David Raul v. Astoria Financial Corporation

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

DAVID RAUL, as custodian for )
MALKA RAUL UTMA, NY, )
)
Plaintiff, )
)
v. ) Civil Action No. 9169-VCG
)
ASTORIA FINANCIAL )
CORPORATION, )
)
Defendant. )

MEMORANDUM OPINION

Date Submitted: May 8, 2014
Date Decided: June 20, 2014

Joel Friedlander and Jaclyn Levy, of FRIEDLANDER & GORRIS, P.A.,
Wilmington, Delaware; OF COUNSEL: Eduard Korsinsky and Douglas E. Julie, of
LEVI & KORSINSKY, LLP, New York, New York, Attorneys for the Plaintiff.

Rolin P. Bissell and Emily V. Burton, of YOUNG CONAWAY STARGATT &
TAYLOR, LLP, Wilmington, Delaware; OF COUNSEL: Stewart D. Aaron and
Robert C. Azarow, of ARNOLD & PORTER LLP, New York, New York,
Attorneys for the Defendant.

GLASSCOCK, Vice Chancellor
 A stockholder directs her attorney to investigate her corporation’s activities,

then sends the board of directors a demand letter stating that, in the opinion of the

stockholder, the corporation is violating the law. The corporation takes action in

response, arguably working a benefit on all stockholders. Is the stockholder

entitled to have her attorneys’ fees reimbursed under the corporate benefit

doctrine?

Our law provides that if the actions of the board of directors were such that,

at the time a demand was made, a suit based on those actions would have survived

a motion to dismiss, and a material corporate benefit resulted, the attorneys’ fees

incurred by the stockholder may be recovered despite the fact that no suit was ever

filed. If, on the other hand, the stockholder has simply done the company a good

turn by bringing to the attention of the board an action that it ultimately decides to

take, she is not entitled to coerced payment of her attorneys’ fees by the

stockholders at large. Finding that the demand at issue here falls into the latter

category, I decline to shift fees onto the corporation and its stockholders.

I. FACTS

1. The Parties

Astoria Financial Corporation (“Astoria,” or the “Company”) is a publicly-

traded Delaware corporation engaged primarily in the operation of its wholly-

owned subsidiary, Astoria Federal, whose business includes “attracting retail

2
deposits from the general public and businesses and investing those deposits,

together with funds generated from operations, principal repayments on loans and

securities and borrowings, primarily in one-to-four family, or residential, mortgage

loans, multi-family mortgage loans, commercial real estate mortgage loans and

mortgage-backed securities”1—in other words, banking.

The Plaintiff in this action is the custodian of Astoria common stockholder

Malka Raul UTMA, NY.

2. Dodd-Frank and “Say On Pay”

In July 2010, “in response to the worst financial crisis since the Great

Depression,”2 Congress enacted the Dodd-Frank Wall Street Reform and

Consumer Protection Act (“Dodd-Frank”). Targeted at regulation of the financial

services industry, ostensibly “in an attempt to restore responsibility and

accountability in our financial system,”3 Dodd-Frank imposed broad new

regulation of approval and disclosure of corporate executive compensation

decisions. Of importance in the present action, Section 951 of Dodd-Frank

1
Compl. ¶ 7. Unless otherwise indicated, the facts cited herein are taken from the Plaintiff’s
Verified Complaint, as well as those documents incorporated by reference in the Complaint. See
LNR Partners, LLC v. C-III Asset Mgmt. LLC, 2014 WL 1312033, at *9 (Del. Ch. Mar. 31, 2014)
(“Generally, on a motion to dismiss under Rule 12(b)(6), the Court will consider only the
complaint and the documents integral to or incorporated by reference into it.”).
2
Compl. ¶ 8.
3
Id.
3
amended the Securities Exchange Act of 1934 to include Section 14A, governing

shareholder approval of executive compensation. Section 14A provides, in part:

(1) In general
Not less frequently than once every 3 years, a proxy or consent or
authorization for an annual or other meeting of the shareholders for
which the proxy solicitation rules of the Commission require
compensation disclosure shall include a separate resolution subject to
shareholder vote to approve the compensation of executives, as
disclosed pursuant to section 229.402 of title 17, Code of Federal
Regulations, or any successor thereto.

(2) Frequency of vote
Not less frequently than once every 6 years, a proxy or consent or
authorization for an annual or other meeting of the shareholders for
which the proxy solicitation rules of the Commission require
compensation disclosure shall include a separate resolution subject to
shareholder vote to determine whether votes on the resolutions
required under paragraph (1) will occur every 1, 2, or 3 years.4

In other words, the so-called “Say On Pay” provisions under Dodd-Frank require

companies to submit to their stockholders non-binding votes (1) to approve the

compensation arrangements of company executives (the “Say-On-Pay Vote”), and

(2) to determine whether future stockholder advisory votes on executive

compensation should occur every one, two, or three years (the “Frequency Vote”).

In addition to requiring that a company hold a Say-On-Pay Vote and

Frequency Vote, Dodd-Frank requires companies to make certain disclosures with

respect to those votes once completed. Two such disclosures are at issue in this

4
15 U.S.C. § 78n-1(a)(1)-(2).
4
litigation, including (1) a requirement that the company disclose in its Form 8-K

the results of the Frequency Vote, as well as its decision, in light of that vote, on

how frequently future Say-On-Pay Votes will be held, and (2) a requirement that

the company disclose in its proxy statement whether, and if so, how, its board

considered the results of the Say-On-Pay Vote when making compensation

decisions.

Specifically, Form 8-K, Item 5.07(b) requires a company to “state the

number of votes cast for each of 1 year, 2 years, and 3 years,” while Item 5.07(d)

provides that:

No later than one hundred fifty calendar days after the end of the
annual or other meeting of shareholders at which shareholders voted
on the frequency of shareholder votes on the compensation of
executives as required by section 14A(a)(2) of the Securities
Exchange Act of 1934 . . . by amendment to the most recent Form 8-K
filed pursuant to (b) of this Item, disclose the company’s decision in
light of such vote as to how frequently the company will include a
shareholder vote on the compensation of executives in its proxy
materials until the next required vote on the frequency of shareholder
votes on the compensation of executives.5

Further, Regulation S-K, Item 402(b)(1)(vii) requires disclosure, in a company’s

proxy statement, of:

Whether, and if so, how the registrant has considered the results of the
most recent shareholder advisory vote on executive compensation
required by section 14A of the Exchange Act . . . in determining
compensation policies and decisions and, if so, how that consideration

5
Form 8-K, Item 5.07(d).
5
 has affected the registrant’s executive compensation decisions and
policies.6

The parties dispute whether Astoria’s board satisfied those disclosure requirements

following the Company’s 2011 annual meeting.

3. Astoria’s 2011 Annual Meeting

Less than a year after the July 2010 enactment of Dodd-Frank, on May 18,

2011, Astoria held an annual meeting. In connection with that meeting, on April

11, 2011, the Astoria board submitted a proxy statement (the “2011 Proxy

Statement”) informing stockholders of the Company’s intention to hold the

Company’s first Say-On-Pay Vote and Frequency Vote. The 2011 Proxy

Statement described the executive compensation packages for which the Company

sought approval, and included the Astoria board’s recommendations that the

stockholders (1) vote to approve the executive compensation packages, and (2)

vote to hold future Say-On-Pay Votes annually.

At the May 18, 2011 annual meeting, approximately 65% of stockholders

voted to approve Astoria’s executive compensation, and roughly 74% of

stockholders voted to hold future Say-On-Pay Votes annually, in both cases as the

board had recommended. After receiving the results of those votes, Astoria filed a

Form 8-K. Pursuant to Item 5.07, the Company disclosed:

6
17 C.F.R. § 229.402(b)(1)(vii).
6
 The non-binding vote to determine the frequency of future
shareholder advisory votes to approve the compensation of the
Company’s named executive officers is based on the highest number
of votes cast by shareholders represented in person or by proxy and
entitled to vote. Based on the vote indicated below, the results of the
future advisory shareholder votes to approve the compensation of the
Company’s named executives is every year.7

Despite the Defendant’s contention that the italicized language above sufficiently

informed Astoria’s stockholders of the results of the Frequency Vote, according to

the Plaintiff, the language cited above was insufficient to meet the disclosure

requirements articulated in Item 5.07.

4. Astoria’s 2012 Annual Meeting

Several months later, on April 6, 2012, as its next annual meeting

approached, Astoria disseminated a second proxy statement (the “2012 Proxy

Statement”) to its stockholders. As in 2011, the 2012 Proxy Statement sought the

Astoria stockholders’ non-binding approval of Astoria’s executive compensation

pursuant to a new 2012 Say-On-Pay Vote. In addition, as in the preceding year,

the 2012 Proxy Statement described the compensation packages at issue, as well as

the board’s recommendation that the stockholders approve Astoria’s executive

compensation arrangements. The Plaintiff contends, however, that the 2012 Proxy

Statement did not disclose whether, and if so, how, the Astoria board considered

7
Mem. of Law in Supp. of Def.’s Mot. to Dismiss at 17, Chart 1 (emphasis added).
7
the results of the prior 2011 Say-On-Pay Vote in making its executive

compensation decisions.

5. The Plaintiff’s Demand

Ten days after Astoria disseminated its 2012 Proxy Statement, on April 16,

2012, the Plaintiff sent a demand letter (the “Demand”) to the Astoria board. In

that Demand, the Plaintiff asserted that, “[i]n violation of Securities and Exchange

Commission (‘SEC’) regulation disclosure standards and the Astoria Board’s duty

of candor,” the Astoria board “concealed material and required information

concerning the Company’s executive compensation policies and practices in the

2012 Proxy Statement”8 by failing to disclose “whether, and if so, how, the Astoria

Board considered the results of the 2011 say-on-pay vote.”9 Further, the Plaintiff

explained that, “[i]n violation of SEC rules, the Company has failed to disclose

how frequently it has decided to hold future say-on-pay votes.”10 In his Demand,

the Plaintiff summarized his position as follows:

The Astoria Board owes Astoria a fiduciary duty of loyalty—the
highest duty known to the law. Each of the Astoria Board members
has a fiduciary duty to ensure that Astoria disseminated accurate,
truthful, and complete information to its shareholders. The Astoria
Board participated in or had actual or constructive knowledge of the
inadequate disclosures made in the 2012 Proxy Statement . . . . Based

8
Id. Ex. 5 at 2.
9
Id. at 1.
10
Id. at 2.
8
 on the foregoing, the Astoria Board breached its fiduciary duty of
loyalty (and candor and good faith).11

Accordingly, the Plaintiff demanded that the board (1) issue corrective disclosures,

(2) adopt stronger protocols regarding disclosures, and (3) amend the Company’s

Compensation Committee Charter to require that Committee to consider the results

of future Say-On-Pay Votes when making executive compensation decisions. The

Demand did not request that the Company conduct any litigation.12

Astoria responded to the Plaintiff’s Demand by letter dated May 3, 2012.

That response explained:

Please be assured that we regularly evaluate the adequacy of our
compensation-related disclosures and related policies and procedures.
We recognize that recent changes to certain disclosure requirements
regarding executive compensation have created some confusion with
respect to compliance with both the letter and the spirit of these
requirements. Many public companies have worked hard to comply
with these new rules, and have not all taken the same path. In
recognition of this and as a result of our ongoing efforts to evaluate
and improve our public disclosures when appropriate, we would like
to advise you of the following recent actions that have been taken by
the Company:

1. On April 20, 2012, the Company filed with the SEC,
pursuant to Item 5.07(d), an amendment on Form 8-K/A . . . .
This amendment discloses that, in light of the shareholder
advisory vote at the 2011 Annual Meeting on the frequency of

11
Id. at 3.
12
See id. (requesting only that Company take certain remedial measures, but noting that “[i]f you
fail to respond or contact the undersigned by May 4, 2012, we will be forced to assume that you
have decided not to pursue any investigation, litigation, or remedial steps described above and
we will be forced to take such action as we deem in the best interest of the Company and its
shareholders, including but not limited to the institution of an action in a court of law”).
9
 shareholder votes on approval of the compensation of the
Company’s named executive officers . . . the Company intends
to hold a say-on-pay vote every year . . . .

2. On April 25, 2012, the Company mailed a letter to its
shareholders, which, among other things, clarifies whether and
how the Company considered the results of the shareholder
advisory vote on the approval of the compensation . . . .

3. In view of the delayed submission of the Form 8-K
Amendment, the Company recently authorized its Director of
Investor Relations to undertake a complete review of the
Current Report requirements under the Exchange Act as they
currently exist and will be implementing an education program
that will allow for timely identification and reporting of those
items that are required to be reported by the Company under the
Exchange Act. . . .13

The Company’s May 3 letter also assured the Plaintiff that:

At the next regular meeting of the Company’s Compensation
Committee, the Compensation Committee will evaluate your request
that the Company include a provision in its Compensation Committee
Charter requiring the Compensation Committee to consider the results
of future say-on-pay votes in its executive compensation decisions
and practices and that such provision should require the
Compensation Committee to reach out to certain shareholders that
voted against the Company’s compensation to determine the reasons
for such opposition.14

In fact, on September 19, 2012, Astoria’s Compensation Committee did amend its

Charter as requested by the Plaintiff.15

13
Mem. of Law in Supp. of Def.’s Mot. to Dismiss Ex. 8 at 1-2.
14
Id. at 2.
15
I note, however, that although the Plaintiff contends that this amendment was a benefit
conferred on the corporation, the adoption of such an amendment bears no relation to the
10
 6. This Litigation

Following a denied request that Astoria pay attorneys’ fees in connection

with investigating and mailing his April 16, 2012 Demand, the Plaintiff filed his

Complaint in this action on December 17, 2013, “seeking an equitable assessment

of attorneys’ fees,”16 and alleging that the Plaintiff’s efforts to remedy the

disclosure violations identified in his Demand conferred upon Astoria a benefit

justifying an award of fees. On February 11, 2014, Astoria moved to dismiss the

Complaint. I heard oral argument on that Motion on May 6, 2014.

In support of its Motion to Dismiss, Astoria contends that the Plaintiff is not

entitled to an award of attorneys’ fees under the corporate benefit doctrine, as the

Plaintiff never (1) presented a meritorious claim to the Astoria board or (2)

conferred any benefit on the corporation. In response, the Plaintiff contends that

under the corporate benefit doctrine, the Plaintiff is entitled to recover attorneys’

fees for the successful resolution of his Demand, as it presented a meritorious

claim for breach of fiduciary duty, and conferred a benefit on the Astoria

stockholders by bringing the Company into compliance with applicable law.

fiduciary duty claims that the Plaintiff asserts could have been brought here. Those claims are
addressed in detail below.
16
Compl. ¶ 1.
11
 II. STANDARD OF REVIEW

Under Court of Chancery Rule 12(b)(6), this Court must deny a motion to

dismiss for failure to state a claim upon which relief may be granted where “the

well-pled factual allegations of the complaint would entitle the plaintiff to relief

under a reasonably conceivable set of circumstances . . . .”17 In considering such a

motion, I must “accept the well-pleaded allegations of fact in the complaint as true

and draw all reasonable inferences that logically flow from those allegations in the

plaintiff’s favor.”18 I am not required, however, to “blindly accept conclusory

allegations unsupported by specific facts,” or to “draw unreasonable inferences in

the plaintiffs’ favor.”19

III. ANALYSIS

The Plaintiff here seeks recovery of attorneys’ fees and costs in connection

with his pre-suit investigation and Demand. Under the corporate benefit doctrine

as it applies to moot claims, a plaintiff may receive attorneys’ fees where “(i) the

[underlying cause of action] was meritorious when filed; (ii) the action producing

benefit to the corporation was taken by the defendants before a judicial resolution

was achieved; and (iii) the resulting corporate benefit was causally related to the

17
Sustainable Energy Generation Grp., LLC v. Photon Energy Projects B.V., 2014 WL 2433096,
at *12 (Del. Ch. May 30, 2014).
18
In re Trados Inc. S’holder Litig., 2009 WL 2225958, at *4 (Del. Ch. July 24, 2009).
19
Gantler v. Stephens, 965 A.2d 695, 704 (Del. 2009).
12
lawsuit.”20 Our Courts have understood the requirement that an underlying claim

be “meritorious when filed” to mean only that when presented to the board, the

underlying cause of action asserted by the plaintiff was meritorious; a plaintiff

need not have filed an underlying action in the Court of Chancery to recover fees.21

The corporate benefit doctrine, an exception to the American Rule under

which each side bears its costs, is premised on the idea that, “where a litigant has

conferred a common monetary benefit upon an identifiable class of stockholders,

all of the stockholders should contribute to the costs of achieving that benefit.”22

Where applicable, the corporate benefit doctrine promotes private enforcement of

fiduciary breaches; through this fee-shifting mechanism, our legal system

incentivizes private actors to police corporate misconduct where, in the absence of

such a mechanism, “there [would] be less shareholder monitoring expenditures

than would be optimum [for] the shareholders as a collectivity.”23 But, “[o]f

course, [private enforcement] itself suffers from deep agency problems,”24 and the

requirement that there exist a meritorious claim when filed, and not merely a

corporate benefit, operates to further protect stockholder interest under our

20
United Vanguard Fund, Inc. v. TakeCare, Inc., 727 A.2d 844, 850 (Del. Ch. 1998).
21
Bird v. Lida, Inc., 681 A.2d 399, 405 (Del. Ch. 1996).
22
United Vanguard Fund, Inc., 727 A.2d at 850.
23
Bird, 681 A.2d at 403.
24
Id.
13
corporate model, in which the board, not the stockholders, are responsible for

managing the corporation.25

Under this model, our Courts adjudicate corporate wrongdoing, not

directors’ exercise of their discretion. The availability of cost-shifting for a

corporate benefit conferred, unrelated to a meritorious claim, was closely

considered nearly twenty years ago by then-Chancellor Allen in Bird v. Lida. That

scholarly and thoughtful analysis cannot be improved upon here. I add only that

where a volunteer stockholder (or non-stockholder, for that matter) notifies

directors, not that they are in breach of their duties, but simply that they have

missed a corporate opportunity or should avoid a corporate loss, the consideration

of such a notification is a board, not a Court, affair. If the board takes action

resulting in a corporate benefit, such that it believes the stockholders at large

would have consented to paying the volunteer for his investigation ex ante, the

directors may have an incentive to reward the volunteer ex post, and may thereby

promote not only equity but efficient levels of volunteer-monitoring in the future,

as the directors find appropriate. It is only where a benefit results from a demand

to address corporate wrongdoing under Rule 23.1, however, that it is appropriate

for the Court to intervene in the equitable distribution of the costs among all

25
See Allied Artists Pictures Corp. v. Baron, 413 A.2d 876, 879 (Del. 1980) (“But this Court has
been concerned with discouraging baseless litigation and has adhered to the merit requirement.”)
(citation omitted).
14
stockholders, consistent with the Court’s role as an adjudicative body. Consider a

stockholder who investigates and provides notice of leaking drums of chemicals

stored at a corporate site. Assume that the circumstances are such that no

actionable breach of duty has taken place by a corporate director or officer in

connection with the leaks. The stockholder through his attorney files a demand

with the board that action be taken to correct the situation, after which the

corporation investigates and rectifies the leak, saving the corporation loss of

product and potential legal liability. The board may decide to reward the

stockholder, in its discretion. But the stockholder would not be able to cause the

Court to force the corporation to reimburse his costs, legal or otherwise, because he

was a mere volunteer, presumably acting in his own interest. The sharing of that

stockholder’s costs—as well as the resulting benefits—among the stockholders at

large may appear efficient, or “fair,” but this Court is not a general enforcer of

either of those qualities outside the context of litigation within its purview. The

costs of litigation may equitably be distributed by the Court, consistent with its

jurisdiction; and equitable distribution of legal costs where a meritorious action is

mooted before litigation commences is but a corollary of the equitable distribution

of litigation expenses. But a general allocation of the costs incurred by good

Samaritans untethered to a meritorious (actual or potential) cause of action would

15
drastically expand the jurisdiction of this Court, and usurp a core function of the

board of directors.

In that light, the stockholder in the hypothetical above would no more be

entitled to compel payment of his costs than would a stockholder/treasure-hunter

whose research enabled her to reveal to the board that a treasure trove was buried

on the grounds of corporate headquarters. To hold otherwise would be to license

each stockholder to decide how much oversight must be devoted to any given

corporate activity, and, when a benefit results, shift the cost to the corporation.

But, so long as the board acts consistent with its fiduciary duties,26 what resources

to devote to oversight—whether for the inspection of storage containers or the

search for buried treasure—is a core board function, and not a stockholder

function. Only where the stockholder has acted on behalf of the corporation

because those whose duty it is to act, the directors, have breached their fiduciary

duties, will the stockholder be entitled to compel payment of fees and costs by the

stockholders generally, via the equitable power of this Court.27

26
See In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, 970 (Del. Ch. 1996).
27
Of course, failure to reward a monitoring volunteer who does the corporation a good turn may
result in a level of volunteer monitoring that is inefficiently low. It is not clear, however, that
coerced cost-shifting in such a situation would result in optimal monitoring, either. In any event,
the efficiency argument was disposed of, persuasively in my view, in Bird:
Quite evidently a strong policy argument in favor of cost sharing in this context
could be made along that line. Against that argument stand certain legal
institutional concerns. Courts do fashion cost sharing/fee shifting awards under
established criteria. In this country that practice occurs not generally, but in a
16
 The state of our law remains as set forth by Chancellor Allen in Bird: the

“presentation of a meritorious corporate claim by a shareholder” is a requisite

element of a claim for reimbursement under the corporate benefit doctrine.28 In

that regard, under our case law, “[a] claim is meritorious within the meaning of the

rule if it can withstand a motion to dismiss on the pleadings if, at the same time,

the plaintiff possesses knowledge of provable facts which hold out some

reasonable likelihood of ultimate success.”29

limited class of cases. To the extent courts extend fee shifting to instances in
which a Rule 23.1 demand is satisfied and derivative litigation is thus avoided, a
small step away from a practice that limits courts to fee shifting in litigation has
been taken. That small step, closely tied by Rule 23.1 to the litigation setting, is
well justified, as Chancellor Seitz held [in Kaufman v. Shoenberg, 91 A.2d 786
(Del. Ch. 1952)]. But will not the same justification apply to a larger step which
would see the court act generally to facilitate solutions to the shareholders
collective action disabilities by ordering the payment of reasonable compensation
whenever a shareholder risks the expenditure of funds in monitoring corporate
management and that expenditure results in board action that confers a substantial
financial benefit on the corporation? Perhaps so, but such an innovation is a step
that would move courts from their traditional mission, including the settlement of
disputed legal questions (and incidentally the awarding of fees for services
rendered in litigation), to a rather different administrative task: the ex post pricing
of “volunteer” informational services to corporations. While such a result would
certainly be rational and quite possibly efficient, the step that it requires cannot
sufficiently be supported by existing legal authorities to warrant judicial adoption
at this time. Therefore, I am of the view that to gain reimbursement of
investigation fees (including reasonable attorney’s fees) following the making of a
good faith shareholders demand pursuant to Rule 23.1, it is essential that the
matter brought to the board’s attention constitute a “meritorious” claim of legal
wrong, and not simply an opportunity for more profitable operation of the firm.
Bird, 681 A.2d at 407.
28
Id. at 405.
29
In re Primedia, Inc. S’holders Litig., 67 A.3d 455, 478 (Del. Ch. 2013) (citing Chrysler Corp.
v. Dann, 223 A.2d 384, 387 (Del. 1966)).
17
 The Defendant here contends that the Plaintiff has failed to identify a

meritorious underlying cause of action justifying a fee award under the corporate

benefit doctrine. While the Plaintiff generally asserts that the Astoria board

breached its fiduciary duties by failing to comply with the disclosure requirements

under Dodd-Frank, he does not fully articulate the legal bases underlying any

fiduciary breach. I assume, for purposes of this Motion to Dismiss only, that a

corporate benefit has resulted from the actions of the Plaintiff.30 In the remainder

of this Memorandum Opinion, I consider whether the underlying allegations

contained in the Plaintiff’s Demand and Verified Complaint state a meritorious

cause of action for breach of the duty of candor, loyalty, or care. For the reasons

that follow, I find that the Plaintiff failed to present to the Astoria board any

meritorious cause of action for breach of fiduciary duty, and accordingly grant the

Defendant’s Motion to Dismiss.

1. Duty of Candor

Under Delaware law, directors owe a fiduciary duty to “fully and accurately

disclose all material information to stockholders when seeking stockholder

30
Because I find that the Plaintiff has failed to assert a meritorious underlying claim, I need not
reach the question of whether in fact the Plaintiff’s actions conferred a benefit on the Astoria
stockholders.
18
action,”31 which duty arises out of a director’s duties of both loyalty and care.32 As

under the federal securities laws, information is material if, in the context of the

“total mix” of information, a reasonable stockholder would consider it important in

deciding how to act.33 To survive a motion to dismiss, “a pleader must allege that

facts are missing from the statement, identify those facts, state why they meet the

materiality standard and how the omission caused injury.”34

As noted above, the Plaintiff fails in briefing to articulate the basis of the

underlying fiduciary duty claim asserted in his Demand, nor does his Complaint

identify such a basis.35 The Plaintiff’s Demand itself, however, asserted that, “[i]n

violation of [SEC] regulation disclosure standards and the Astoria Board’s duty of

31
Ehlen v. Conceptus, Inc., 2013 WL 2285577, at *2 (Del. Ch. May 24, 2013); see also In re
Sauer-Danfoss Inc. S’holders Litig., 65 A.3d 1116, 1127 (Del. Ch. 2011) (“[I]f a complaint does
not identify a material misstatement or omission, it cannot survive a motion to dismiss and
therefore is not meritorious.”).
32
See Orman v. Cullman, 794 A.2d 5, 41 (Del. Ch. 2002) (“The fiduciary duty to disclose
material facts does not solely implicate the duty of loyalty, a breach of which results in liability
that cannot be avoided by an exculpatory provision. Rather, ‘[t]he duty of directors to observe
proper disclosure requirements derives from the combination of the fiduciary duties of care,
loyalty and good faith.’”).
33
Ehlen, 2013 WL 2285577, at *2.
34
Malpiede v. Townson, 780 A.2d 1075, 1087 (Del. 2001) (quoting Loudon v. Archer-Daniels-
Midland Co., 700 A.2d 135, 141 (Del. 1997).
35
The Plaintiff’s Complaint refers only twice to the Astoria board’s fiduciary duties. See Compl.
¶ 16 (“The Demand Letter identified the disclosure deficiencies described above and alleged that
the Board violated the federal securities laws and breached its fiduciary duty of candor by failing
to disclose the required and material information detailed above.”); id. at ¶ 24 (“Plaintiff’s
Demand raised meritorious legal claims with respect to the Board’s breaches of fiduciary duties
and violations of federal securities laws by failing to disclose material and required information
following their 2011 say-on-pay vote.”).
19
candor,”36 the Astoria board failed to satisfy the disclosure requirements contained

in Item 5.07(d) of Form 8-K as well as 17 C.F.R. § 229.402(b)(1)(vii).37 In other

words, the Plaintiff challenged the board’s failure to disclose (1) how the board

considered the results of the 2011 Frequency Vote, and (2) whether and how the

board considered the results of the 2011 Say-On-Pay Vote. I do not accept,

however, that the underlying allegations in the Plaintiff’s Demand presented a

meritorious claim for breach of the duty of candor under Delaware law.

The Plaintiff has identified two purportedly actionable omissions, neither of

which, in my view, rise to a level of a breach of the duty of candor. First, the

Plaintiff suggests that a failure to disclose to the Astoria stockholders how the

board considered the results of the 2011 Frequency Vote constituted a breach of

the duty of candor. However, it is unclear to me how that information would be

material to a reasonable stockholder given that the board (1) recommended in the

2011 Proxy Statement that stockholders vote to hold annual Say-On-Pay Votes; (2)

disclosed in a subsequent 8-K that “[b]ased on the vote indicated below, the results

of the future advisory shareholder votes to approve the compensation of the

36
Mem. of Law in Supp. of Def.’s Mot. to Dismiss Ex. 5 at 2 (emphasis added).
37
I note that although the Plaintiff contended in his Demand that the failure to omit certain
information violated disclosure requirements under Dodd Frank, Dodd Frank itself explicitly
provides that the Act does not “create or imply any change to the fiduciary duties” of, or “create
or imply any additional fiduciary duties” for, directors. 15 U.S.C. § 78n-1(c)(2)-(3).
20
Company’s named executives is every year;”38 and (3) disclosed in the 2012 Proxy

Statement its intent to hold a second Say-On-Pay Vote. With that information

available to the Astoria stockholders, I find that the board did not omit material

information in its initial 8-K by failing to explicitly inform the stockholders that

the results of the 2011 Frequency Vote showed that the stockholders had voted to

hold future Say-On-Pay Votes annually, as the board had recommended, and that

the board had accepted those results.

Similarly, whether and how the board considered the results of the 2011

Say-On-Pay Vote cannot be material as a matter of Delaware law. The Plaintiff

can point to no authority indicating that, as a matter of Delaware law, every

consideration underlying a board’s approval of executive compensation must be

disclosed. The supplemental disclosure made after the Demand—which the

Plaintiff points to as a corporate benefit—itself provided only the boilerplate

information that the board “was aware of a variety of factors, including the

outcome of the advisory vote, when it authorized the changes, but no single factor

was determinative.”39 Known to the stockholders, before the Plaintiff sent his

Demand and the board supplemented the 2012 Proxy Statement, was that (1) the

board recommended certain compensation packages in 2011; (2) the board planned

38
Mem. of Law in Supp. of Def.’s Mot. to Dismiss at 17, Chart 1.
39
Id. at 18, Chart 2.
21
to “take into account the outcome of the vote when considering future executive

compensation;”40 (3) a majority of the stockholders voted in favor of the board’s

recommendation;41 and (4) the board implemented those compensation decisions it

had recommended and the stockholders had blessed.42 The proxy supplement,

though in compliance with Dodd-Frank, is devoid of further content, and the

failure to include the additional disclosures in the Company’s 2012 Proxy

Statement does not, in my view, constitute a material omission sufficient to

demonstrate a breach of the duty of candor.

2. Caremark Claim

As the underlying facts of the Plaintiff’s Demand and Complaint do not state

a claim for breach of the duty of candor, neither do they state a claim for breach of

the duty of good faith under the standard articulated in Caremark. As that case

explained, “a director’s obligation includes a duty to attempt in good faith to assure

that a corporate information and reporting system, which the board concludes is

adequate, exists, and that failure to do so under some circumstances may, in theory

at least, render a director liable for losses caused by non-compliance with

applicable legal standards.”43 However, “only a sustained or systematic failure of

40
Id.
41
Id. Ex. 2 at 2.
42
Id. Ex. 4 at 34, 39.
43
In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, 970 (Del. Ch. 1996).
22
the board to exercise oversight—such as an utter failure to attempt to assure a

reasonable information and reporting system exists—will establish the lack of

good faith that is a necessary condition to liability.”44 As the Plaintiff’s Complaint

concedes, the Company’s May 3, 2012 response to the Plaintiff’s Demand

indicated that Astoria “regularly evaluate[s] the adequacy of [its] compensation-

related disclosures and related policies and procedures.”45 Further, Plaintiff’s

counsel agreed at oral argument that he “wouldn’t view this through a Caremark

lens.”46 As neither the Plaintiff’s Complaint nor his Demand provides any basis to

infer that the Astoria board utterly failed to institute procedures aimed at ensuring

the Company satisfies applicable disclosure laws, I conclude that the Plaintiff’s

Demand failed to present to the Company a meritorious Caremark claim.

3. Good Faith

The underlying facts of the Plaintiff’s Demand and Complaint also fail to

present a meritorious claim for breach of the duty of good faith independent of a

Caremark claim. In addition to situations “where the fiduciary intentionally fails

to act in the face of a known duty to act, demonstrating a conscious disregard for

his duties,” a fiduciary may also act in bad faith by “intentionally break[ing] the

law,” or by “intentionally act[ing] with a purpose other than that of advancing the

44
Id. at 971.
45
Mem. of Law in Supp. of Def.’s Mot. to Dismiss Ex. 8 at 1.
46
Oral Arg. Tr. 24:14-15.
23
best interests of the corporation . . . .”47 Neither the Plaintiff’s Demand nor his

Complaint provides the Court any basis to infer that, assuming the Astoria board

did in fact violate disclosure requirements under Dodd-Frank, it did so

intentionally.48 Rather, at oral argument, Plaintiff’s counsel suggested that a

meritorious underlying claim for breach of the duty of good faith may have existed

because, had the board chosen to disregard the Plaintiff’s Demand, the Plaintiff

then could “have filed a complaint that said that by refusing the demand, the board

now knew the violation of the federal securities law that existed and refused to

remedy it. That is a decision to continue to violate the law.”49 Of course, the

corporate benefit doctrine requires the actual existence of a meritorious claim at

the time a cause of action is filed or presented to the board—not the theoretical

existence of a meritorious claim under circumstances that never came to fruition—

and that argument accordingly must fail. As a result, I find that the Plaintiff

presented no meritorious underlying claim for breach of the duty of good faith.

47
In re Goldman Sachs Grp., Inc. S’holder Litig., 2011 WL 4826104, at *13 (Del. Ch. Oct. 12,
2011).
48
In briefing, the Plaintiff contends that “[d]irectors and officers have a fiduciary duty to ensure
that a company is in compliance with applicable laws and regulations.” Pl.’s Mem. of Law in
Opp’n to Def.’s Mot. to Dismiss at 9. In support of that contention, the Plaintiff cites case law
explaining that “[u]nder Delaware law, a fiduciary may not choose to manage an entity in an
illegal fashion[.]” Id. (citing Metro Commc’n Corp. BVI v. Advanced Mobilcomm Techs., Inc.,
854 A.2d 121, 131 (Del. Ch. 2004)). However, as indicated above, neither the Plaintiff’s
Demand nor his Complaint indicates that the board intentionally “chose” to violate known law.
49
Oral Arg. Tr. 25:1-5.
24
 4. Duty of Care

Finally, I find that the Plaintiff’s Demand and Complaint do not allege facts

sufficient to state a meritorious claim for breach of the duty of care. As an initial

matter, Astoria’s Certificate of Incorporation contains a provision adopted pursuant

to 8 Del. C. § 102(b)(7) exculpating directors for breaches of the duty of care.50 As

a result, only a claim for injunctive relief, and not money damages, could

theoretically state a claim for breach of the duty of care that could survive a motion

to dismiss. Such a claim would be problematic, as it is unclear what injunctive

relief would be available to the Plaintiff in this Court,51 or how the Plaintiff could

demonstrate irreparable harm.

At any rate, even if Astoria’s 102(b)(7) provision did not prevent the

Plaintiff from pursuing a duty of care claim against the Astoria board, his Demand

and Complaint contain no allegations indicating that the Astoria directors acted

with gross negligence—reckless indifference to their responsibilities—sufficient to

50
Certificate of Incorporation § 11.
51
The Plaintiff suggests that he could have brought a non-exculpated claim for (1) a declaratory
judgment that the Company failed to comply with federal disclosure laws, and (2) injunctive
relief compelling the Company to comply with applicable law. This Court is not typically in the
business of issuing injunctions requiring defendants to comply with the law, however, as “it is
not at all clear what purpose would be served by enjoining [a defendant] from violating duly
enacted statutes that it is already duty-bound to honor.” State ex rel. Brady v. Pettinaro Enters.,
870 A.2d 513, 536 (Del. Ch. 2005).
25
constitute a breach of the duty of care.52 To the contrary, the Plaintiff has not

suggested that any action of the board amounted to gross negligence, nor did the

Plaintiff identify a breach of the duty of care in his Demand, which noted only that

“[b]ased on the foregoing, the Astoria Board breached its fiduciary duty of loyalty

(and candor and good faith).”53 As a result, I conclude that the Plaintiff failed to

assert a meritorious claim for breach of the duty of care in his Demand or

Complaint.

IV. CONCLUSION

For the reasons explained above, I conclude that the Complaint fails to state

a claim for entitlement to attorneys’ fees under the corporate benefit doctrine.

Evaluating the allegations of the Complaint and the Plaintiff’s Demand, the

Plaintiff has presented no underlying meritorious claim for breach of fiduciary

duty. Accordingly, the Defendants’ Motion to Dismiss is granted. An appropriate

Order is attached.

52
See Malpiede v. Townson, 780 A.2d 1075, 1098 n.77 (Del. 2001) (“In the corporate context,
[director] liability for breaching the duty of care is predicated upon concepts of gross
negligence.”) (internal quotation marks omitted); McPadden v. Sidhu, 964 A.2d 1262, 1273-74
(Del. Ch. 2008) (“Gross negligence . . . is exculpated because such conduct breaches the duty of
care. . . . Delaware’s current understanding of gross negligence is conduct that constitutes
reckless indifference or actions that are without the bounds of reason.”).
53
Mem. of Law in Supp. of Def.’s Mot. to Dismiss Ex. 5 at 2.
26
 IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

DAVID RAUL, as custodian for )
MALKA RAUL UTMA, NY, )
)
Plaintiff, )
)
v. ) Civil Action No. 9169-VCG
)
ASTORIA FINANCIAL )
CORPORATION, )
)
Defendant. )

ORDER

AND NOW, this 20th day of June, 2014,

For the reasons stated in my Memorandum Opinion of June 20, 2014, the

Defendant’s Motion to Dismiss is GRANTED, and this action is DISMISSED.

SO ORDERED:

/s/ Sam Glasscock III
Vice Chancellor

27