(Santa Clara County Super.Ct.No. CV041521) Trial Judge: Hon. Jack Komar.
The opinion of the court was delivered by: Duffy, J.
CERTIFIED FOR PARTIAL PUBLICATION*fn1
Management of a corporation, including decisions concerning the prosecution of actions, is vested in its board of directors. When the board refuses to enforce corporate claims, however, the shareholder derivative suit provides a limited exception to the rule that the corporation is the proper party plaintiff. In deference to the managerial role of directors and in order to curb potential abuse, the shareholder asserting a derivative claim must make a threshold showing that he or she made a presuit demand on the board to take the desired action. This demand requirement was recognized over 120 years ago by the Supreme Court (see Hawes v. City of Oakland (1881) 104 U.S. 450), and is codified in California (see Corp. Code, § 800, subd. (b)(2); hereafter, § 800(b)(2)).*fn2 Under section 800(b)(2), a plaintiff must plead "with particularity" the attempts that were made to secure board action before bringing suit, or, alternatively, the factual basis upon which the plaintiff believes that a demand on the board was unnecessary, i.e., that a demand would have been futile. Difficulties often arise in shareholder derivative suits in resolving whether the plaintiff has alleged sufficient facts supporting demand futility, thereby obviating the need for a prior demand on the board and the concomitant opportunity for the directors to decide whether to pursue litigation on the corporation's behalf. Another issue that often presents itself is whether a shareholder who brings suit alleging an individual wrong (or direct action) is in fact asserting a derivative claim for which a demand on the board is required. Both of these issues are present in the case before us.
Plaintiff Lauri Cohen Bader filed a shareholder derivative suit in May 2005 against Apple, Inc., and its directors and officers. She challenged a cash performance bonus plan for nondirectors (Plan) that was approved by Apple shareholders after the dissemination of a March 2005 proxy statement (Proxy Statement, or Statement) that she claimed was misleading. In her amended complaint, she alleged that she was pursuing both derivative claims and individual (or direct) claims. After the sustaining of three successive demurrers, and after the case had been pending for more than two years, the court sustained without leave to amend a demurrer to the fourth amended complaint (Complaint). The court concluded, among other things, that Bader had failed to adequately plead (1) demand futility, (2) that the Proxy Statement was false or misleading, or (3) facts sufficient to constitute a direct cause of action.
Bader argues that she adequately pleaded both derivative and direct claims. She asserts further that the court erred because the demand futility doctrine is inapplicable to claims based upon materially false and misleading proxy statements. Bader also contends that she adequately pleaded facts demonstrating that the Proxy Statement contained material misstatements and omissions.
In the published portion of this opinion, we conclude that Bader lacked standing to assert derivative claims on behalf of Apple because of her failure to make a presuit demand on the board and her failure to allege that the making of such a demand would have been futile. In so holding, we reject Bader's position that the requirement of specific pleading of a demand (or, in the alternative, demand futility) under section 800(b)(2) is inapplicable to derivative suits based upon alleged misrepresentations in proxy statements. We also hold in the published portion of this opinion that the claims Bader purported to assert in the Complaint as direct claims on behalf of herself and all similarly situated shareholders are not maintainable, because the gravamen of those claims is corporate in nature and may therefore be asserted only by the corporation. In the unpublished portions of this opinion, we (1) reject Bader's derivative claim based on the contention that the Plan's adoption was invalid; (2) conclude that the allegations of the Complaint were insufficient to support a derivative claim based upon an allegedly false or misleading Proxy Statement; (3) dispose of Bader's remaining contentions by holding that they have been forfeited; and (4) find that the court did not abuse its discretion by denying Bader leave to amend where she failed to identify in what manner the Complaint could be amended to state a viable claim. Accordingly, we will affirm the judgment of dismissal.
On May 19, 2005, Bader filed a shareholder derivative complaint alleging three causes of action, naming Apple, seven individuals alleged to be members of its board of directors, and nine individuals alleged to be executive officers and Plan participants.*fn3
Prior to defendants' filing an answer, Bader filed an amended complaint alleging three causes of action. Bader asserted both direct and derivative claims challenging the adoption of the Plan, claiming that the Proxy Statement soliciting the shareholder vote was false and misleading. Defendants filed a demurrer, which was sustained by the court with leave to amend.
In Bader's second amended complaint, she again alleged both direct and derivative claims in three causes of action. The court sustained defendants' demurrer with leave to amend as to Apple and the Apple directors. The court concluded, inter alia, that the claims alleged were derivative, not direct; Bader had failed to plead facts sufficient to establish demand futility required for a derivative action; and Bader had failed to allege sufficient facts that the Proxy Statement was false or misleading. The court also sustained the demurrer without leave to amend as to the Apple officers.
Bader filed a third amended complaint, alleging that she was asserting both a "stockholder's direct or class action" as well as a derivative action. She alleged five causes of action. Apple and the Apple directors again demurred; the court sustained the demurrer with leave to amend. The court concluded, inter alia, that Bader had failed to allege sufficient facts that the Proxy Statement was false or misleading to support her direct shareholder claim; even if such allegations had been sufficient, Bader could not assert a direct claim because the primary alleged injury was to Apple; the class action allegations were insufficient; and Bader had again failed to plead facts sufficient to establish demand futility required for a derivative action. The court also allowed Bader to conduct limited discovery on the issue of demand futility.
II. Fourth Amended Complaint
On April 30, 2007, Bader filed a (Fourth Amended) Complaint. In it, she alleged six causes of action, namely, for (1) a declaration that the Plan was void because it was not adopted in accordance with California law; (2) a declaration that the Plan was void because there were material misstatements and omissions in the Proxy Statement; (3) breach of fiduciary duty; (4) unfair and unlawful business practices in violation of Business and Professions Code, section 17200; (5) violations of the express terms of the Plan; and (6) waste.
Bader alleged*fn4 that she had been an Apple shareholder continuously since October 10, 2000. She brought the action "for the benefit of [Apple] to redress injuries suffered and to be suffered by [Apple] as a result of [the conduct of] . . . the individual defendants." Bader did not make a prior demand on the board in accordance with section 800(b)(2). She claimed that her suit did not concern a management decision and therefore the business judgment rule did not apply. Bader alleged that because the demand requirement is an extension of the business judgment rule, she was not required to make a presuit demand. Demand was, in any event, not required because "[t]he entire board [was] neither [disinterested] nor independent . . . ."
In the first cause of action claiming that the Plan was invalidly adopted, Bader alleged that the board had appointed a compensation committee (Committee) consisting of three persons (Campbell, Drexler, and Gore), and that the Committee "authorized and enacted the Plan" ultimately approved by the shareholders. The board itself never approved the Plan, an omission that rendered its purported adoption invalid pursuant to section 311.
The second cause of action (captioned "Material Misstatements and Omissions in Proxy Statement") extensively referred to and quoted from the Statement over the course of 16 pages of text. The board authorized the distribution of the Proxy Statement to shareholders for the purpose of, inter alia, approval of the Plan at the annual shareholders meeting scheduled for April 21, 2005. Each of the defendants "knew or should have known that the Proxy Statement contained materially false or misleading representations and omissions . . . ." The Complaint alleged that the Statement falsely represented that bonus payments made under the Plan, if the Plan were approved, would qualify as "performance-based" compensation that would be deductible as provided in section 162, subdivision (m) of the Internal Revenue Code, title 26 United States Code section 162, subdivision (m) (IRC, § 162(m)). Bader alleged further that the Statement's use of the term "operating margin" was false or misleading; the term was vague and nonobjective, and was not a performance goal stated in the Plan. The Proxy Statement was also "false or misleading" in that it stated that the Committee would make an adjustment in evaluating performance under a performance criterion by excluding " "extraordinary non-recurring items' [a phrase that] is not an accounting expression."
It was also alleged in the second cause of action that the Proxy Statement was false and misleading because it did not disclose the identities and the number of persons who were eligible under the Plan, did not define the term "key employee," and did not disclose the number of such employees that would participate in the Plan. The Proxy Statement represented that the Committee had engaged an outside compensation consultant, who had "concluded that the total cash compensation paid to [Apple's] executive vice president and senior vice presidents was not competitive and falls significantly below market median due to the absence of a cash bonus program." But the Statement did not disclose whether the consultant had reached that conclusion with the benefit of the additional information that Apple had granted restricted stock units (RSUs) to various executive officers in March 2004 "worth millions of dollars."
The third through sixth causes of action incorporated by reference the prior paragraphs of the Complaint. In the third claim, Bader alleged that the Apple directors and Apple officers breached their fiduciary duties owed to the corporation and its shareholders. In the fourth cause of action, Bader alleged that defendants' conduct constituted unfair and unlawful business acts or practices within the meaning of Business and Professions Code section 17200. In the fifth cause of action (captioned as a claim for "Violations of the Express Terms of the Plan"), she alleged that the board had permitted the use of undefined performance goals, including "operating margin goals," to be used in implementing the Plan for Apple's 2005 and 2006 fiscal years. The sixth cause of action alleged a claim of waste, based upon (1) the making of bonus payments under the Plan; (2) the issuance in 2003 and 2004 of the RSUs to senior officers, because they were structured in a way that the payments were nondeductible by Apple; and (3) the grant in January 2000 to Jobs of options to purchase 20,000,000 of Apple shares, which option grants may have been backdated and therefore nondeductible by Apple.
Apple and the Apple directors again filed a demurrer. The court sustained the demurrer without leave to amend. The court concluded, inter alia, that Bader had again failed to plead facts sufficient to establish that (1) she was excused from making demand on Apple's board of directors before bringing suit; (2) the Proxy Statement was false or misleading; (3) she had a viable direct cause of action; or (4) the Plan was invalid because its manner of adoption did not comply with California law.
A judgment of dismissal was entered in favor of defendants on October 25, 2007. Bader filed a timely notice of appeal. The matter is a proper subject for appellate review. (Berri v. Superior Court (1955) 43 Cal.2d 856, 860; Hill v. City of Long Beach (1995) 33 Cal.App.4th 1684, 1695.)
I. Standard of Review of Order Sustaining Demurrer
We perform an independent review of a ruling on a demurrer and decide de novo whether the challenged pleading states facts sufficient to constitute a cause of action. (McCall v. PacifiCare of Cal., Inc. (2001) 25 Cal.4th 412, 415.) "In reviewing the sufficiency of a complaint against a general demurrer, we are guided by long-settled rules. "We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. [Citation.] We also consider matters which may be judicially noticed.' [Citation.] Further, we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. [Citation.] When a demurrer is sustained, we determine whether the complaint states facts sufficient to constitute a cause of action. [Citation.]" (Blank v. Kirwan (1985) 39 Cal.3d 311, 318; see also Randi W. v. Muroc Joint Unified School Dist. (1997) 14 Cal.4th 1066, 1075.)
"It is not the ordinary function of a demurrer to test the truth of the plaintiff's allegations or the accuracy with which he describes the defendant's conduct. A demurrer tests only the legal sufficiency of the pleading." (Committee on Children's Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 213.) Thus, as noted, in considering the merits of a demurrer, "the facts alleged in the pleading are deemed to be true, however improbable they may be. [Citation.]" (Del E. Webb Corp. v. Structural Materials Co. (1981) 123 Cal.App.3d 593, 604; see also Alcorn v. Anbro Engineering, Inc. (1970) 2 Cal.3d 493, 496 [court reviewing propriety of ruling on demurrer is not concerned with the "plaintiff's ability to prove . . . allegations, or the possible difficulty in making such proof"].)
On appeal, we will affirm a "trial court's decision to sustain the demurrer [if it] was correct on any theory. [Citation.]" (Kennedy v. Baxter Healthcare Corp. (1996) 43 Cal.App.4th 799, 808, fn. omitted.) Thus, "we do not review the validity of the trial court's reasoning but only the propriety of the ruling itself. [Citations.]" (Orange Unified School Dist. v. Rancho Santiago Community College Dist. (1997) 54 Cal.App.4th 750, 757.)
A. Corporate Governance and Derivative Suits
It is a fundamental principle of corporate governance that the role of managing the business of the corporation is vested in its board of directors, not in its shareholders. (Grosset v. Wenaas (2008) 42 Cal.4th 1100, 1108.) This responsibility includes the prosecution, defense, and control of corporate litigation. (Ibid.) Judicial deference is accorded to directors under the "business judgment rule," which recognizes that where decisions are without fraud or breach of trust, "management of the corporation is best left to those to whom it has been entrusted, not to the courts. [Citation.]" (Desaigoudar v. Meyercord (2003) 108 Cal.App.4th 173, 183.) As codified in section 309, the business judgment rule obligates a director to perform his or her duties "in good faith, in a manner such director believes to be in the best interests of the corporation and its shareholders and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances" (§ 309, subd. (a)); and it insulates a director from liability when he or she performs those obligations in the manner provided in the statute (§ 309, subd. (c)).*fn5
In light of the directors' role in the operation of the business affairs of the corporation, where conduct, including mismanagement by corporate officers, causes damage to the corporation, it is the entity that must bring suit; the individual shareholder may not bring an action for indirect personal losses (i.e., decrease in stock value) sustained as a result of the overall harm to the entity. (Anderson v. Derrick (1934) 220 Cal. 770, 773-774; see also Nelson v. Anderson (1999) 72 Cal.App.4th 111, 127.) A contrary rule "would "authorize multitudinous litigation and ignore the corporate entity.' [Citation.]" (Schuster v. Gardner (2005) 127 Cal.App.4th 305, 312 (Schuster).) And "[d]irectors have the same discretion with respect to the prosecution of claims on behalf of the corporation as they have in other business matters." (Findley v. Garrett (1952) 109 Cal.App.2d 166, 177 (Findley).) Thus, the business judgment rule "protects a board's good faith decision to reject a derivative lawsuit" so long as the majority of the board does not have a personal interest in the lawsuit's outcome. (Desaigoudar v. Meyercord, supra, 108 Cal.App.4th at p. 184; see also § 204, subd. (a)(10)(iii).)
This principle that the corporation must bring suit on its own behalf notwithstanding, where the directors fail or refuse to act, a shareholder has a sufficient interest in the entity "to justify the bringing of a "propulsive' action, designed to set in motion the judicial machinery for the redress of the wrong to the corporation. [Citations.]" (Klopstock v. Superior Court (1941) 17 Cal.2d 13, 16-17 (Klopstock).) "[T]he corporation is the ultimate beneficiary of such a derivative suit." (Id. at p. 21.) A derivative lawsuit is in essence a consolidation in equity of two suits, one by the shareholder against the directors seeking an order that they sue those who have wronged the corporation, and the other by the corporation against the wrongdoers. (Daily Income Fund, Inc. v. Fox (1984) 464 U.S. 523, 529, fn. 4.) A presuit demand on the directors, however, is ordinarily required for the bringing of a derivative action.
B. Derivative Suits-Demand and Demand Excusal
As a precondition for bringing a derivative action on behalf of the corporation, the shareholder "should show to the satisfaction of the court that he has exhausted all the means within his reach to obtain, within the corporation itself, the redress of his grievances, or action in conformity with his wishes. He must make an earnest, not a simulated effort, with the managing body of the corporation, to induce remedial action on their part, and this must be apparent to the court." (Hawes v. City of Oakland, supra, 104 U.S. at pp. 460-461.) The shareholder must demonstrate to the court "with particularity" the efforts he or she made to induce the directors to take action. (Id. at p. 461.) As the Supreme Court later explained, Hawes "sought to maintain derivative suits as a limited exception to the usual rule that the proper party to bring a claim on behalf of a corporation is the corporation itself, acting through its directors or the majority of its shareholders. . . . [¶] The principal means by which the Court in Hawes sought to vindicate this policy was, of course, its requirement that a shareholder seek action by the corporation itself before bringing a derivative suit. [Citation.] This "demand requirement' affords the directors an opportunity to exercise their reasonable business judgment and "waive a legal right vested in the corporation in the belief that its best interests will be promoted by not insisting on such right. They may regard the expense of enforcing the right or the furtherance of the general business of the ...