LMPERS v. Wynn, No. 14-15695 (9th Cir. 2016)
Annotate this CasePlaintiffs, shareholders of Wynn Resorts, challenged two actions the board took on behalf of its subsidiary Wynn Macau: a 2011 decision to donate $135 million to the University of Macau Development Foundation, and a 2012 decision to redeem the shares held by a former director named Kazuo Okada, who was the only director to vote against the donation. Plaintiffs filed a derivative action, alleging that the director defendants breached their fiduciary duties and committed corporate waste by approving the Macau donation because the donation caused the company to incur legal expenses and be exposed to potential liability. Plaintiffs also allege that defendants breached their fiduciary duties by redeeming Okada’s shares because such action had no legitimate purpose and merely encumbered the company with a higher debt load. The district court dismissed the amended complaint. At issue is whether shareholders may pursue a derivative lawsuit against a corporation’s board of directors despite their failure to demand that the board initiate this litigation itself. Plaintiffs argued that demand would be futile. As a preliminary matter, the court concluded that jurisdiction is improper under 28 U.S.C. 1332(a)(2) because both plaintiffs and some defendants are American citizens; one of the defendants is neither a citizen of a State nor a citizen of a foreign state for jurisdiction under section 1332(a)(3); but, the court dismissed that defendant as a dispensable party under Rule 19 in order to make jurisdiction under section 1332(a)(3) proper. On the merits, the court concluded that the district court did not abuse its discretion in determining that the shareholders failed to comply with Rule 23.1 or state law governing demand futility. The court concluded that plaintiffs' broad-based domination theory is simply too speculative and insufficiently particularized to satisfy the heightened pleading requirements of Rule 23.1; the court rejected plaintiffs' theory that demand is excused based on allegations that the directors face a substantial likelihood of liability for approving the Macau donation; and the court rejected plaintiffs' theory that demand is futile because there is a reasonable doubt that the directors will be entitled to the business judgment rule if the Okada redemption is challenged in court. Finally, the court rejected plaintiffs' claim that the district court illicitly considered materials extraneous to the complaint. Accordingly, the court affirmed the judgment.
Court Description: Shareholder Derivative Lawsuit. The panel affirmed the district court’s dismissal under Fed. R. Civ. P. 23.1 of a shareholder derivative lawsuit alleging that Wynn Resorts board of director defendants breached their fiduciary duties. Addressing jurisdictional issues, the panel held that diversity jurisdiction under 28 U.S.C. § 1332(a)(2) was improper because there were American citizens on both sides of the case. The panel also held that diversity jurisdiction under 28 U.S.C. § 1332(a)(3) was foiled by one of the defendants who was a United States citizen, but who was a permanent resident of Macau and was not domiciled in a State. The panel concluded that the defendant was a dispensable party under Fed. R. Civ. P. 19. Under Fed. R. Civ. P. 21, the panel exercised its discretion to dismiss the defendant from the suit in order to perfect diversity jurisdiction. The panel concluded that diversity jurisdiction was thereby established under § 1332(a)(3). LMPERS V. WYNN 3 Before bringing a suit on behalf of the corporation, shareholders are required either to make a demand on the board of directors or to explain why such demand would be futile. The shareholders argued that demand would be futile. The panel held that the district court did not abuse its discretion in determining that the shareholders failed to comply with Rule 23.1 or state law governing demand futility. Specifically, the panel held that the shareholders did not give sufficiently particularized allegations to support an inference that a majority of the board of directors lacked independence. The panel also rejected the shareholders’ theory that demand was excused based on allegations that the directors faced a substantial likelihood of personal liability for any wrongdoing. The panel also rejected the shareholders’ argument that demand was futile based on the directors not getting the benefit of the business judgment rule if a questionable stock redemption were challenged in court, because under Nevada law it was not reasonable to assume the board was acting dishonestly. Finally, the panel held that there was no reversible error if the district court considered materials extraneous to the complaint.
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