Arduini v. Int'l Gaming Tech., No. 12-15750 (9th Cir. 2014)
Annotate this CaseShareholders are required to make a “demand” on the corporation’s board of directors before filing a derivative suit, unless they sufficiently allege that demand would be futile. Before Arduini filed his derivative action against IGT and its board, four shareholders filed derivative suits that were consolidated. They argued that a demand was excused because: the IGT board extended the employment contract of IGT’s former CEO and chairman of IGT’s board of directors, and allowed him to resign rather than terminating him for cause; three directors received such high compensation from IGT that their ability to impartially consider a demand was compromised; six directors faced a substantial likelihood of liability for breaches of their fiduciary duties as committee members; and that other members had engaged in insider trading. The district court dismissed the consolidated suit for failure to make a demand or sufficiently allege futility; the Ninth Circuit affirmed. The district court then dismissed Arduini’s action, holding that Arduini had failed to make a demand and could not allege demand futility based on issue preclusion due to its ruling in the prior suit. The Ninth Circuit affirmed, holding that under Nevada law and these facts, issue preclusion barred relitigation of futility.
Court Description: Shareholder Derivative Actions/Issue Preclusion. The panel affirmed the district court’s dismissal of a shareholder derivative action on the basis that issue preclusion barred relitigation of whether plaintiff, Lawrence Arduini, made a sufficient “demand” on a corporation’s board of directors before filing suit. Under Federal Rule of Civil Procedure 23.1, a shareholder must either demand action from the corporation’s directors before filing a shareholder derivative suit, or plead with particularity the reasons why such demand would have been futile. The panel held that issue preclusion prevented Arduini from relitigating the issue of demand futility. The panel noted that before Arduini filed his derivative action against International Gaming Technology and its board of directors, four separate shareholders filed separate derivative suits against the company that were subsequently consolidated and dismissed. See Fosbre v. Matthews, 2010 WL 2696615 (D. Nev. July 2, 2010). The panel determined that the issue of demand futility was the same in both Fosbre and Arduini’s action, and therefore there was an identity of issues. The panel held that Arduini and the Fosbre plaintiffs were in privity because International Gaming Technology was the true party in interest and there was no indication that the Fosbre plaintiffs were inadequate representatives. Further, there was no inequity in applying issue preclusion because the Fosbre plaintiffs fully litigated their demand futility claim. There was no due process violation because there was no requirement that shareholders be given notice of dismissal in a derivative suit where the issue of demand futility is fully litigated and dismissed on the merits. Moreover, the panel noted that the record showed that Arduini’s counsel in this case had actual notice of the Fosbre proceedings.
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