The defendants contended that Data Key Partners had not pled facts sufficient to show entitlement to relief because they had not pled around the business judgment rule, which shields directors from liability for potential breaches of fiduciary duty. The complaint stated that the directors had engaged in “willful misconduct,” one of the statutory exceptions to the rule. But the court found that the plaintiff had not pled any facts supporting its “willful misconduct” conclusion, and dismissed the complaint. The court also found that even if a plaintiff alleging a fiduciary-duty violation did not raise the business judgment rule in its complaint, the plaintiff would still need to plead facts sufficient to avoid that rule because it is substantive law, not just an affirmative defense.
In finding that the plaintiff had not pled sufficient facts to state a claim, the court noted that it was not improper for the directors to proceed with the sale to Permira. Although Plato had offered to pay more, the directors considered certain risks that would accompany an eleventh-hour sale to Plato. In addition, had Renaissance cancelled its sale to Permira, Renaissance would be obligated to pay a $13 million penalty. “The directors could in good faith conclude that a bird in the hand was worth two in the bush,” the court reasoned.
Insufficient Facts Pled Against Controlling Shareholders
Data Key Partners further claimed that Renaissance’s majority shareholders breached their fiduciary duty when they voted in favor of the sale to Permira. Specifically, the plaintiff alleged that the majority shareholders used their influence on the board to force the Permira sale for their own personal benefit—namely, receipt of a license to use Renaissance’s software for the educational use of the majority shareholders’ family. The plaintiffs also alleged that the majority shareholders’ personal banker was involved in the Permira sale.
Majority shareholders are not entitled to the presumption of the business judgment rule, which protects only the decisions of corporate directors. The court still, however, dismissed the claim against the shareholders. In the court’s view, the plaintiff needed to allege that the educational license was worth more than the $10 million premium that the minority shareholders received from the Permira sale over what the majority shareholders received. In addition, the court found that Data Key Partners did not explain how the personal banker’s services benefitted the majority shareholders.
“It’s unusual in this context, when you have a fiduciary who is alleged to be involved in self-dealing, that the burden of proof is placed on the plaintiff,” observes Patrick D. Keating, Dallas, TX, cochair of the Fiduciary Duties Subcommittee of the ABA Section of Litigation’s Business Torts and Unfair Competition Litigation Committee. “Ordinarily under Delaware law, which many states look to, the burden is on the defendant,” Keating notes.
Meeting the Plausibility Standard
“Lawyers should be careful to check whether a state in which they are litigating has adopted the plausibility pleading standard,” advises Keating. “It is not safe to assume that is the case just because a state has a rule of civil procedure similar to Federal Rule of Civil Procedure 8,” he explains.
States have taken different approaches. “Some state courts had higher pleading requirements to begin with, some have looser standards, some have adopted Iqbal/Twombly and some have not,” remarks Mor Wetzler, New York, NY, Iqbal Task Group Director for the Section of Litigation’s Pretrial Practice and Discovery Committee. “The impact of Iqbal/Twombly is very complaint-specific, sometimes even judge-specific,” she adds.
The Data Key result in Wisconsin contrasts sharply with that reached in Walsh v. U.S. Bank, N.A., where the Minnesota Supreme Court held that the Twombly plausibility standard does not apply to civil pleadings in Minnesota. This divergence means lawyers must be alert to the applicable standard where they are litigating.
If the forum requires plaintiffs to plead facts sufficient to plausibly show a right to relief, include as many facts as possible,” Keating recommends. “I could see a lawyer making a mistake with respect to duty of care because the lawyer needs to plead what the directors should have done, but failed to do,” says Keating. “Did the directors fail to hold any meetings where they discussed the transaction at issue? Did they fail to hire outside advisors regarding whether the transaction was beneficial to the company and its shareholders? State the facts supporting what you think happened,” Keating concludes.
Lisa R. Hasday is an associate editor for Litigation News.