Aug. 6, 2013 – Whether the decisions of corporate directors are protected by the “business judgment rule” is a fact-intensive inquiry that cannot generally be resolved at the motion to dismiss stage, a state appeals court recently clarified.
A circuit court granted a motion to dismiss filed by Renaissance Learning Incorporated’s directors and majority shareholders. A minority shareholder, Data Key Partners, accused them of breaching fiduciary duties in a merger deal with another company.
But the circuit court dismissed the complaint based on the business judgment rule, which protects directors from liability for purely business decisions. On appeal, Data Key argued that business judgment rule questions cannot be resolved at that stage.
And a three-judge panel for the Wisconsin Court of Appeals agreed in Data Key Partners v. Permira Advisors LLC, 2012AP1967 (Aug. 1, 2013), reversing the circuit court and remanding the case to allow Data Key’s fiduciary duty claims to proceed.
“[C]ourts in notice pleading jurisdictions traditionally disfavor application of the business judgment rule at the motion to dismiss stage because application of the rule generally requires a fact-intensive analysis that would be incompatible with notice pleading,” wrote Judge Brian Blanchard, citing a case from Delaware.
Renaissance was a publicly traded company founded by Terrance and Judith Paul, who owned a majority of the company’s nearly 30 million shares. The Pauls also sat on the corporation’s board of directors when it was sold to Permira Advisors LLC.
Data Key said the Pauls and other directors on the board at Renaissance breached fiduciary duties when it accepted the lower of two offers to purchase Renaissance. The rejected offer would have given minority shareholders more money per share.
Among its claims, Data Key’s complaint stated that Renaissance directors placed their own personal interests above the interests of minority shareholders and omitted material information about the sale in proxy statements.
The complaint also states that the Pauls used a personal banking relationship with Goldman Sachs, the financial advisor on the corporation’s merger deal with Permira, to influence the financial advice the bank gave to other Renaissance directors.
Under Wis. Stat. section 180.0828, directors are not liable for business decisions unless they commit willful misconduct, derive an improper personal profit, or deal unfairly “in connection with a matter in which the director has a material conflict of interest.”
The appeals court panel rejected the directors’ argument that a plaintiff must allege facts that, if proven, would overcome the business judgment rule. “Such specificity is generally not required for purposes of notice pleading,” Judge Blanchard explained.
Data Key also alleged that Permira, the company that purchased Renaissance, aided and abetted the fiduciary duty breaches by Renaissance directors.
Civil liability for aiding and abetting requires that a party consciously desire or intend to aid another party in committing an unlawful act. The appeals court rejected this claim.
“Data Key cites no authority addressing the claim of aiding and abetting in the corporate context or suggesting that allegations like these could be sufficient to meet the ‘consciously desiring or intending’ standard,” Judge Blanchard wrote.