Leyte-Vidal v. Semel

Filed 10/23/13
CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SIXTH APPELLATE DISTRICT

MIGUEL A. LEYTE-VIDAL, H037762
(Santa Clara County
Plaintiff and Appellant, Super. Ct. No. 1-09-CV-147707)

v.

TERRY S. SEMEL, et al.,

Defendants and Respondents.

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

1 The named "Individual Defendants" were Terry S. Semel, Susan L. Decker. Arthur H.
Kern, Jerry Yang, David Filo, Eric Hippeau, Edward R. Kozel, Robert A. Kotick, Roy J.
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

Bostock, Gary L. Wilson, Ronald W. Burkle, Vyomesh Joshi, Daniel L. Rosensweig,
Farzad Nazem, and Maggie Wilderotter. All of these "Individual Defendants" were also
referred to as "Director Defendants" except for Decker, Rosensweig, and Nazem. Those
three, along with Semel and Filo, were denominated "Officer Defendants."
2 Plaintiff's federal action originated as a derivative lawsuit brought in June 2007 by Jill
Watkins, naming 11 of the same defendants. The derivative lawsuit echoed many of the
allegations of a class action brought in May 2007 by Ellen Rosenthal Brodsky and others,
asserting violations of federal securities laws by Semel, Yahoo!'s CEO, and Decker, its
CFO. Rosensweig and Nazem were added later. The federal district court dismissed the
class action without leave to amend on June 18, 2009 for failure to state the requisite
particularity in its claims after repeated amendments. (Brodsky v. Yahoo! Inc. (N.D. Cal.
2009) 630 F.Supp.2d 1104.)
3 As described in the operative complaint, "[c]lick fraud" occurs when either automated
systems or individuals repeatedly click on an advertisement solely for the purpose of
creating revenue for the site on which the ad appears. "[T]he reason click fraud is
particularly important is [that] Yahoo! charges advertisers on a scale determined by the
amount [sic] of clicks Yahoo! creates for the advertisement through placement of the ads.
Thus, protecting and policing against false clicks is a critical concern for advertisers."

2
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.
Discussion
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.

3
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 A.2d 805, 811 (Aronson), overruled on another point in Brehm v. Eisner
(Del. 2000) 746 A.2d 244, 253-254.)
A derivative action, however, is in essence "a challenge to a board of directors'
managerial power" (Spiegel v. Buntrock, supra, 571 A.2d at p. 773), and thus it
"impinges on the managerial freedom of directors." (Aronson, supra, 473 A.2d at p. 811;
see also South v. Baker (Del. Ch. 2012) 62 A.3d 1, 13 [in derivative action shareholder
"seeks to displace the board's authority"].) In Aronson the Delaware Supreme Court
expressed the view that "the entire question of demand futility is inextricably bound to
issues of business judgment and the standards of that doctrine's applicability. The
business judgment rule is an acknowledgment of the managerial prerogatives of

4
Delaware . . . . It is a presumption that in making a business decision the directors of a
corporation acted on an informed basis, in good faith and in the honest belief that the
action taken was in the best interests of the company. [Citations.] Absent an abuse of
discretion, that judgment will be respected by the courts. The burden is on the party
challenging the decision to establish facts rebutting the presumption." (473 A.2d at p.
812; see also Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart (2004) 845
A.2d 1040, 1048-1049 (Beam) [plaintiff has burden to overcome presumption that
directors were faithful to their fiduciary duties].) "Thus, absent an allegation of
interestedness or disloyalty to the corporation, the business judgment rule prevents a
judge or jury from second guessing director decisions if they were the product of a
rational process and the directors availed themselves of all material and reasonably
available information." (In re Citigroup Inc. Shareholder Derivative Litigation (Del. Ch.
2009) 964 A.2d 106, 124.)
The "key principle" underlying judicial analysis of a pleading asserting a
derivative action is "that the directors are entitled to a presumption that they were faithful
to their fiduciary duties." (Beam, supra, 845 A.2d at p. 1048.) Because a shareholder in
a derivative action contests the business judgment of corporate directors, "shareholders
seeking to assert a claim on behalf of the corporation must first exhaust intracorporate
remedies by making a demand on the directors to obtain the action desired, or . . . plead
with particularity why demand is excused." (Spiegel v. Buntrock, supra, 571 A.2d at p.
773; see Del. Chancery Court Rule 23.1.)4 "The purpose of pre-suit demand is to
[en]sure that the stockholder affords the corporation the opportunity to address an alleged
wrong without litigation, to decide whether to invest the resources of the corporation in

4 Court of Chancery rule 23.1(a) requires the plaintiff in a derivative action to "allege
with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff
desires from the directors or comparable authority and the reasons for the plaintiff's
failure to obtain the action or for not making the effort."

5
litigation, and to control any litigation [that] does occur." (Spiegel v. Buntrock, supra,
571 A.2d at p. 773; accord, Brehm v. Eisner, supra, 746 A.2d at p. 255.)
In order to be excused from the demand prerequisite to a derivative action, a
shareholder must demonstrate through his or her pleading that a demand would have been
futile. (Kaplan v. Peat, Marwick, Mitchell & Co. (Del. 1988) 540 A.2d 726, 730.) A
showing of demand futility requires that the plaintiff allege "with particularity why the
stockholder was justified in having made no effort to obtain board action." (King v.
VeriFone Holdings, Inc. (Del. 2011) 12 A.3d 1140, 1145.) "As explained in Aronson v.
Lewis, one ground for alleging demand futility is that a 'reasonable doubt' exists as to
whether the board is capable of making an independent decision to assert the claim if
demand were made. . . . Other reasons for showing demand excusal would be: (1) a
majority of the board has a material financial or familial interest; (2) a majority of the
board is incapable of acting independently for some other reason such as domination or
control; or (3) the underlying transaction is not the product of a valid exercise of business
judgment." (Id. at p. 1146, fn. 24.)
The reasonable doubt that the plaintiff must raise to create demand futility depends
on whether he or she is challenging a "conscious decision by directors to act or refrain
from acting" or, in the absence of board action, "whether the board that would be
addressing the demand can impartially consider its merits without being influenced by
improper considerations." (Rales v. Blasband (Del. 1993) 634 A.2d 927, 933, 934
(Rales).) If a decision of the board to act or decline to act is under scrutiny, we use the
Aronson test described above; the business judgment of the board is at issue. (Id. at p.
933.) In those cases the pleading rules in Delaware require the shareholder plaintiff to
allege with particularity "facts raising a reasonable doubt that the corporate action being
questioned was properly the product of [its] business judgment." (Brehm v. Eisner,
supra, 746 A.2d at pp. 254-255.) "[Chancery Court] Rule 23.1 is not satisfied by
conclusory statements or mere notice pleading. On the other hand, the pleader is not

6
required to plead evidence. What the pleader must set forth are particularized factual
statements that are essential to the claim. Such facts are sometimes referred to as 'ultimate
facts,' 'principal facts' or 'elemental facts.' . . . A prolix complaint larded with conclusory
language . . . does not comply with these fundamental pleading mandates." (Brehm v.
Eisner, supra, 746 A.2d at p. 254, fn. omitted.)
On the other hand, "[w]here there is no conscious decision by directors to act or
refrain from acting, the business judgment rule has no application." (Rales, supra, 634
A.2d at p. 933.) "The absence of board action, therefore, makes it impossible to perform
the essential inquiry contemplated by Aronson—whether the directors have acted in
conformity with the business judgment rule in approving the challenged transaction."
(Ibid.) Accordingly, in that case "a court must determine whether or not the
particularized factual allegations of a derivative stockholder complaint create a
reasonable doubt that, as of the time the complaint is filed, the board of directors could
have properly exercised its independent and disinterested business judgment in
responding to a demand." (Id. at p. 934.)5
In this case the parties disagree as to which test of demand futility applies to
plaintiff's claims. Plaintiff urges us to apply the Aronson test, based on his allegations of
insider selling and dissemination of false and misleading information to the public.
Defendants maintain that Rales provides the applicable standard. The debate is largely
academic. "To satisfy either test, a plaintiff must 'comply with stringent requirements of
factual particularity' of Court of Chancery Rule 23.1." (Wood v. Baum (Del. 2008) 953

5 As the Delaware Supreme Court noted in Rales, "[t]his situation would arise in three
principal scenarios: (1) where a business decision was made by the board of a company,
but a majority of the directors making the decision have been replaced; (2) where the
subject of the derivative suit is not a business decision of the board; and (3) where, as
here, the decision being challenged was made by the board of a different corporation."
(Rales, supra, 634 A.2d at p. 934, fns. omitted.)

7
A.2d 136, 140, citing Brehm v. Eisner, supra, 746 A.2d at p. 254.)6 In any event,
plaintiff insists that even under Rales he adequately pleaded demand futility because he
raised "a reasonable doubt that six or more directors were able to independently consider
a demand." We consider plaintiff's position in light of the allegations of the operative
pleading, the third amended complaint. As will become evident, the outcome is the same
under either Aronson or Rales.
3. Demand Futility in the Third Amended Complaint
Following demurrer on plaintiff's original complaint in superior court, plaintiff
eliminated all causes of action except the first two, which alleged violation of
Corporations Code section 25402 and breach of fiduciary duty, both based on alleged
insider trading by the "Insider Selling Defendants." The third amended complaint,
however, added back the original claims of breach of fiduciary duty and unjust
enrichment. This final pleading asserted (1) violation of Corporations Code section
25402 by the 11 "Insider Selling Defendants"7; (2) breach of fiduciary duty and
misappropriation of information by those same defendants, who sold stock while
knowing that the company's financial condition was "materially overstated" to the public;

6 Some courts have opined that a Rales inquiry in its practical application "makes
germane all of the concerns relevant to both the first and second prongs of Aronson. For
example, in a situation when a breach of fiduciary duty suit targets acts of self-dealing
committed . . . by the two key managers of a company who are also on a nine-member
board, and the other seven board members are not alleged to have directly participated or
even approved the wrongdoing (i.e., it was not a board decision), the Rales inquiry will
concentrate on whether five of the remaining board members can act independently of the
two interested manager-directors. This looks like a first prong Aronson inquiry. [¶]
When, however, . . . the directors face a 'substantial likelihood' of personal liability, their
ability to consider a demand impartially is compromised under Rales, excusing demand."
(Guttman v. Huang (Del. Ch. 2003) 823 A.2d 492, 501.)
7 The "Insider Selling Defendants" were Semel, Decker, Rosensweig, Nazem, Kern,
Yang, Hippeau, Kozel, Kotick, Bostock, and Wilson.

8
(3) breach of fiduciary duty against all defendants for allowing the dissemination of
misleading and inaccurate financial information to shareholders; (4) breach of fiduciary
duty against four of the defendants (Joshi, Kern, Bostock, and Wilson) for failing to
ensure the accuracy of press releases and financial statements and for allowing insider
selling to occur; and (5) unjust enrichment by the Insider Selling Defendants.
Plaintiff's demand futility allegations consisted of the following concerns about
each director. Yang could not independently consider a demand because of his "uniquely
close relationship" with the company, having co-founded Yahoo! and "served as the
'Chief Yahoo!' from the Company's inception until his departure in 2008." Plaintiff also
alleged that Yang faced a "substantial likelihood of liability" for having engaged in
insider selling.
Bostock, according to plaintiff, had also participated in insider selling; moreover,
he "knowingly authorized and/or permitted" the publication of false and misleading
statements to the public, to securities analysts, and to shareholders. In addition, as a
Board member and member of the Audit Committee, Bostock failed to remedy problems
involving Yahoo!'s advertising services, the company's acquisition of Overture Services,
Inc. (Overture), development of the Project Panama technology, and improvement of
software to prevent "click fraud." In his capacity as a member of the Compensation
Committee, Bostock "completely abdicated" his duty to determine appropriate
compensation for Yahoo! executives by approving the "outrageous" compensation of
Semel, the company's chairman of the board and CEO. Finally, Bostock's lack of
independence was illustrated by his "blind and unreasonable support of Yang's rejection
of Microsoft's offer out of hand" and his opposition to Carl Icahn's proposal to replace the
incumbent board with 10 "independent" directors.
Kern was not disinterested and independent, according to the complaint, for the
same reasons described in the allegations regarding Bostock. Kern also had allegedly
engaged in insider trading and had failed to adhere to his duties as a member of both the

9
Audit Committee and the Compensation Committee. And, like Bostock, Kern was
"dominated and controlled" by Yang and had thwarted Icahn's efforts to replace board
members.
The allegations as to Hippeau overlapped those pertaining to Bostock and Kern.
He, too, had engaged in "illegal insider selling" and had "authorized and/or permitted the
issuance of false and misleading statements." Further, as a board member, he had failed
to "act in the best interests of the Company's public shareholders" in the face of the
problems with Project Panama, the Overture acquisition, and the click-fraud software.
The picture was similar as to Wilson: He had participated in insider selling, and
he had abdicated his duties as a member of the compensation and audit committees for
the same reasons as had his colleagues.
The superior court assumed, for purposes of discussion, that plaintiff had
adequately pleaded insider trading in the first and second causes of action.8 But of the
"Insider Selling Defendants," only five were directors at the time plaintiff's action
commenced: Yang, Bostock, Hippeau, Kern, and Wilson. Because plaintiff could not
plead facts indicating that at least six of the 12 directors were interested because they had
themselves engaged in insider trading, he had to identify at least one other director who
was not disinterested and independent in order for him to show that demand would have
been futile.
Plaintiff's efforts to allege demand futility with respect to the remaining directors
focused on two of them: Burkle and Joshi, neither of whom was accused of insider

8 The court had previously recognized the inadequacy of an allegation of insider trading
based solely on the sale of stock while in possession of material nonpublic information,
without scienter. (See, e.g., Guttman v. Huang, supra, 823 A.2d at p. 502 [proper
analysis focuses on whether the plaintiff has pleaded particularized facts creating a
"sufficient likelihood of personal liability because [defendant directors] have engaged in
material trading activity at a time when (one can infer . . . that) they knew material, non-
public information about the company's financial condition"].)

10
trading. The allegations targeting Burkle otherwise were almost identical to those
directed at Bostock, Kern, and Hippeau in that Burkle "knowingly authorized and/or
permitted the publication of false statements disseminated directly to the public or made
directly to securities analysts and which were made available and distributed to
shareholders." Like the other three, Burkle "benefitted from these statements by selling
his Yahoo! stock at artificially inflated prices," although Burkle was not identified as an
insider-selling defendant. Also like the other three, Burkle allegedly failed to take any
action to correct problems associated with Project Panama, the acquisition of Overture, or
click-fraud prevention software. Burkle, too, was a member of the Compensation
Committee, and he approved Semel's "obviously egregious and excessive" compensation.
All of this conduct, plaintiff insisted, demonstrated that Burkle "clearly puts his own
interests ahead of those of Yahoo!'s public shareholders, to whom he owed fiduciary
duties."
Joshi also was identified as a director who was not independent and disinterested.
He, too, was alleged to have abdicated his duties as a member of the Audit Committee:
He failed to investigate and stop click-fraud and concealed the issue, and he failed to
ensure control of and pursue redress for insider trading. Additionally, as an Audit
Committee member he faced a "substantial likelihood of personal liability" because he
and the other committee members were responsible for the "false financial statements he
and other directors made and for the illegal insider selling committed by the Insider
Selling Defendants." Thus, plaintiff asserted, "there is no way that Joshi can possibly be
considered independent for purposes of disinterestedly considering a demand to bring a
lawsuit against himself and his fellow Director Defendants."
Both Burkle and Joshi were defendants in the third cause of action, in which
plaintiff alleged that all of the individual defendants were liable for breach of fiduciary
duty "by causing or allowing the Company to disseminate to Yahoo[!] shareholders
materially misleading and inaccurate information through, inter alia, SEC filings, press

11
releases, and other public statements and disclosures as detailed herein. Further, each of
the Individual Defendants failed to correct the Company's publicly reported financial
results and guidance." In plaintiff's view, "[t]hese actions could not have been a good
faith exercise of prudent business judgment."
Joshi was also named in the fourth cause of action (along with Kern, Bostock, and
Wilson) for breach of fiduciary duty by (1) "willfully" ignoring and failing to correct the
"obvious and pervasive problems" with the company's financial statements, press
releases, accounting and internal control practices and procedures"; (2) failing to ensure
the accuracy of those press releases and financial statements; and (3) "consciously or
recklessly" allowing insider selling to occur.
All of the allegations regarding Burkle and Joshi's "abdication" of their fiduciary
duty pertained to failures to investigate and remedy misconduct or their exercise of poor
judgment in addressing problems with software and public financial reports. As the
superior court recognized, however, a mere negligent failure to monitor problems and
control risks is insufficient to ascribe bad faith to the directors. Nor can bad faith be
inferred solely from a director's membership on an audit committee. (Wood v. Baum,
supra, 953 A.2d at p. 142.) As the Supreme Court of Delaware has emphasized, even
gross negligence is insufficient to constitute bad faith in what amounts to an oversight
challenge. (In re Walt Disney Co. Derivative Litigation (Del. 2006) 906 A.2d 27, 65
(Disney) ["grossly negligent conduct . . . does not and cannot constitute a breach of the
fiduciary duty to act in good faith"]; see also In re Caremark Int'l Derivative Litig.
(Del.Ch.1996) 698 A.2d 959, 971 ["sustained or systematic failure of a director to
exercise reasonable oversight" necessary to establish lack of good faith].)
On the other hand, "A failure to act in good faith may be shown, for instance,
where the fiduciary intentionally acts with a purpose other than that of advancing the best
interests of the corporation, where the fiduciary acts with the intent to violate applicable
positive law, or where the fiduciary intentionally fails to act in the face of a known duty

12
to act, demonstrating a conscious disregard for his duties." (Disney, supra, 906 A.2d at
p. 67.) The "imposition of liability requires a showing that the directors knew that they
were not discharging their fiduciary obligations. Where directors fail to act in the face of
a known duty to act, thereby demonstrating a conscious disregard for their
responsibilities, they breach their duty of loyalty by failing to discharge that fiduciary
obligation in good faith." (Stone ex rel. AmSouth Bancorporation v. Ritter (Del. 2006)
911 A.2d 362, 370, fns. omiccted.)
In this case plaintiff's allegations of bad faith in essence did accuse the directors of
intentionally failing to act in Yahoo!'s best interests, "demonstrating a conscious
disregard for [their] duties." (Ibid.) But as the superior court pointed out, even if
plaintiff had set forth the particular facts that demonstrated this bad faith (and not just the
details of the problems the directors allowed to occur), the third and fourth causes of
action for breach of fiduciary duty had been abandoned in the first and second amended
complaints following the sustaining of the demurrer to the original complaint. The
previous order sustaining the demurrer to the second amended complaint had been
limited in scope: The court had then allowed amendment "solely to permit Plaintiff an
opportunity to plead particularized facts showing how a sufficient number of directors are
beholden to an interested director, officer or other controlling person for purposes of
excusing demand." Consequently, the court ruled, plaintiff's reintroduction of allegations
of false reporting and failure to maintain adequate internal controls "was untimely and
went beyond the limited scope of leave to amend that was clearly stated in the court's
July 11, 2011 order." The court therefore struck the third and fourth causes of action "as
not filed in conformity with a court order."
We are not convinced that this ruling constituted an abuse of discretion. (See
Harris v. Wachovia Mortg., FSB (2010) 185 Cal.App.4th 1018, 1023 [plaintiff may
amend complaint only as authorized by and within the scope of the order granting leave
to amend]; see also Code Civ. Proc., § 436 [court may strike any part of pleading not in

13
conformity with a law, rule, or court order].) These claims not only violated the order
granting leave to amend the second amended complaint but provided no improvement on
the same claims he resurrected from the original complaint, which had failed on demurrer
before a different judge of the superior court.
The superior court then addressed the subject on which leave to amend had been
granted, Yang's alleged domination and control of the identified directors. "A controlled
director is one who is dominated by another party, whether through close personal or
familial relationship or through force of will. [Citation.] A director may also be deemed
'controlled' if he or she is beholden to the allegedly controlling entity, as when the entity
has the direct or indirect unilateral power to decide whether the director continues to
receive a benefit upon which the director is so dependent or is of such subjective material
importance that its threatened loss might create a reason to question whether the director
is able to consider the corporate merits of the challenged transaction objectively."
(Telxon Corp. v. Meyerson (Del. 2002) 802 A.2d 257, 264; see also Aronson, supra, 473
A.2d at p. 815 [plaintiff must show "through personal or other relationships the directors
are beholden to the controlling person"]; accord, Rales, supra, 634 A.2d at p. 936
[plaintiff had to show directors were beholden to Rales brothers "or so under their
influence that their discretion would be sterilized"]; Beam, supra, 845 A.2d at p. 1051-
1052 [social and business affinity insufficient standing alone to negate presumption that
directors are unable to consider demand independently].)
In light of the stricken causes of action, the superior court disregarded the
allegations that pertained to false and misleading financial statements and excessive
compensation of Semel, focusing strictly on the "domination and control" allegation.
Although plaintiff had pleaded control by Yang with respect to six directors (Bostock,
Hippeau, Kern, Wilson, Joshi, and Burkle), the allegation was based on the vague
assertion that Yang "caused" these directors not only to reject the Microsoft offer but to
"thwart further advances from Microsoft" by adopting a "facially invalid" employee

14
severance plan. 9 It was only the "fact that [these six directors] allowed Yang to adopt
these outrageously self-interested entrenchment mechanisms" that allegedly demonstrated
Yang's domination and control.
As the superior court pointed out, "there is no cause of action arising out of this
conduct." More importantly, the allegation was circular and conclusory. Plaintiff
asserted that Yang "so dominated and controlled" these six directors that he "caused"
them to reject the Microsoft offer; and the fact that they "allowed" Yang to adopt
defensive "entrenchment mechanisms" in itself "amply demonstrate[s] the domination
and control that Yang exerts over the rest of Yahoo[!]'s board." Missing from plaintiff's
complaint are the particularized facts that permit an inference that because of Yang's
relationship with each director, each acted under Yang's influence in making the
challenged decisions. Thus, even setting aside the rejected claims, we agree with the
lower court that these allegations did not provide the required particularity.
As noted earlier, plaintiff made additional "domination and control" allegations
specific to Bostock, Kern, and Burkle. Only those directed at Burkle are of concern
since, for purposes of this appeal, plaintiff is assumed to have adequately pleaded illegal
insider trading as to Bostock and Kern. Nevertheless, as to Burkle's allegiance to Yang,
the outcome of the pleading is the same. Burkle was allegedly beholden to Yang

9 Plaintiff specifically alleged that these directors demonstrated their "lack of
independence and bad faith" by following Yang's defensive measures designed to thwart
the Microsoft takeover, including the "facially invalid poison pill under the guise of an
employee severance plan." Instead of protecting the interests of the company and its
shareholders, these six defendants (along with Wilderotter) "acceded to Yang's self-
interested conduct on multiple occasions." The current directors were "hopelessly
conflicted," as any action against themselves would "expose their own misconduct" and
force them to "take positions contrary to the defenses they will likely assert in the
securities class actions. This they will not do." Moreover, changes in their liability
insurance policies had eliminated coverage for any action brought directly by Yahoo!
against them. Only a derivative action would ensure coverage and provide for recovery
by the Company.

15
because, as a member of the Compensation Committee, he approved "the employee
severance plan in response to the Microsoft offer, and his blind and unreasonable support
of Yang's rejection of Microsoft's offer out of hand, before Burkle o[r] the other directors
even knew the price being offered by Microsoft."
This allegation is plainly insufficient. Just as in the case of the other directors,
plaintiff did not set forth specific facts showing a relationship between Yang and Burkle
which demonstrated that Burkle was beholden to Yang. "The shorthand shibboleth of
'dominated and controlled directors' is insufficient." (Aronson, supra, 473 A.2d at p.
816.) The bare fact that Burkle supported Yang's rejection of the Microsoft offer (along
with his approval of defensive measures against Microsoft) does not, in itself,
"demonstrate" Yang's domination and control of Burkle; it only affirms plaintiff's
disagreement with Burkle's decision to oppose the Microsoft takeover.
In summary, plaintiff failed to plead particularized facts manifesting a reasonable
doubt that the board could not have exercised its independent and disinterested judgment
in responding to his demand, had he made one at the time he brought the action. The
demurrer to the third amended complaint was properly sustained.
Disposition
The judgment is affirmed.
_______________________________
ELIA, J.
WE CONCUR:
____________________________
PREMO, Acting P. J.

____________________________
MÁRQUEZ, J.

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Trial Court: Santa Clara County Superior Court

Trial Judge: Hon. James P. Kleinberg

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

Leyte-Vidal v. Semel, et al.
H037762

17