Class Action Derivative Claims Challenging Severance Package Paid by HP to Former CEO Dismissed for Failure to Make Requisite Demand on Board and Failure to Establish Futility California Federal Court Holds
Plaintiffs filed a class action against Hewlett-Packard, its former chief executive officer, Carleton Fiorina, and various other individual defendants challenging the severance package HP paid Fiorina. Indiana Electrical Workers Pension Trust Fund v. Dunn, ___ F.Supp.2d ___ (N.D. Cal. March 28, 2008) [Slip Opn., at 1-2]. The class action complaint outlined Fiorina’s role in HP’s merger with Compaq, over board member Walter Hewlett’s vigorous opposition, and alleged that Fiorina and HP used knowingly false financial projections to secure approval of the merger. Id., at 2-3. The class action also alleged that after the merger was characterized as a failure, HP fired Fiorina and paid her more than $40 million in benefits, including a $21.4 million severance package that, plaintiffs allege, was aimed at “mak[ing] sure that Fiorina kept quiet about the Compaq merger debacle.” Id., at 3. The second amended class action complaint charges that Fiorina’s severance package were ‘far in excess” of “the express terms of the Company’s Severance Policies,” id. The gravamen of the complaint was that Fiorina termination was “involuntarily” and, accordingly, “she was not entitled to any accelerated vesting of payments under HP’s Long-Term Performance Cash (‘LTPC’) Program.” Id., at 3-4. Defense attorneys for HP and the individual defendants moved to dismiss the class action; the district court granted the motion.
The defense motion to dismiss the class action advanced two main arguments. First, defense attorneys argued that the class action complaint’s derivative claims failed because plaintiffs never made the requisite demand on HP’s board of directors. Dunn, at 8. The district court explained that “[a] shareholder seeking to vindicate the interests of a corporation through a derivative suit must first demand action from the corporation’s directors or plead with particularity the reasons why such demand would have been futile.” Id., at 8-9 (citing In re Silicon Graphics Inc. Securities Litig., 183 F.3d 970, 989-90 (9th Cir. 1999)). Because the laws of the state in which HP is incorporated govern whether it would be futile to make the requisite demand and because HP is incorporated in Delaware, the court analyzed futility under Delaware law. Id., at 9. Based on its detailed factual analysis, the district court rejected plaintiffs’ counter that making the requisite demand on the board would have been futile. See id., at 9-14. The district court also concluded that the business judgment rule insulates the board’s decision to pay Fiorina the $21 million severance. Id., at 14. The court explained at pages 14 and 15 that it was incumbent upon plaintiffs to “allege facts sufficient to rebut a presumption that the decision was a result of a valid exercise of business judgment.” Based on the federal court’s analysis, plaintiffs failed to rebut this presumption, see id., at 15-17, and failed to establish that the board’s acts were ultra vires, see id., at 17-21.
With respect to the class action complaint’s “direct claims,” defense attorneys argued that these claims were in fact nothing more than disguised derivative claims and must be dismissed for the same reasons discussed above (i.e., failure to make a demand or establish futility). Dunn, at 21. Under Delaware law, “The distinction of whether a claim is derivative or direct ‘depends upon the nature of the wrong alleged and the relief, if any, which could result if plaintiff were to prevail.’” Id., at 22 (citations omitted). The district court agreed that plaintiffs’ claims were derivative, id., at 22-24. Because plaintiffs had several opportunities to properly plead their class action claims, the district court dismissed the complaint with prejudice, id., at 24-25.