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Leyte-Vidal v. Semel

California Court of Appeals, Sixth District

October 23, 2013

MIGUEL A. LEYTE-VIDAL, Plaintiff and Appellant,
TERRY S. SEMEL, et al., Defendants and Respondents.

Santa Clara County Superior Court No. 1-09-CV-147707, Hon. James P. Kleinberg, Trial Judge:

Attorneys for Plaintiff and Appellant: Chapin Fitzgerald Sullivan & Bottini and Francis A. Bottini, Jr. and Keith M. Cochran; Bottini & Bottini and Francis A. Bottini, Jr.

Attorneys for Defendants and Respondents: Morrison & Foerster and Jordan Eth, Anna Erickson White and Mark R.S. Foster


In this appeal plaintiff Miguel Leyte-Vidal challenges an order sustaining a demurrer without leave to amend in his shareholder derivative action against officers and directors of Yahoo! Inc., a publicly traded company incorporated in Delaware and headquartered in Sunnyvale. Plaintiff contends that he adequately pleaded facts excusing the pre-suit requirement of a demand on the board of directors to pursue litigation on the corporation's behalf. We agree with the superior court, however, that plaintiff failed to allege demand futility with the particularity required under Delaware law. Accordingly, we will affirm the judgment dismissing the action.

Procedural Background

Plaintiff initiated this action on July 17, 2009, asserting five causes of action against 15 individual defendants associated with Yahoo!.[1] One day earlier plaintiff had dismissed a similar lawsuit he had maintained in federal district court.[2] In his original complaint in superior court he alleged insider selling, in violation of Corporations Code section 25402; breach of fiduciary duty for improper financial reporting, insider selling, and misappropriation of material nonpublic information; abuse of control, gross mismanagement and waste of corporate assets; and unjust enrichment. These claims were based on losses caused by false statements to the public that did not reflect Yahoo!'s true financial picture, the company's failure to control "click fraud" affecting Internet advertisers, [3] and the delay in implementing "Project Panama, " a technology platform that was intended to help Yahoo! compete with Google. In addition, several of the "Individual Defendants" were accused of illegal insider trading, having sold stock while in possession of "undisclosed material adverse information."

Three amendments followed, in the wake of successive orders sustaining each of defendants' demurrers with leave to amend. On each occasion the superior court ruled that plaintiff had failed to allege facts specifically directed at demand futility with respect to at least half of the directors plaintiff claimed to be interested or not independent. Consequently, plaintiff lacked standing to bring the action as a derivative lawsuit. Finally, in its September 20, 2011 order, the court again sustained defendants' demurrer but determined that plaintiff's "repeated failure to allege sufficient facts to establish his standing" compelled it to conclude that there was "no reasonable possibility" that this defect could be cured by further amendment. From the ensuing judgment on December 9, 2011, plaintiff filed this timely appeal.


1. Standard of Review

A demurrer is properly sustained when the complaint "does not state facts sufficient to constitute a cause of action." (Code Civ. Proc., § 430.10, subd. (e).) As we noted in Bader v. Anderson (2009) 179 Cal.App.4th 775, 787, " '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.' [Citation.] Thus, ... 'the facts alleged in the pleading are deemed to be true, however improbable they may be.' [Citations.]" On appeal from a dismissal following the sustaining of a demurrer, this court examines the complaint de novo to determine whether it alleges facts sufficient to constitute a cause of action. Like the trial court, we assume the truth of all properly pleaded factual allegations. "Whether the plaintiff will be able to prove these allegations is not relevant; our focus is on the legal sufficiency of the complaint." (Los Altos Golf and Country Club v. County of Santa Clara (2008) 165 Cal.App.4th 198, 203; see also Landmark Screens, LLC v. Morgan, Lewis & Bockius, LLP (2010) 183 Cal.App.4th 238, 243-244.) "Further, we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context." (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) We do not, however, assume the truth of "mere contentions or assertions contradicted by judicially noticeable facts." (Evans v. City of Berkeley (2006) 38 Cal.4th 1, 20; see also Blatty v. New York Times Co. (1986) 42 Cal.3d 1033, 1040 ["when the allegations of the complaint contradict or are inconsistent with such facts, we accept the latter and reject the former"].)

2. Standing to Assert a Shareholder Derivative Action

The parties agree that Delaware law controls the outcome of this case—and in particular, the adequacy of plaintiff's pleading. "A basic principle of the General Corporation Law of the State of Delaware is that directors, rather than shareholders, manage the business and affairs of the corporation. [Citations.]... The decision to bring a law suit or to refrain from litigating a claim on behalf of a corporation is a decision concerning the management of the corporation. [Citation.] Consequently, such decisions are part of the responsibility of the board of directors." (Spiegel v. Buntrock (Del. 1990) 571 A.2d 767, 772-773.)

"The derivative action developed in equity to enable shareholders to sue in the corporation's name where those in control of the company refused to assert a claim belonging to it. The nature of the action is two-fold. First, it is the equivalent of a suit by the shareholders to compel the corporation to sue. Second, it is a suit by the corporation, asserted by the shareholders on its behalf, against those liable to it." (Aronson v. Lewis (Del. 1984) 473 ...

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