Welch Ex Rel. SAIC v. Havenstein

553 F. App'x 54

• Court: Court of Appeals for the Second Circuit
• Decided: January 30, 2014
• Docket: 13-2648-cv
• Status: Unpublished

Opinion

SUMMARY ORDER

Derivative plaintiff-appellant Monte Welch appeals from the June 14, 2018 judgment of the District Court for the Southern District of New York (Oetken, J.), entered pursuant to the district court’s June 10, 2013 order granting nominal defendant-appellee SAIC, Inc.’s motion to dismiss. We assume the parties’ familiarity with the underlying facts, procedural history, and specification of issues for review.

On appeal, Welch argues that the district court was incorrect in determining that Welch had not sufficiently pled the futility of a demand on the board of directors prior to initiating this litigation. Welch principally argues that this is so because, he asserts, his complaint adequately alleges that a majority of the board of directors are insufficiently “disinterested,” and as such he could not expect a proper evaluation of his demand. See Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984) (overruled on other grounds by Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000)). Reasonable doubt of directors’ disinterest suffices to make out demand futility under Aronson, which challenges “a decision of the board of directors.” In re Veeco Instruments, Inc. Sec. Litig., 434 F.Supp.2d 267, 274 (S.D.N.Y.2006) (emphasis in original). Shareholder derivative suits may also be brought “where the subject of the derivative suit is not a decision of the board.” Rales v. Blasband, 634 A.2d 927, 934 (Del.1993). To establish demand futility in such a case, however, the allegations in the complaint must still “create a reasonable doubt that ... the board of directors could have properly exercised its independent and distinterested business judgment in responding to a demand.” Id.

The district court noted as follows:

Plaintiffs’ interpretation of the [c]om-plaint attempts to collapse the choice between Aronson (designed for board action) and Rales (designed for board inaction) into the question whether a[b]oard majority is interested because it faces a substantial likelihood of liability due to its conscious decision to remain inactive.... Plaintiffs’ proposed inquiry focuses on whether the [bjoard’s apparent inaction should be treated as a form of board action.

In re SAIC Inc. Derivative Litig., 948 F.Supp.2d 366, 379 (S.D.N.Y.2013). Finding no support for plaintiffs contention that action is to be inferred from interest-edness the district court determined that the complaint made out claims that targeted the inaction of the board with respect to its failure to monitor the corporation over the course of the fraud that is at the heart of this suit, and thus implicated In re Caremark Int’l Inc. Derivative Litig., which held that “a sustained or systematic failure of the board to exercise oversight— such as an utter failure to attempt to assure a reasonable information and reporting system exists — will establish the lack of good faith that is a necessary condition to liability.” 698 A.2d 959, 971 (Del. Ch.1996). Because the complaint makes no particularized allegation that the board took action to approve the fraudulent conduct, we agree. Therefore we affirm the district court’s determination that the complaint implicates Caremark claims. And as Welch conceded before us and the district court that if the claims are in fact Caremark claims, then they must be dismissed, we therefore affirm the district court’s grant of SAIC’s motion to dismiss as well. Even apart from that concession, we agree with the district court that the so-called “red flags” alleged in the complaint did not “support an inference of actual or constructive knowledge on the part of the [bjoard.” In re SAIC Inc. Derivative Litig., 948 F.Supp.2d at 391. Nor do we see merit in Welch’s novel contention that constructive notice should create a presumption of tacit approval. Therefore, the so-called “red flags” did not expose the director defendants to the substantial likelihood of liability that would excuse demand. See, e.g., In re Baxter Int’l, Inc., S’holders Litig., 654 A.2d 1268, 1269 (Del.Ch.1995).

We have considered Welch's remaining arguments, and find them to be without merit. Accordingly, the judgment of the district court hereby is AFFIRMED.