
questionnaire. In her deposition, Hund-Mejean reiterated her
answers to questions 24 and 25. Baltimore testified in a manner
that was consistent with the answers on his questionnaire.
Plaintiff argues the Day Pitney memo raises a genuine material
factual dispute about the members' knowledge of and involvement
in Prudential's practices and response to the Verus audit as it
was ongoing, which should have foreclosed summary judgment on the
critical issue of whether the SLC was "independent." We disagree.
"Directorial independence 'means that a director's decision
is based on the corporate merits of the subject before the board
rather than extraneous consideration or influences.'" PSE & G,
supra, 173 N.J. at 290 (quoting In re Prudential Ins. Co.
Derivative Litig., 282 N.J. Super. 256, 276 (Ch. Div. 1995)).
Judge Moore accepted the commonsense notion that as members of the
Board, each SLC member would have received some information about
the audit as it was ongoing. The judge focused on the deposition
testimony of the three SLC members, which was unequivocal. We
agree that the Day Pitney memorandum, standing alone, does not
raise a material factual dispute about the knowledge each SLC
14 A-1241-15T2 member possessed, or the actions or inactions they took as Board
members, and therefore does not raise a material factual dispute
about the SLC's independence and disinterestedness.
Plaintiff next contends material facts regarding Day Pitney's
independence foreclosed the conclusion that it acted independently
in providing counsel to the SLC. Specifically, plaintiff argues
the law firm had previously represented a Board member, Krapek,
in unrelated litigation, and it represented another corporation
of which Poon served as a director.
Plaintiff's claims rest upon a table prepared by Day Pitney
indicating its representation between January 1, 2010 and March
24, 2014, the date the SLC report was issued, of "Entities
Associated With Individual Defendants" named in this litigation.
In five instances, Day Pitney represented a client with which
Krapek had some affiliation. It was apparently undisputed that
the firm had earned more than $300,000 in fees for these
representations, some of which ended before the SLC was formed,
but that was a minute percentage of the firm's gross revenues.
Poon appeared as an associated defendant with respect to one
Day Pitney client.2 However, when specifically questioned at
2 The chart listed three entities in one line item.
15 A-1241-15T2 deposition about her directorship with the listed entities, Poon's
answers were unclear.3
3 The Day Pitney conflicts list included "Philips Electronics" as the entity with which Poon was affiliated. At deposition, she was asked about her membership on corporate boards, and responded:
Q: And which boards might those be?
A: I am a director of the public board called Regeneron.
Q: Okay.
A: I'm a director of the public board that's called Philips.
. . . .
Q: Okay. And with regard to Philips, would that be Philips Electric?
A: Yes. Electronics.
Q: I'm sorry. Electronics.
A: Royal Philips is —
Q: Okay. Royal Philips. And is there another name that begins with a K that's probably too long for me to say? Something like Koinklijke?
A: Yes.
Q: And there are also I believe some subsidiaries that you're affiliated with of Philips; is that correct?
A: That's not correct.
16 A-1241-15T2 Judge Moore concluded Day Pitney's prior representation of
entities with which Krapek and Poon had some affiliation did not
raise a genuine factual dispute about the law firm's independence.
He cited In re Par Pharmaceutical, Inc. Derivative Litigation, 750
F. Supp. 641, 647 (S.D.N.Y. 1990), where the court held that an
SLC must be represented by independent counsel. However, as Judge
Moore noted, in that case, the same firm represented both the SLC
and the corporation. Id. at 644.
Before us, plaintiff relies upon a portion of Justice Stein's
concurring opinion in PSE & G, supra, 173 N.J. at 298-300, which
discussed the importance of an SLC having independent counsel.
However, there too, the law firm conducting the investigation of
the plaintiffs' claim had previously represented the corporation
in seeking an extension to respond to the complaint. Id. at 299-
300.
Plaintiff cites to no other authority for the proposition
that Day Pitney's representation of entities with which Krapek and
Poon had some affiliation raised a material factual dispute
regarding the independence of the firm's investigation of the
complaint and the advice and counsel it rendered to the SLC.
Plaintiff also argues genuine material factual disputes exist
regarding the reasonableness of the SLC's investigation.
Specifically, he contends the SLC failed to conduct interviews of
17 A-1241-15T2 key witnesses and never considered in its investigation the impact
of another class action securities fraud complaint made against
Prudential (the securities action). Defendants contend these
issues were never raised before Judge Moore, and we agree that his
oral decision does not specifically address these claims.
Nonetheless, we conclude plaintiff's arguments lack any merit.
The Court described how we should consider whether the company
conducted a reasonable investigation. "[T]he court's inquiry is
not into the substantive decision of the board, but rather is into
the procedures employed by the board in making its determination."
PSE & G, supra, 173 N.J. at 291 (citation omitted). "In that
regard, there is 'no prescribed procedure that a board must
follow.'" Id. at 291-92 (quoting Levine v. Smith, 591 A.2d 194,
214 (Del. 1991), overruled on other grounds, Brehm v. Eisner, 746
A.2d 244 (Del. 2000)). "Nonetheless, the process should be such
that a reviewing court can look to it and conclude confidently
that it reflects a corporation's earnest attempt to investigate a
shareholder's complaint." Id. at 292. "Stated differently, the
inquiry is whether the 'investigation has been so restricted in
scope, so shallow in execution, or otherwise so pro forma or half
hearted as to constitute a pretext or sham[.]'" Ibid. (quoting
Stoner v. Walsh, 772 F. Supp. 790, 806 (S.D.N.Y. 1991) (internal
quotation marks and citation omitted)).
18 A-1241-15T2 Plaintiff contends the SLC failed to interview Mark Grier,
Prudential's Vice-Chairman who admittedly was responsible for a
wide variety of corporate functions. The federal district court
denied Prudential's motion to dismiss the complaint in the
securities action that named Grier as a defendant. Plaintiff also
contends the SLC failed to interview Verus or any government entity
affected by Prudential's practices during the relevant period.
The Court has recognized that "[o]ne of a board's prerogatives
. . . is 'to entrust its investigation to a law firm[.]'" PSE &
G, supra, 173 N.J. at 292 (quoting Stepak v. Addison, 20 F.3d 398,
405 (11th Cir. 1994)). In City of Orlando Police Pension Fund v.
Page, 970 F. Supp. 2d 1022 (N.D. Cal. 2013), the court said:
[T]he [SLC] committee was not obligated to interview every potential witness identified by plaintiff (or any witnesses at all), nor does it suggest that plaintiff is somehow relieved of its burden to show that the un- interviewed individuals "had knowledge that was unique and unobtainable without those interviews, and how those interviews if taken would have altered the board's decision to refuse demand."
[Id. at 1032 (quoting Copeland v. Lane, No. 5:11-cv-01058 EJD, 2012 U.S. Dist. LEXIS 146815 (N.D. Cal. Oct. 10, 2012)).]
The SLC's report details the process employed to investigate
plaintiff's claims. In part, Day Pitney reviewed more than eleven
million pages of documents and interviewed twenty-nine witnesses.
19 A-1241-15T2 Those interviewed included "current and former employees,
officers, and members of the Board[;] [m]ultiple members of senior
management . . . , as well as employees involved in the Company's
disclosure process[,] and . . . representatives of multiple Board
Committees." We can conclude with confidence that the
investigation conducted by the SLC "reflects a corporation's
earnest attempt to investigate a shareholder's complaint."
PSE & G, supra, 173 N.J. at 292.
Plaintiff's final contention, that the SLC did not consider
the securities action in reaching its conclusion, lacks sufficient
merit to warrant discussion. R. 2:11-3(e)(1)(E). The SLC report
actually cites other contemporaneously filed litigation against
Prudential and other insurance companies regarding alleged
failures to properly investigate deaths of policy holders.
Affirmed.
20 A-1241-15T2