North Carolina Business Litigation Report

In re Pozen Shareholders Litigation, 2005 NCBC 7 (N.C. Super. Ct. Nov. 10, 2005)(Tennille)

The Court dismissed a series of shareholder derivative actions due to plaintiffs' failure to make the required demand under Delaware law. Since the shareholders did not attack a specific action of the board, the Court undertook to determine "whether any of the directors were rendered 'interested' by any of the conduct alleged and, if so, whether the disinterested directors were nonetheless capable of acting independently from those interested directors." (If a specific action of the board had been under attack, the Court would have analyzed whether there was a "a reasonable doubt that either: (1) a majority of the directors [was] incapable of acting in a disinterested and independent manner or (2) the transaction was not a result of a valid exercise of business judgment.").

The Court rejected the argument that four of the directors of the company were "interested" because of their service on the company's audit committee. The Court held that "[a]udit committees of publicly traded companies are required to have independent and disinterested directors comprise the committee. It makes no sense to require audit committees to be made up of independent and disinterested directors and then find them not to be independent and disinterested because they are on the audit committee."

The Court also rejected what it referred to as "blanket allegations" that the directors participated in or approved the alleged misconduct. The directors were entitled to rely upon management's assessment of the safety and efficacy of the company's products" in the absence of specific language to the contrary.

The Court also ran through, and rejected, a series of arguments in support of futility that had been rejected by the Delaware Courts, including (a) that the directors would be forced to sue themselves, (b) that the directors would not sue themselves because this would open them up to further litigation, (c) that the directors had an interest in the suit being derivative because they would have no insurance coverage for a direct claim, and (d) that the directors were interested because they had stock options.

The Court also considered the independence of the directors. It held that allegations that some of the directors were beholden to members of the compensation committee, which determined whether they would be compensated for their service, were insufficient. It held that allegations of business, professional, and personal relationships would not affect independence, in the absence of facts showing that "'the non-interested director would be more willing to risk his or her reputation' than to jeopardize his relationship with the person with whom he is allegedly entangled."

In a footnote, the Court once again referenced its belief that shareholders should make books and records inspection requests before filing such actions. It quoted Beam v. Stewart, 833 A.2d 961, 981 (Del. Ch. September 30, 2003) for the propositiong that “it is troubling to this Court that, notwithstanding repeated suggestions, encouragement, and downright admonitions over the years both by this Court and by the Delaware Supreme Court, litigants continue to bring derivative complaints pleading demand futility on the basis of precious little investigation beyond perusal of the morning newspapers”.

Full Opinion

Trackbacks (0) Links to blogs that reference this article Trackback URL
http://www.ncbusinesslitigationreport.com/admin/trackback/62645
Comments (0) Read through and enter the discussion with the form at the end
Mack Sperling
Brooks Pierce, LLP
2000 Renaissance Plaza
230 North Elm Street
Greensboro, NC 27401
336.373.8850

1600 Wachovia Capitol Center
150 Fayetteville Street
Raleigh, NC 27601
919.839.0300