Louisiana Municipal Police Employees' Retirement System v. Wynn et al, No. 2:2012cv00509 - Document 122 (D. Nev. 2013)

Court Description: ORDER Granting 99 Motion to Dismiss. FURTHER ORDERED that plaintiffs, if they choose to amend their complaint, file the motion to amend, attaching the proposed amended complaint, within 30 days of the date of this order. Signed by Judge James C. Mahan on 2/1/13. (Copies have been distributed pursuant to the NEF - MMM)
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Louisiana Municipal Police Employees' Retirement System v. Wynn et al Doc. 122 1 2 3 4 UNITED STATES DISTRICT COURT 5 DISTRICT OF NEVADA 6 7 8 9 LOUISIANA MUNICIPAL POLICE EMPLOYEES RETIREMENT SYSTEM, 10 11 2:12-CV-509 JCM (GWF) Plaintiff, v. 12 13 STEPHEN A. WYNN, et al., Defendants. 14 15 16 ORDER 17 18 Presently before the court is defendants Stephen A. Wynn, Linda Chen, Russell Goldsmith, 19 Ray R. Irani, Robert J. Miller, John A. Moran, Marc D. Schorr, Alvin V. Shoemaker, D. Boone 20 Wayson, and Allan Zeman’s motion to dismiss. (Docs. # 109, 103).1 Defendants Elaine P. Wynn 21 (doc. # 102), and Wynn Resorts, Limited (doc. # 104) joined the motion to dismiss. Plaintiffs 22 Louisiana Municipal Police Employees’ Retirement System, Boilermakers Lodge No. 154 23 Retirement Fund, Maryanne Solak, and Excavators Union Local 731 Welfare Funds (collectively, 24 25 26 27 28 1 Defendants also request the court to take judicial notice of two orders by Nevada state court (Ex. A & Ex. C) and a publication by the Nevada Secretary of State (Ex. B). (Doc. # 101). Plaintiffs opposed the request. (Doc. # 113). Defendants replied. (Doc. # 118). Defendants also submitted a declaration in support of their motion. (Doc. # 100). James C. Mahan U.S. District Judge Dockets.Justia.com 1 “plaintiffs”) responded. (Doc. # 114).2 Defendants replied. (Doc. # 116).3 Defendants Elaine P. 2 Wynn (doc. # 119), and Wynn Resorts, Limited (doc. # 120) joined the reply. 3 I. Factual background 4 This is a shareholder derivative action on behalf of nominal defendant Wynn Resorts Limited 5 (“Wynn Resorts” or the “company”) against eleven directors of the twelve person board of directors.4 6 The director defendants are Stephen A. Wynn (“Wynn”), Linda Chen (“Chen”), Russell Goldsmith 7 (“Goldsmith”), Ray R. Irani (“Irani”), Robert J. Miller (“Miller”), John A. Moran (“Moran”), Marc 8 D. Schorr (“Schorr”), Alvin V. Shoemaker (“Shoemaker”), D. Boone Wayson (“Wayson”), Allan 9 Zeman (“Zeman”), and Elaine P. Wynn (“E. Wynn”) (collectively, “defendants”). 10 In 2006, Wynn Resorts opened a hotel in Macau under a land concession agreement granted 11 by the Macau government,5 with a term running from 2002 to 2022. (Doc. # 95, ¶¶ 3, 51). In 12 February 2006, the company announced that it had submitted an application to the Macau 13 government for a second land concession agreement to build a new casino resort. (Id., ¶¶ 3, 53). 14 After five years, the second land concession agreement had still not been approved. (Id., ¶¶ 3-4). In 15 May 2011, defendants approved a $135 million donation to the University of Macau’s Development 16 Foundation (the “Macau donation”). (Id., ¶ 4). All but one member of the Wynn Resorts’s board of 17 directors (the “board”) approved the donation. (Id., ¶¶ 4, 8). Director Kazuo Okada (“Okada”) did 18 not approve the donation. (Id.). The Macau donation consisted of a $25 million donation made in 19 2011, and a commitment to make additional donations of $10 million per year for each of the 20 calendar years from 2012 to 2022. (Id., ¶ 4). In February 2012, the Securities and Exchange 21 Commission (the “SEC”) notified Wynn Resorts that it had commenced an informal inquiry into the 22 Macau donation. (Id., ¶ 67). 23 Plaintiffs allege that the Macau donation represented an improper attempt by defendants to 24 2 Plaintiff filed a declaration in support of their response. (Doc. # 115). 3 Defendants filed a supplemental declaration in support of their reply. (Doc. # 117). 4 Kazuo Okada was terminated pursuant to a voluntary dismissal. (Doc. # 107). 5 Macau is a special administrative region of the People’s Republic of China. (Doc. # 95, ¶ 2). 25 26 27 28 James C. Mahan U.S. District Judge -2- 1 influence the Macau government to expedite approval of the second land concession agreement. (Id., 2 ¶¶ 6, 56). Plaintiffs allege that defendants breached their fiduciary duties and committed corporate 3 waste by approving the Macau donation resulting in “the cost of defending Wynn Resorts against 4 government investigations and the penalties, fines and other liabilities and expenses associated with 5 those investigations.” (Id., ¶¶ 5, 131-32, 135). 6 In relation to the Macau donation, Okada called into question whether the magnitude of the 7 donation was an appropriate use of corporate funds in the company’s best interests. (Id., ¶¶ 8, 66, 8 79). Okada also demanded to investigate the company’s records related to the donation. (Id., ¶¶ 8, 9 10, 63, 66). 10 In November 2011, the board retained Freeh Sporkin & Sullivan, LLP (“Freeh”) to 11 investigate whether Okada was “suitable” to own shares of Wynn Resorts. (Id., ¶¶ 9, 64-65). Based 12 on Freeh’s conclusions, the board forcibly redeemed Okada’s $2.77 billion stake6 in exchange for 13 a promissory note worth $1.9 billion. (Id., ¶¶ 11, 71-72). The board’s justification for removing 14 Okada as an “unsuitable” shareholder was that he was a threat to the company’s Nevada gaming 15 license. (Id., ¶¶ 11, 71, 117). In February 2012, the board sued Okada and the two entities he 16 controls–Aruze and Universal Entertainment Corp.–for breach of fiduciary duty. (Id., ¶ 70). In March 17 2012, the entities filed a counterclaim challenging the company’s redemption of his shares. (Id., ¶ 18 74). 19 Plaintiffs claim that defendants breached their fiduciary duties by redeeming Okada’s shares 20 because the redemption replaced Okada’s equity stake in the company with a promissory note, a 21 change which lacked a valid corporate purpose. (Id., ¶¶ 11, 131). Plaintiffs also claim that the 22 redemption wasted the company’s assets because it encumbered the company with a $1.9 billion 23 liability and caused it to incur legal fees. (Id.). 24 25 Plaintiffs allege the following claims against defendants: (1) breach of fiduciary duty; (2) waste of corporate assets; (3) permanent injunction; and (4) unjust enrichment. 26 27 28 James C. Mahan U.S. District Judge 6 Okada’s stake in Wynn Resorts is held primarily through Aruze USA, Inc. (“Aruze”), an entity he controls. (Doc. # 95, ¶ 11). -3- 1 II. Legal standards 2 A. 3 A court may dismiss a plaintiff’s complaint for “failure to state a claim upon which relief can 4 be granted.” Fed. R. Civ. P. 12(b)(6). A properly pled complaint must provide “[a] short and plain 5 statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2); Bell 6 Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). While Rule 8 does not require detailed factual 7 allegations, it demands “more than labels and conclusions” or a “formulaic recitation of the elements 8 of a cause of action.” Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009) (citation omitted). Motion to dismiss pursuant to Rule 12(b)(6) 9 “Factual allegations must be enough to rise above the speculative level.” Twombly, 550 U.S. 10 at 555. Thus, to survive a motion to dismiss, a complaint must contain sufficient factual matter to 11 “state a claim to relief that is plausible on its face.” Iqbal, 129 S.Ct. at 1949 (citation omitted). 12 In Iqbal, the Supreme Court clarified the two-step approach district courts are to apply when 13 considering motions to dismiss. First, the court must accept as true all well-pled factual allegations 14 in the complaint; however, legal conclusions are not entitled to the assumption of truth. Id. at 1950. 15 Mere recitals of the elements of a cause of action, supported only by conclusory statements, do not 16 suffice. Id. at 1949. 17 Second, the court must consider whether the factual allegations in the complaint allege a 18 plausible claim for relief. Id. at 1950. A claim is facially plausible when the plaintiff’s complaint 19 alleges facts that allows the court to draw a reasonable inference that the defendant is liable for the 20 alleged misconduct. Id. at 1949. 21 Where the complaint does not permit the court to infer more than the mere possibility of 22 misconduct, the complaint has “alleged – but not shown – that the pleader is entitled to relief.” Id. 23 (internal quotations omitted). When the allegations in a complaint have not crossed the line from 24 conceivable to plausible, plaintiff's claim must be dismissed. Twombly, 550 U.S. at 570. 25 The Ninth Circuit addressed post-Iqbal pleading standards in Starr v. Baca, 652 F.3d 1202, 26 1216 (9th Cir. 2011). The Starr court stated, “First, to be entitled to the presumption of truth, 27 allegations in a complaint or counterclaim may not simply recite the elements of a cause of action, 28 James C. Mahan U.S. District Judge -4- 1 but must contain sufficient allegations of underlying facts to give fair notice and to enable the 2 opposing party to defend itself effectively. Second, the factual allegations that are taken as true must 3 plausibly suggest an entitlement to relief, such that it is not unfair to require the opposing party to 4 be subjected to the expense of discovery and continued litigation.” Id. 5 B. 6 Federal Rule of Civil Procedure 23.1(a) imposes a heightened pleading standard when “one 7 or more shareholders or members of a corporation or an unincorporated association bring a 8 derivative action to enforce a right that the corporation or association may properly assert but has 9 failed to enforce.” FED.R.CIV.P. 23.1(a). Under this standard, the complaint must “state with 10 particularity: (A) any effort by the plaintiff to obtain the desired action from the directors or 11 comparable authority and, if necessary, from the shareholders or members; and (B) the reasons for 12 not obtaining the action or not making the effort.” FED.R.CIV.P. 23.1(b)(3); see also Potter v. 13 Hughes, 546 F.3d 1051, 1056 (9th Cir. 2008) (explaining that a plaintiff is able to bring a 14 shareholder derivative lawsuit if: (1) the plaintiff owned shares in the corporation at the time of the 15 disputed transaction; and (2) the plaintiff alleged with particularity the efforts, if any, made by the 16 plaintiff to obtain the action the plaintiff desires from the directors). This requirement operates as 17 a threshold to insure that plaintiffs exhaust intracorporate remedies so that courts may properly focus 18 on the motivations fueling a board’s decision rather than its particular merits. See Iron Workers 19 Local No. 25 Pension Fund ex rel. Monolithic Power Sys., Inc. v. Bogart, case no. 11-4604 PSG, 20 2012 WL 2160436, at *2 (N.D. Cal. June 13, 2012). Motion to dismiss pursuant to Rule 23.1 21 Rule 23.1 does not establish the circumstances under which demand would be futile; rather, 22 the law of the Wynn Resorts’s incorporating state, Nevada, sets that standard. In re Silicon Graphics, 23 Inc. Secs. Litig., 183 F.3d 970, 989–90 (9th Cir. 1999), abrogated on other grounds as recognized 24 in S. Ferry LP, # 2 v. Killinger, 542 F.3d 776, 784 (9th Cir. 2008). The Nevada Supreme Court 25 clarified Nevada law regarding demand futility, adopting the approach developed by the Delaware 26 Supreme Court. See Shoen v. SAC Holding Corp., 122 Nev. 621, 137 P.3d 1171, 1184 (Nev. 2006) 27 (following Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984), overruled in part on other grounds by 28 James C. Mahan U.S. District Judge -5- 1 Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000), and modified by Rales v. Blasband, 634 A.2d 927, 2 933 (Del.1993)); see also In re Amerco Derivative Litig., 127 Nev. Adv. Op. 17, 252 P.3d 681 (Nev. 3 2011). 4 The first prong of the Aronson test asks whether the shareholder has pleaded “with 5 particularity facts that establish that demand would be futile because the directors are not 6 independent or disinterested.” In re J.P. Morgan Chase & Co. S'holder Litig., 906 A.2d 808, 820 7 (Del.Ch. 2005) (internal citations omitted). The second prong of the test asks whether there is a 8 reasonable doubt that “the challenged transaction was otherwise the product of a valid exercise of 9 business judgment.” Id. These prongs are in the disjunctive, and therefore, “if either prong is 10 satisfied, demand is excused.” Brehm, 746 A.2d at 256. A derivative plaintiff’s failure to adequately plead futility of demand justifies “dismissal of 11 12 the complaint . . . .” Shoen, 137 P.3d at 1180. 13 III. Judicial notice 14 Review on a motion pursuant to Fed.R.Civ.P. 12(b)(6) is normally limited to the complaint 15 itself. See Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir. 2001). If the district court relies 16 on materials outside the pleadings in making its ruling, it must treat the motion to dismiss as one for 17 summary judgment and give the non-moving party an opportunity to respond. FED.R.CIV.P. 12(b); 18 see United States v. Ritchie, 342 F.3d 903, 907 (9th Cir.2003). “A court may, however, consider 19 certain materials—documents attached to the complaint, documents incorporated by reference in the 20 complaint, or matters of judicial notice—without converting the motion to dismiss into a motion for 21 summary judgment.” Ritchie, 342 F.3d at 908. 22 A court may also treat certain documents as incorporated by reference into the plaintiff’s 23 complaint if the complaint “refers extensively to the document or the document forms the basis of 24 the plaintiff's claim.” Id. at 908. If adjudicative facts or matters of public record meet the 25 requirements of Fed. R. Evid. 201, a court may judicially notice them in deciding a motion to 26 dismiss. Id. at 909; see FED.R.EVID. 201(b) (“A judicially noticed fact must be one not subject to 27 reasonable dispute in that it is either (1) generally known within the territorial jurisdiction of the trial 28 James C. Mahan U.S. District Judge -6- 1 court or (2) capable of accurate and ready determination by resort to sources whose accuracy cannot 2 reasonably be questioned.”); see also Carstarphen v. Milsner, 594 F. Supp. 2d 1201, 1207 (D. Nev. 3 2009). 4 “Court orders and filings are the type of documents that are properly noticed under [Rule 5 201(b) ].” Neilson v. Union Bank of Cal., 290 F.Supp.2d 1101, 1112 (C.D. Cal. 2003). In particular, 6 courts may take judicial notice of proceedings of other courts if those proceedings have a “direct 7 relation to matters at issue.” United States ex rel. Robinson Rancheria Citizens Council v. Borneo, 8 971 F.2d 244, 248 (9th Cir. 1992) (citations omitted). Nonetheless, the court can only take judicial 9 notice of these documents for the “limited purpose of recognizing the ‘judicial act’ that the order 10 represents on the subject matter of litigation.” Neilson, 290 F.Supp.2d at 1112 (quoting United States 11 v. Jones, 29 F.3d 1549, 1553 (11th Cir. 1994)). 12 Defendants request the court to take judicial notice of two state court orders. (Doc. # 101, 13 Ex. A & Ex. C). Defendants represent that the purpose of requesting judicial notice is that these 14 cases did not appear to be readily available in an official reporter and were enclosed for the court’s 15 convenience. Since state court authority on the issue of futility is relevant to this court’s analysis, the 16 court takes judicial notice for the “limited purpose of recognizing the ‘judicial act,’” Neilson, 290 17 F.Supp.2d at 1112, and considers the orders to the extent they are informative. 18 Defendants also request the court to take judicial notice of an online publication of the 19 Nevada Secretary of State. (Doc. # 101, Ex. B). While the court acknowledges that it can take 20 judicial notice of government web sites, see e.g., In re Amgen Inc. Sec. Litig., 544 F. Supp. 2d 1009, 21 1030 (C.D. Cal. 2008), the court does not find it necessary to do so here.7 22 ... 23 24 25 26 27 7 Further, the court takes this opportunity to remind the parties that this is federal court and as a federal court, it follows the Federal Rules of Civil Procedure. See Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188 (1938). 28 James C. Mahan U.S. District Judge -7- 1 IV. Futility discussion 2 Demand futility analysis is normally conducted on a claim-by-claim basis. See In re 3 Countrywide Fin. Corp. Deriv. Litig., 554 F.Supp.2d 1044, 1080 (C.D.Cal. 2008) (citation omitted). 4 Here, however, the parties have not organized their arguments claim-by-claim. The court will 5 proceed with its analysis as argued by the parties, but remains mindful of the requirement that 6 demand be excused for each claim individually. 7 The Wynn Resorts’s board consisted, as of the time this lawsuit was filed, of twelve 8 directors. Thus, to establish demand futility, plaintiffs must have pleaded facts raising a reasonable 9 doubt regarding the capability of at least six of those directors to consider impartially a demand with 10 11 12 regard to each claim. See Shoen, 137 P.3d at 1184 n. 62. A. Disinterested and independent I. Disinterest 13 “[T]o show interestedness, a shareholder must allege that a majority of the board members 14 would be materially affected, either to [their] benefit or detriment, by a decision of the board, in a 15 manner not shared by the corporation and the stockholders.” Shoen, 137 P.3d at 1183 (citation 16 omitted, edit in original). An interested director is one who has “divided loyalties” or stands to 17 receive a financial benefit from the transaction at issue. Id. at 1182. 18 However, “[a]llegations of mere threats of liability through approval of the wrongdoing or 19 other participation, [ ] do not show sufficient interestedness to excuse the demand requirement.” Id. 20 at 1183. “[A]s the Delaware courts have indicated, interestedness because of potential liability can 21 be shown only in those rare case[s] . . . where defendants’ actions were so egregious that a 22 substantial likelihood of director liability exists.” Id. at 1183-84 (citation omitted, edit in original). 23 Plaintiffs argue that a majority of the Wynn Resorts’s board lacks disinterestedness because 24 eleven of the company’s twelve directors face a substantial likelihood of liability for approving the 25 Macau donation and the redemption of Okada’s shares. (Doc. # 114, 17:14-17). Further, plaintiffs 26 allege that the redemption of Okada’s shares benefitted Wynn differently from other shareholders. 27 28 James C. Mahan U.S. District Judge -8- 1 a. Macau donation 2 Plaintiffs assert that defendants face a substantial likelihood of liability for approving the 3 Macau donation because they knew it was an improper bribe that exposed the company to liability 4 for violating the Foreign Corrupt Practices Act (“FCPA”). Thus, plaintiffs attempt to show 5 interestedness by arguing that defendants’ approval of the Macau donation was a breach of fiduciary 6 duty of loyalty because they knowingly engaged in bribery.8 7 However, plaintiffs’ complaint fails to sufficiently allege that defendants knew that the 8 Macau donation was improper. (See doc. # 95, ¶¶ 3-5, 38-43, 52-53, 56-58, 66-67, 77-78, 88-92, 9 115). Instead, the allegations establish that defendants knew of the company’s obligations not to 10 engage in bribery. And on the one occasion that plaintiffs alleged knowledge of wrongdoing on 11 behalf of defendants, the allegation, alone is insufficient under the heightened pleading standard of 12 Rule 23.1(a) to establish a substantial likelihood of personal liability for defendants. (See id., ¶ 6). 13 Because NRS 78.138(7) requires intent or knowledge on the part of directors in order to hold 14 them individually liable for their conduct, it would follow that failure to allege intent or knowledge 15 would render defendants disinterested because they would not face a substantial likelihood of 16 liability. Without allegations establishing that defendants acted intentionally or knowingly, 17 defendants’ liability is a “mere threat,”Ash v. McCall, CIV.A. 17132, 2000 WL 1370341, at *10 18 (Del. Ch. Sept. 15, 2000), which is insufficient to create reasonable doubt that any defendant faces 19 a “substantial likelihood” of personal liability for approving the Macau donation. 20 b. Redemption of Okada’s shares 21 Plaintiffs argue that the redemption of Okada’s shares was in attempts to discredit Okada’s 22 influence at the company and in furtherance of defendants’ own self-interests, and was not in the best 23 interest of Wynn Resorts or its shareholders. Plaintiffs specifically allege that the board redeemed 24 these shares “solely to perpetuate [Wynn’s] control over the company and the board.” (Doc. # 95, 25 ¶¶ 104, 61-62). Plaintiffs assert that the redemption was not undertaken to protect the company’s 26 8 27 28 James C. Mahan U.S. District Judge NRS 78.138(7) provides that in order to state a claim for damages against a director or officer for breach of fiduciary duty, a plaintiff must allege that the defendant engaged in “intentional misconduct, fraud or a knowing violation of law.” -9- 1 gaming licenses as defendants purported, but rather to retaliate against Okada for raising questions 2 about the Macau donation. Plaintiffs argue that it is impossible for the redemption to protect the 3 company’s gaming license by merely converting Okada from an equity holder to a debt holder. 4 Plaintiffs assert that the redemption of Okada’s shares materially affects Steve Wynn’s 5 control over the board and company. But regardless of whether this redemption actually decreases 6 Wynn’s voting power pursuant to the Stockholder Agreement as defendants argue, plaintiff makes 7 this allegation to Wynn only. And any allegation that the redemption benefitted Wynn only is 8 insufficient to establish that “a majority of the board members would be materially affected . . . ,” 9 Shoen, 137 P.3d at 1183, by the challenged conduct and thus are interested. 10 Plaintiff argues that NRS § 463.643(7) prohibits “unsuitable” persons from holding voting 11 or debt securities in a gaming company. But this is not so. The Gaming Control Act provides that 12 a holder of 10 percent or more of any class of voting securities in a publicly traded corporation with 13 the Nevada Gaming Commission “shall apply to the Commission for a finding of suitability.” NRS 14 § 463.643(4). By contrast, a person who acquires the debt of a publicly traded registrant does not 15 face a mandatory application requirement. Instead, the statute provides that a debt holder “may be 16 required to be found suitable if the Commission has reason to believe that the person’s acquisition 17 of the debt security would otherwise be inconsistent with the declared policy of this state.” NRS § 18 463.643(2). 19 Based on this distinction of “suitability” between equity and debt holders, it is not inherently 20 improper for the board to have redeemed Okada’s equity share in the company in exchange for debt 21 based on the directors’ belief that Okada was “unsuitable” or that such redemption would protect the 22 company’s gaming licenses. Therefore, such an allegation does not demonstrate intentional 23 misconduct to establish a breach of fiduciary duty and, in turn, establish a substantial likelihood of 24 liability. 25 Plaintiffs also argue that the board’s filing of a lawsuit at 2:14 a.m. the morning after the 26 board deemed Okada “unsuitable” and redeemed his shares, is a sufficient allegation to establish 27 intentional misconduct on behalf of defendants under NRS § 78.138(7). However, the court does not 28 James C. Mahan U.S. District Judge - 10 - 1 find the inference plaintiffs urge the court to make compelling. Preemptive use of the legal system 2 cannot, as a matter of course, indicate knowledge or intentional misconduct on behalf of those filing 3 the lawsuit. Such an inference would deter those availing themselves, in good faith, of the justice 4 system. Thus, the court declines to draw this inference. Further, even if the court did draw this 5 inference, this allegation is insufficient under Rule 23.1’s heightened pleading standard to establish 6 a substantial likelihood of liability. 7 Plaintiffs also argue that the board’s failure to disclose that it had removed Okada as vice- 8 chairman of the board until more than three months after the fact establishes a substantial likelihood 9 of liability for breach of fiduciary duty. But this allegation falls short of establishing intentional 10 misconduct. If anything, a failure to disclosure can be construed as an omission. Under NRS § 11 78.138(7), a director does not face personal liability for an omission that does not result from some 12 intent or knowledge. Thus, the allegation cannot serve to establish a substantial likelihood of liability 13 for breach of fiduciary duty. 14 ii. Independence 15 Independence exists when a director’s decision is based on the “corporate merits of the 16 subject before the board” rather than on “extraneous considerations or influences.” Aronson, 473 17 A.2d at 816. Such “extraneous conditions or influences” may include “a material financial or familial 18 interest” or current or past business and employment relationships with each other and the entities 19 involved. See Grimes v. Donald, 673 A.2d 1207, 1216 (Del. 1996) overruled in part by Brehm v. 20 Eisner, 746 A.2d 244 (Del. 2000); Grace Bros., Ltd. v. Uniholding Corp., CIV.A. 17612, 2000 WL 21 982401, at *10 (Del. Ch. July 12, 2000); c.f. In re AMERCO, 252 P.3d at 706 (“[w]hile a close 22 family relationship can disqualify a director . . . , business, social, and more remote family 23 relationships are not disqualifying, without more.”); see also Beam ex rel. Martha Stewart Living 24 Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1051 (Del. 2004) (allegation that directors “moved in 25 the same social circles, attended the same weddings, developed business relationships before joining 26 the board, and described each other as ‘friends,’ . . . are insufficient, without more, to rebut the 27 presumption of independence.”). 28 James C. Mahan U.S. District Judge - 11 - 1 To raise reasonable doubt as to a director’s independence, a shareholder must allege that a 2 majority of the board members “is beholden to directors who would be liable,”or is otherwise 3 interested so that he would be unable to consider a demand on its merits. Shoen, 137 P.3d at 1183 4 (citation omitted). 5 As an initial consideration, plaintiffs need allege only that six of the twelve person board 6 lacked independence. See Shoen, 137 P.3d at 1184 n. 62. Further, the court takes judicial notice of 7 the Wynn Resorts’s 2011 proxy statement (doc. # 115, ex. B, p. 20).9 The proxy statement 8 acknowledges that Wynn, E. Wynn, Chen and Schorr are not independent under the NASDAQ 9 listing standards which are virtually identical to the standards for establishing director independence 10 under Nevada demand futility law. See In re Dow Chem. Co. Derivative Litig., CIV.A. 4349-CC, 11 2010 WL 66769, at *8 n.43 (Del. Ch. Jan. 11, 2010); see also In re Countrywide Fin. Corp. 12 Derivative Litig., 554 F. Supp. 2d 1044, 1080-81 (C.D. Cal. 2008). Thus, the court will only analyze 13 the independence of Goldsmith, Irani, Miller, Moran, Shoemaker, Wayson, and Zeman, to determine 14 if two of these board members lack independence. 15 Plaintiffs argue that the board was beholden to Wynn and that Wynn had a personal interest 16 in the challenged actions, that is the Macau donation and the redemption of Okada’s shares. Plaintiffs 17 allege that the board is beholden to Wynn because he “hand-picked” them and he has “business, 18 professional, and personal relationships” with certain directors. 19 For purposes of this analysis, plaintiffs have met their burden under the heightened pleading 20 standard of Rule 23.1 that Wynn was interested in the redemption of Okada’s shares, at least to the 21 extent that the redemption resulted in Okada no longer holding the position of the company’s largest 22 shareholder.10 23 24 25 26 9 The court may treat certain documents as incorporated by reference into the plaintiff’s complaint if the complaint “refers extensively to the document or the document forms the basis of the plaintiff's claim.” Ritchie, 342 F.3d at 908. Here, the plaintiffs reference the 2011 proxy statement in paragraph 111 of their complaint for precisely this proposition: the dependence of Wynn, E. Wynn, Chen, and Schorr. 10 27 28 James C. Mahan U.S. District Judge The court does not make any determination on whether Wynn is a “controlling shareholder” or the extent to which Wynn’s voting power increased or deceased in relation to the election of directors or other matters voted upon by shareholders. - 12 - 1 Plaintiffs allege only that some of the remaining directors have been friends with Wynn for 2 many years (Miller, Moran, Zeman),11 were previously employed by Wynn-controlled enterprises 3 (Wayson), or received Wynn’s support in philanthropic or political endeavors (Miller and Moran). 4 The court addresses whether the following board members are beholden to Wynn to determine if 5 each lacks independence. 6 a. Miller 7 Plaintiffs allege that Wynn and Miller have been friends for 40 years and that Wynn has 8 played a significant role in Miller’s political success. Plaintiff substantiates his allegations by 9 pointing to (1) a $70,000 donation to Miller’s 1994 gubernatorial race, (2) a threat Wynn made 10 against an opponent of Miller’s in the 1994 election, and (3) Miller testifying on Wynn’s behalf in 11 a 1997 libel case. 12 Without more, the court does not find that plaintiffs have met their burden to rebut the 13 presumption of independence. Allegations of friendship, alone, are insufficient–even if the friend 14 did testify on the interested director’s behalf. Further, plaintiffs have not alleged a campaign 15 contribution of such a significant magnitude that would lead the court to believe that Miller lacks 16 independence 19 years after the contribution was made. 17 b. Moran 18 Plaintiffs allege that Moran and Wynn have been friends for 30 years. Plaintiffs specially 19 allege that Wynn donated $1 million to the Moran Eye Center at the University of Utah in 1993 and 20 made another “large donation” after the new Moran Eye Center opened in 2007. Plaintiffs also allege 21 that Wynn made a “large donation” to Senator Bob Dole’s 1996 presidential campaign to which 22 Moran was the finance chair. 23 After considering whether these allegations cast doubt as to Moran’s independence, the court 24 finds that they do not. While $1 million is a considerable amount of money, this donation was made 25 20 years ago and was not a financial gift from which Moran personally benefitted. Further, the other 26 27 28 James C. Mahan U.S. District Judge 11 Plaintiffs’ allegation as to Zeman is only that he and Wynn have a “longstanding personal friendship.” (Doc. # 95, ¶ 110). But this is insufficient to show a lack of independence on behalf of Zeman. - 13 - 1 donations are not alleged with sufficient particularity for the court to draw an inference that Moran 2 would feel beholden to Wynn. 3 c. Wayson 4 Plaintiffs allege that Wynn has been close with Wayson since they were young, as their 5 fathers had a business relationship in the 1950s operating a bingo hall together. Plaintiff also points 6 to Wynn’s past employment of Wayson and of Wayson’s siblings. 7 Beyond the vague allegations of friendship between Wynn and Wayson, plaintiffs do not 8 allege sufficient facts to raise a reasonable doubt as to Wayson’s independence. While current 9 employment (outside of that as a director) of Wayson or one of Wayson’s sibling might call into 10 question one’s independence, no such allegation was made here. 11 Accordingly, plaintiff have not alleged with particularity sufficient facts to show that two 12 more directors lack independence to establish that a majority of the board is interested under Shoen 13 to excuse the demand requirement. Business judgment12 14 B. 15 Under the second prong of Aronson, demand is futile if there is a reasonable doubt that the 16 board’s decision was a valid exercise of business judgment. Shoen, 137 P.3d at 112; Aronson, 473 17 A.2d at 814. The business judgment rule presume that in making a business decision, the directors 18 of a corporation acted on an informed basis, in good faith, and in the honest belief that the action 19 taken was in the company’s best interest. Shoen, 137 P.3d at 1178-79. To rebut this presumption, 20 plaintiff must allege “facts sufficient to raise (1) a reason to doubt that the action was taken honestly 21 and in good faith or (2) a reason to doubt that the board was adequately informed in making the 22 decision.” In re Walt Disney Co. Derivative Litig., 825 A.2d 275, 286 (Del.Ch. 2003). 23 24 25 12 26 27 28 James C. Mahan U.S. District Judge Plaintiffs have not established that a majority of directors is interested. See Aronson, 473 A.2d at 812. Although plaintiffs do not directly allege a breach of fiduciary duty as to the duty of care, there are facts that give rise to a duty of care claim. See Shoen, 137 P.3d at 1181. On this basis, the court addresses whether plaintiffs have alleged facts with sufficient particularity as to raise a reasonable doubt to rebut the business judgment rule presumption. - 14 - 1 NRS § 78.138(3) provides that “[d]irectors and officers, in deciding upon matters of business, 2 are presumed to act in good faith, on an informed basis and with a view to the interests of the 3 corporation.” “[E]ven a bad decision is generally protected by the business judgment rule’s 4 presumption . . . .” Shoen, 137 P.3d at 1181. Plaintiff carries a “heavy burden” in this regard. Id. 5 I. Macau donation 6 Plaintiffs allege that the Macau donation was a bribe to Macau government officials in 7 exchange for a second land concession to expand Wynn Macau. Plaintiffs’ allegation is based on the 8 size and timing of the Macau donation–$135 million, over 10 years, including $25 million two 9 months before the Macau government approved the land concession agreement. 10 Plaintiffs made a single allegation that may be construed as intentional misconduct or a 11 knowing violation of the law (see doc. # 95, ¶ 6); however, this allegation alone is insufficient to 12 meet the particularity requirements of Rule 23.1.13 Even plaintiffs’ allegation that the donation was 13 made “[i]n order to push the land concession agreement along,” (id., ¶ 56), this allegation is not 14 stated with sufficient particularity to impart bad faith onto the directors. The complaint lacks 15 particular allegations that defendants knew they were engaged in wrongdoing in approving the 16 Macau donation. At most, the complaint alleges that defendants knew the donation was made in an 17 effort to obtain the land concession and recites the obligations of the company under the FCPA; 18 however, this does not demonstrate bad faith on behalf of the directors in approving the Macau 19 donation. 20 Plaintiffs assert that they have met their burden to a raise reasonable doubt as to the directors’ 21 good faith intentions in making the Macau donation. However, plaintiffs alleged that the directors 22 made this donation to benefit the company. See In re Walt Disney Co. Derivative Litig., 907 A.2d 23 693, 753 (Del. Ch. 2005) aff’d, 906 A.2d 27 (Del. 2006)(“Bad faith has been defined as authorizing 24 a transaction ‘for some purpose other than a genuine attempt to advance corporate welfare or [when 25 26 27 28 James C. Mahan U.S. District Judge 13 Further, to the extent that plaintiffs alleged that each director “knew, or was reckless in not knowing, that the transfer to [the university] would expose the Company to liability under the FCPA . . .” (doc. # 95, ¶¶ 26, 27, 28, 29, 30, 31, 32, 33, 34, 35, 36), these allegations are not stated with sufficient particularity to impart bad faith onto the directors. - 15 - 1 the transaction] is known to constitute a violation of applicable positive law.’”) (edit and emphasis 2 in original). Without allegations that the donation was made to advance some interest other than the 3 company’s welfare or that the directors had knowledge of the violation of the law, the court finds 4 that the business judgment rule presumption still applies. 5 Directors “have a duty to inform themselves, prior to making a business decision of all 6 material information reasonably available to them” prior to making a decision. Aronson, 473 A.2d 7 at 812. Plaintiffs argue that in light of the suspicious circumstances surrounding the donation, the 8 directors failed to consider material that was critical to making an informed decision. Plaintiffs, 9 however, have not met their burden. Limiting itself to reviewing the process the board followed in 10 coming to its decision, the court finds that plaintiffs have not met the heightened pleading standard 11 of Rule 23.1 in alleging what material was reasonably available but not considered. 12 Instead, plaintiffs allege that Wynn purported to have a legal opinion that sanctioned the 13 transaction, but that Wynn did not provide this opinion to the board. This allegation does not 14 establish reason to doubt that the board was adequately informed for two reasons: (1) plaintiffs have 15 not alleged that any defendant, other than Wynn, knew of the legal opinion at the time the transaction 16 was approved; and (2) the legal opinion allegedly is in support of the transaction plaintiffs challenge. 17 Thus, if anything, this legal opinion would have bolstered defendants’ position in approving the 18 donation. 19 While the court acknowledges that plaintiffs have alleged facts that lead the court to believe 20 that the size and timing of the donation was “highly suspicious” that alone cannot serve as the basis 21 to rebut the statutory business judgment presumption. 22 ... 23 ... 24 ... 25 ... 26 ... 27 ... 28 James C. Mahan U.S. District Judge - 16 - 1 ii. 2 Plaintiffs allege that converting Okada from an equity holder to a debt holder had no 3 effect on his purported status as an “unsuitable” person14 and that this conversion encumbered the 4 company with a $1.9 billion debt and associated litigation expenses. Redemption of Okada’s shares 5 The company’s articles of incorporation15 authorize the directors to redeem the shares of an 6 “unsuitable” shareholder and permits the exchange of a shareholder’s equity stake for a promissory 7 note. (Doc. # 100, Ex. 2, Art. VII, §§ 1(j), 2). Thus, the articles envisioned circumstances in which 8 shares would been redeemed in exchange for debt. On this basis, the court does not find that 9 encumbering the company with a debt obligation permitted by the articles of incorporation to fall 10 outside the protections afforded by the business judgment rule. 11 Accordingly, plaintiffs have failed to demonstrate that they should be excused from the pre- 12 suit demand requirements under either Aronson prong. Plaintiffs’ complaint shall be dismissed for 13 failure to have adequately pleaded the futility of pre-suit demand. 14 V. Leave to amend 15 In their opposition to defendants’ motion to dismiss, plaintiffs requested leave to amend. 16 (Doc # 114, 30, n.28). Defendants oppose this request arguing that plaintiffs have already been 17 afforded an opportunity to amend the pleadings once upon consolidation of four separate derivative 18 suits. (Doc. # 116, 19:21-20:1). Considering that plaintiffs have not been afforded an opportunity 19 to amend their complaint with the court’s guidance, the court is inclined to permit amendment. 20 ... 21 ... 22 23 24 25 26 27 28 James C. Mahan U.S. District Judge 14 The court previously addressed the “suitability” of shareholders, supra IV.A.i.b. While, this discussion was in terms of the directors’ interestedness, the court finds the analysis applicable here. That is, whether the decision to convert Okada’s shares should be afforded the protections of the business judgment rule presumption. The court finds that it does. 15 The court takes judicial notice of the Wynn Resorts’s articles of incorporation (doc. # 100, Ex. 2). The articles of incorporation were relied upon by plaintiffs in their complaint and therefore is proper for the court to consider without converting the instant motion to dismiss into a motion for summary judgment. See Goodwin v. Exec. Tr. Servs., LLC, 680 F. Supp.2d 1244, 1250 (D. Nev. 2010). - 17 - 1 Under Rule 15(a)(2) leave to amend is to be “freely given when justice so requires.” FED. R. 2 CIV. P. 15. In general, amendment should be allowed with “extreme liberality.” Owens v. Kaiser 3 Found. Health Plan, Inc., 244 F.3d 708, 712 (9th Cir. 2001) (quoting Morongo Band of Mission 4 Indians v. Rose, 893 F.2d 1074, 1079 (9th Cir. 1990)). Absent a showing of an “apparent reason” 5 such as undue delay, bad faith, dilatory motive, prejudice to the defendants, futility of the 6 amendments, or repeated failure to cure deficiencies in the complaint, leave to amend should be 7 granted. Moore v. Kayport Package Express, Inc., 885 F.2d 531, 538 (9th Cir. 1989). 8 Accordingly, the court will afford plaintiffs an opportunity to amend their complaint. The 9 court reminds plaintiffs that if they choose to amend their complaint, they must comply with the 10 requirements of Local Rule 15-1 and file a motion to amend, attaching the proposed amended 11 complaint. Additionally, if the amended complaint is similarly deficient, the court may conclude that 12 further leave to amend would be futile. 13 VI. Conclusion 14 Accordingly, 15 IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that Stephen A. Wynn, Linda 16 Chen, Russell Goldsmith, Ray R. Irani, Robert J. Miller, John A. Moran, Marc D. Schorr, Alvin V. 17 Shoemaker, D. Boone Wayson, Allan Zeman, Elaine P. Wynn, and Wynn Resorts, Limited’s motion 18 to dismiss (docs. # 109, 103) be, and the same hereby is, GRANTED without prejudice. 19 IT IS FURTHER ORDERED that plaintiffs, if they chooses to amend their complaint, file 20 the motion to amend, attaching the proposed amended complaint, within thirty (30) days of the date 21 of this order. 22 DATED February 1, 2013. 23 24 UNITED STATES DISTRICT JUDGE 25 26 27 28 James C. Mahan U.S. District Judge - 18 -