Keith Paul Bishop writes:
In a posting yesterday, Professor Stephen Bainbridge poses the question “When an acquirer spots red flags: Should Microsoft’s board beware?” He points out:
Numerous Delaware cases (mostly arising in the oversight context, of course) hold that independent directors will be liable for acting in bad faith only when they ignore alleged “red flags” that are “either waved in one’s face or displayed so that they are visible to the careful observer.” Rattner v. Bidzos, 2003 WL 22284323 at 13 (Del. Ch. 2003), quoting In re Citigroup Inc. S’holders Litig., 2003 WL 21384599, at *2 (Del. Ch. 2003).
Microsoft, however, is incorporated in the State of Washington, not Delaware. Not being familiar with Washington corporate law, I don’t have a view on whether Washington would follow Delaware. However, I could find no reported decision of a Washington state court that cites either Bidzos or Citigroup.
But that absence is itself telling. See generally Washington Bancorp. v. Said, 812 F. Supp. 1256, 1265 (D.D.C. 1993) (where the governing law does “not provide much assistance,” courts “turn to general principles of corporation law, particularly those decisions rendered in Delaware”); NCR Corp. v. American Tel. & Tel. Co., 761 F. Supp. 475, 499 (S.D. Ohio 1991) (“the decisions of Delaware courts are often persuasive in the field of corporate law”); Weiland v. Illinois Power Co., [1990-1991 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 95,747, at 98,589-90 (C.D. Ill. Sept. 17, 1990) (“Delaware is often recognized as an authority for corporate law”).
At least one federal court has similarly held that Washington would follow Delaware law on derivative litigation:
... this Court must attempt to “predict how the highest court of the state would decide the case if presented with the case today.” See Boland v. Engle, 113 F.3d 706, 710 (7th Cir.1997). The Boland Court noted that this analysis may involve the consideration of relevant authority of other jurisdictions that have addressed the issue. Id. at 711–12 (noting that “Delaware corporate law is undoubtedly persuasive authority” but concluding that it is not necessarily dispositive). Ultimately, the Boland Court found the trend towards narrowing the exceptions to the demand requirement persuasive and held that Boland's failure to make a demand was not excused. Id. at 713–14. In this Case, RCW 23B.07.400(2) strongly implies the existence of a substantive demand requirement in Washington State as does the underlying policy rational (i.e., business decisions are within the province of the Board of Directors and a shareholder demand is a business decision). Accordingly, the Court concludes that the Washington State Supreme Court would likely adopt the substantive demand requirement and apply a similar, if not the same, exception for futility as that employed in Delaware.
Caremark did not address demand futility, but only stated the liability standard for certain breaches of the duty of care. 698 A.2d at 970 (director's obligation includes a duty to attempt in good faith to assure that a corporate information and reporting system exists and failure to do so may, in theory, render a director liable for losses caused by non-compliance). The Caremark Court held that “only 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.” Id. at 971. The Court described such a claim as “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment” and noted that, even if the harm to the corporation was caused by a violation of the criminal law, it is not necessarily enough to create a breach of fiduciary duty. Id. at 967, 972. To demonstrate that the Audit Committee is interested as the result of a possible Caremark claim, Plaintiffs must provide “particularized factual allegations” that the members face a “materially detrimental impact” if the claim were to proceed. See Rales, 634 A.2d at 934, 936. The “mere threat” of liability under a Caremark claim is not enough. Sagent, 278 F.Supp.2d at 1089.