In re Lubrizol Shareholders Litigation

[Cite as In re Lubrizol Shareholders Litigation, 2017-Ohio-622.]

IN THE COURT OF APPEALS

ELEVENTH APPELLATE DISTRICT

LAKE COUNTY, OHIO

IN RE: LUBRIZOL : OPINION
SHAREHOLDERS LITIGATION
:
CASE NO. 2016-L-026
:

Civil Appeal from the Lake County Court of Common Pleas, Case No. 2011 CV
000684.

Judgment: Affirmed.

Jack Landskroner, Landskroner Grieco Merriman LLC, 1360 West Ninth Street, Suite
200, Cleveland, OH 44113, Phillip A. Ciano, Andrew S. Goldwasser, and Robert A.
West, Jr., Ciano & Goldwasser, LLP, 1610 Midland Building, 101 West Prospect
Avenue, Cleveland, OH 44115, Juan E. Monteverde, Monteverde & Associates PC,
350 Fifth Avenue, 59th Floor, New York, NY 10118, Stephen J. Oddo, Robbins Arroyo
LLP, 60 B Street, Suite 1900, San Diego, CA 92101, and David A. Knotts and David T.
Wissbroecker, Robbins Geller Rudman & Down, LLP, 655 West Broadway, Suite 1900,
San Diego, CA 32101 (For Appellants).

Geoffrey J. Ritts and Marjorie P. Duffy, Jones Day, 901 Lakeside Avenue, Cleveland,
OH 44114 (For Appellees).

DIANE V. GRENDELL, J.

{¶1} Plaintiff-appellant, Emilie J. Sair, derivatively on behalf of nominal

defendant, The Lubrizol Corporation, appeals the Judgment of the Lake County Court of

Common Pleas dismissing the Second Amended Consolidated Derivative and Class

Action Complaint for lack of standing. The issues before this court are whether a

plaintiff bringing a shareholder derivative action loses standing to maintain the action if
he ceases to hold corporate stock during the pendency of the litigation and whether a

plaintiff satisfies the futility exception to Civil Rule 23.1 by claiming that the corporate

directors would not take legal action against themselves. For the following reasons, we

affirm the decision of the court below.

{¶2} On March 16, 2011, Henry Mandel, on Behalf of Himself and All Others

Similarly Situated, and Derivatively on Behalf of The Lubrizol Corporation, filed a Class

and Derivative Action in the Lake County Court of Common Pleas against members of

Lubrizol’s Board of Directors1, Berkshire Hathaway Inc., Ohio Merger Sub, Inc., and The

Lubrizol Corporation as a nominal defendant. The action sought “to enjoin defendants

from further breaching their fiduciary duties in pursuit of a sale of the Company at an

unfair price through an unfair and self-serving process to Berkshire.”

{¶3} On May 10, 2011, the trial court issued a Judgment Entry consolidating

Mandel v. Hambrick, Case No. 11CV000684, with Spletter v. Lubrizol, Case No.

11CV000825, Sair v. Hambrick, Case No. 11CV000807, Jaroslawicz v. Hambrick, Case

No. 11CV000886, and State-Boston Retirement System v. Hambrick, Case No.

11CV001006.

{¶4} On October 31, 2011, Plaintiffs Mandel and Sair filed a Second Amended

Consolidated Derivative and Class Action Complaint, captioned In re Lubrizol

Shareholder Litigation.2 It was alleged that on March 14, 2011, Lubrizol and Berkshire

Hathaway announced a Merger Agreement to sell Lubrizol to Berkshire wherein

1. Individually identified as James L. Hambrick (Chairman of the Board and Lubrizol’s CEO and
President), Gordon D. Harnett, Forest J. Farmer, Sr., Dominic J. Pileggi, Robert E. Abernathy, Harriett
Tee Taggart, James E. Sweetnam, Phillip C. Wildman, Michael J. Graff, Edward P. Campbell, and N.
Mohan Reddy.
2. An initial Consolidated Derivative and Class Action Complaint had been filed on May 27, 2011. The
Second Consolidated Complaint did not include Berkshire Hathaway or Ohio Merger Sub as defendants,
but added David L. Sokol, an executive at Berkshire Hathaway, as a defendant. On January 30, 2013,
Sokol was dismissed as a defendant without prejudice by stipulation of the parties.

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“Berkshire would acquire all of the outstanding shares of Lubrizol for $9.7 billion, or

$135 per share.” On June 9, 2011, Lubrizol shareholders formally approved the

acquisition.

{¶5} The Consolidated Complaint raised two causes of action, one a class or

direct claim and the other a derivative claim. Both causes of action were for breach of

fiduciary duties: the defendants, Lubrizol’s Board of Directors, “have violated their

fiduciary duties of due care, loyalty, candor, good faith, and independence owed to the

public shareholders of the Company and have acted to put their personal interests

ahead of the interests of the Company * * * by entering into and completing the

Acquisition [of Lubrizol by Berkshire Hathaway] without regard to the fairness of the

transaction to Lubrizol shareholders, particularly considering the positive outlook for the

Company as a standalone entity.”

{¶6} The Consolidated Complaint did not “challenge the specific price of the

Acquisition,” but sought “monetary damages on behalf of Lubrizol shareholders” based

on the defendants’ failure “to ensure a fair process and maximization of shareholder

value.” The Complaint further sought a declaration that the Merger Agreement was

unlawful and unenforceable and the rescission thereof.

{¶7} On February 27, 2012, the Lubrizol defendants filed a Motion to Dismiss

the Second Amended Consolidated Derivative and Class Action Complaint.

Supplemental memoranda and authority were filed on April 27, 2012, September 18,

2013, and June 2, 2014. The defendants sought the dismissal of the first cause of

action (the direct claims) on the grounds that the plaintiffs failed to allege any injury

“separate and distinct” from that of other shareholders so as to create standing to assert

direct or class claims. The defendants similarly sought the dismissal of the second

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cause of action (the derivative claims) on the grounds that the plaintiffs lacked standing

as they no longer owned Lubrizol stock. Further, the defendants claimed the plaintiffs

failed to make a pre-suit demand as required by Civil Rule 23.1. Finally, the defendants

asserted that all the plaintiffs’ claims are barred by the application of the business

judgment rule.

{¶8} On March 30, 2012, the plaintiffs filed their Memorandum of Law in

Opposition to the Lubrizol Defendants’ Motion to Dismiss. Supplemental authority was

filed on September 5, 2013.

{¶9} On December 10, 2015, the plaintiffs filed a Suggestion of Death of Henry

Mandel.

{¶10} On February 18, 2016, the trial court issued a Judgment Entry, granting

the Lubrizol defendants’ Motion to Dismiss. With respect to the first cause of action, the

court held that “Plaintiffs do not have standing to bring a direct class action claim for

breach of fiduciary duty” since they “have brought no allegations which are not common

to all of Lubrizol’s former shareholders.” With respect to the second cause of action, the

court held that “Plaintiffs do not have standing to bring a derivative claim because they

are not shareholders of the corporation” and because they failed to “make a pre-suit

demand and did not show that a pre-suit demand would be futile as is required pursuant

to Civ.R. 23.1.” With respect to the Lubrizol defendants’ argument that the plaintiffs’

claims were barred by the business judgment rule, the court declined to rule as such

“claims have been rendered moot” on account of “lack [of] standing to bring both a

direct action and a derivative action on behalf of the corporation.”

{¶11} On March 18, 2016, Sair filed a Notice of Appeal. On appeal, she raises

the following assignments of error:

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 {¶12} “[1.] The trial court erred in granting Defendants-Appellees’ motion to

dismiss Plaintiff’s Second Cause of Action by determining that Ohio Civ.R. 23.1

imposes a ‘continuous ownership’ requirement, which would make it impossible for

target shareholders in Ohio to prosecute post-close breach of fiduciary duty claims

challenging a corporate acquisition.”

{¶13} “[2.] The trial court erred by granting Defendants-Appellees’ motion to

dismiss Plaintiff’s Second Cause of Action without addressing and sustaining the

viability of the substantive claim for breach of fiduciary duty.”

{¶14} “[3.] The trial court erred in granting Defendants-Appellees’ motion to

dismiss Plaintiff’s Second Cause of Action by holding that Plaintiff did not sufficiently

plead derivative demand futility.”

{¶15} Dismissal of a complaint based on the plaintiff’s lack of standing to bring

the action is commonly construed as a dismissal for “failure to state a claim upon which

relief can be granted.” Civ.R. 12(B)(6); Wilkins v. Harrisburg, 2015-Ohio-5472, 56

N.E.3d 320, ¶ 39 (10th Dist.). “In order for a court to dismiss a complaint for failure to

state a claim upon which relief can be granted (Civ.R. 12(B)(6)), it must appear beyond

doubt from the complaint that the plaintiff can prove no set of facts entitling him to

recovery.” O’Brien v. Univ. Community Tenants Union, Inc., 42 Ohio St.2d 242, 327

N.E.2d 753 (1975), syllabus.

{¶16} The standard of review typically applied to dismissals for failure to state a

claim is de novo. Corrado v. Lowe, 11th Dist. Geauga No. 2014-G-3239, 2015-Ohio-

1993, ¶ 22; also State ex rel. Butler Twp. Bd. of Trustees v. Montgomery Cty. Bd. of Cty.

Commrs., 2d Dist. Montgomery No. 22664, 2008-Ohio-6542, ¶ 11 (“[w]hen an appellate

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court is presented with a standing issue, it is generally a question of law, and we

therefore apply a de novo standard of review”).

{¶17} The assignments of error will be considered out of order.

{¶18} In the first assignment of error, Sair argues the trial court erred in holding

that, “in order for the Plaintiffs to bring a derivative claim on behalf of all shareholders of

Lubrizol, Plaintiffs must be shareholders.” Sair cites the Ohio Civil Rule governing

derivative actions by shareholders, which provides: “In a derivative action brought by

one or more legal or equitable owners of shares to enforce a right of a corporation, the

corporation having failed to enforce a right which may properly be asserted by it, the

complaint shall be verified and shall allege that the plaintiff was a shareholder at the

time of the transaction of which he complains or that his share thereafter devolved on

him by operation of law.” Civ.R. 23.1. Sair notes that “the rule contains no requirement

that a stockholder own shares throughout the duration of the litigation.” Appellant’s brief

at 11.

{¶19} Sair also cites two Eleventh District cases in support of her position. In

Cantagallo v. Ashtabula Cty. S. & L. Co., 11th Dist. Ashtabula No. 1023, 1981 WL 4400

(June 29, 1981), a shareholder filed a derivative suit alleging mismanagement against

the board of directors in conducting a merger. The complaint was filed prior to the

merger, which occurred during the pendency of the suit. Id. at 1. The directors argued

on appeal that “[a] shareholder-plaintiff in a derivative case loses his standing to

maintain the action if the corporation on whose behalf the claim was made ceases to

exist as a result of a merger with another corporation.” Id. at 6. This court rejected the

argument relying on statutory law that, following a corporate merger, “the surviving or

new entity is liable for all the obligations of each constituent entity, including liability to

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dissenting shareholders.” R.C. 1701.82(A)(4). This court held that “[a] derivative suit by

Cantagallo is a suit on behalf of the corporation and, thus, is a ‘claim existing, or action

or proceeding pending, by or against’ a constituent corporation.” Cantagallo at 7, citing

R.C. 1701.82(A)(4).

{¶20} Although factually similar, Cantagallo is not dispositive. The argument

considered therein was focused on the fact that the constituent or subsidiary

corporation, on whose behalf a derivative claim is brought, ceased to exist following the

merger. That question is directly addressed by recourse to R.C. 1701.82, which

provides that a corporation’s obligations, as well as claims, survive the merger or

consolidation. The question of what effect the fact that Cantagallo was no longer a

shareholder had on his standing to assert claims on behalf of the subsidiary corporation

was neither asked nor addressed.

{¶21} In Convenient Food Mart Franchising Co. v. Region 3 Advertising Corp.,

11th Dist. Lake No. 99-L-008, 2000 WL 655441 (May 19, 2000), this court applied Civil

Rule 23.1 to a situation where one corporation (Convenient) brought suit against

another non-profit corporation (Region 3) of which it was a member, and its officers,

inter alia, for breach of fiduciary duties. Id. at 1-2. Prior to filing suit, Convenient

withdrew as a member of Region 3. The trial court granted summary judgment in favor

of Region 3, noting that Convenient “did not have the necessary legal or equitable

ownership in Region 3 to maintain its action; that it had withdrawn as a member of

Region 3 four months prior to filing suit; and, had not alleged an independent cause of

action other than injuries as a member of the corporation.” Id. at 3.

{¶22} Relying on Civil Rule 23.1, this court reversed. We held that the Rule only

requires that a derivative action plaintiff be a shareholder “at the time of the transaction

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of which he complains,” not when the complaint was filed. Id. Thus, Convenient “ha[d]

standing to bring a derivative complaint against Region 3” and its officers. Id.3

{¶23} As with Cantagallo, Convenient Food Mart is not dispositive. Convenient

was not a shareholder in a merged corporation, but a member of another corporation,

both of which continued to exist as independent entities after Convenient’s withdrawal.

These distinctions are material as to whether Sair’s standing to bring a derivative action

was forfeited by virtue of her ceasing to be a shareholder.

{¶24} Although not expressly stated by the trial court, the rule that plaintiffs

bringing derivative claims lose their standing to prosecute those claims if they cease to

be shareholders of the corporation on whose behalf suit is brought derives from

Delaware corporate law. Parfi Holding AB v. Mirror Image Internet, Inc., 954 A.2d 911,

940 (Del.Ch.2008) (“the rule is a bedrock tenet of Delaware law and is adhered to

closely”); Quadrant Structured Prods. Co., Ltd. v. Vertin, 115 A.3d 535, 552

(Del.Ch.2015) (“[w]hen a stockholder wishes to sue derivatively, Delaware common law

requires that the stockholder beneficially own an interest in common stock at the time of

filing and continuously throughout the litigation”).

{¶25} As stated by the Delaware Supreme Court: “To have standing to maintain

a shareholder derivative suit, a plaintiff must be a shareholder at the time of the filing of

the suit and must remain a shareholder throughout the litigation.” Kramer v. W. Pacific

Industries, Inc., 546 A.2d 348, 354 (Del.1988).

3. The Lubrizol defendants would distinguish Convenient Food Mart on the grounds that, despite
withdrawing from Region 3, Convenient continued to assert that it “still had membership rights in the
corporation.” Id. at 3. This claim, whether accurate or not, was immaterial to this court’s holding which
was wholly based on the fact that Convenient was a member at the time of the alleged misconduct by the
defendants.

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 {¶26} The purpose of the rule, commonly known as the “continuous ownership

rule” is “to eliminate abuses associated with a derivative suit.” Lewis v. Anderson, 477

A.2d 1040, 1046 (Del.1984). The logic behind the rule depends on the nature of the

derivative suit, wherein the plaintiff sues not on his own behalf, but on behalf of the

corporation.

A shareholder’s derivative action is brought by a shareholder in the

name of the corporation to enforce a corporate claim. Such a suit

is an exception to the usual rule that a corporation’s board of

directors manages or supervises the management of a corporation.

A derivative action allows a shareholder to circumvent a board’s

refusal to bring a suit on a claim. On the other hand, if the

complaining shareholder is injured in a way that is separate and

distinct from an injury to the corporation, then the complaining

shareholder has a direct action.

(Footnote omitted.) Crosby v. Beam, 47 Ohio St.3d 105, 107, 548 N.E.2d 217 (1989).

Since “the shareholders sue in a representative capacity only, any damages recovered

in the derivative suit inure directly to the corporation,” and “a plaintiff’s derivative claim is

regarded as a property right belonging to the corporation instead of the shareholder.”

Alabama By-Prods. Corp. v. Cede & Co. ex rel. Shearson Lehman Bros., Inc., 657 A.2d

254, 265 (Del.1995).

{¶27} Standing, then, for the derivative action plaintiff, is not so much a matter of

the plaintiff having a personal stake in the outcome of the controversy as a matter of the

plaintiff having an interest in the corporation which justifies the plaintiff’s bringing suit on

9
its behalf. When that interest is extinguished, so is the plaintiff’s justification for

maintaining a derivative action.

{¶28} We are aware of no Ohio decision either expressly adopting or rejecting

the continuous ownership rule. We decline to adopt it in the present case.

{¶29} Bearing in mind the equitable nature of derivative actions, Sair notes a

significant distinction between Ohio and Delaware law rendering the adoption of the rule

in Ohio inequitable. Under Delaware law, claims for breach of fiduciary duty as are

raised here are cognizable as direct action claims: “direct attacks against a given

corporate transaction (attacks involving fair dealing or fair price) give complaining

shareholders standing to pursue individual actions even after they are cashed-out

through the effectuation of a merger.” Kramer, 546 A.2d at 354.

{¶30} Under Ohio law, in contrast, “a director’s breach of a fiduciary duty is

understood to harm the corporation and, as a result, any resulting damages inure to the

corporation” so that “a plaintiff-shareholder is generally required to bring a derivative

action, i.e., a lawsuit on behalf of the corporation.” Heaton v. Rohl, 193 Ohio App.3d

770, 2011-Ohio-2090, 954 N.E.2d 165, ¶ 55 (11th Dist.); Weston v. Weston Paper &

Mfg. Co., 74 Ohio St.3d 377, 379, 658 N.E.2d 1058 (1996) (rejecting the plaintiffs’

argument that breach of fiduciary duty claims against corporate directors should be

allowed as a direct action in the absence of injury separate and distinct from the

corporation: “[i]f any injuries occurred, they occurred to all the other shareholders alike”

and “[t]hat is precisely the situation in which derivative actions are required”). In fact,

this was the basis on which the trial court dismissed the first cause of action in the

Second Consolidated Complaint.

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 {¶31} Thus, under Delaware law, former shareholders who are precluded from

maintaining a derivative action due to lack of standing retain their right to bring fiduciary

claims in direct actions, unlike their counterparts in Ohio. Kramer at 354 (“no one would

assert that a former owner suing for loss of property through deception or fraud has lost

standing to right the wrong that arguably caused the owner to relinquish ownership or

possession of the property”) (citation omitted). Given these circumstances, the trial

court erred in imposing a continuous ownership requirement on Sair.

{¶32} The first assignment of error is with merit.

{¶33} In the third assignment of error, Sair contends the trial court erroneously

concluded that she did not meet the demand requirement of Civil Rule 23.1. According

to the Rule, “[t]he complaint shall * * * allege with particularity the efforts, if any, made

by the plaintiff to obtain the action he desires from the directors * * * and the reasons for

his failure to obtain the action or for not making the effort.” “The demand requirement is

essentially a requirement that a shareholder exhaust his intracorporate remedies before

going to court with a derivative suit.” (Citation omitted.) Grand Council v. Owens, 86

Ohio App.3d 215, 221, 620 N.E.2d 234 (10th Dist.1993).

{¶34} As noted above, the boards of directors are “charged with the

responsibility of making decisions on behalf of the corporation and are the proper

parties to bring a suit on behalf of the corporation or, in their business judgment, to

forego a lawsuit.” Drage v. Procter & Gamble, 119 Ohio App.3d 19, 24, 694 N.E.2d 479

(1st Dist.1997). “The shareholders may make a demand on the directors to bring a suit

on behalf of the corporation, but no shareholder has an independent right to bring suit

unless the board refuses to do so and that refusal is wrongful, fraudulent or arbitrary, or

is the result of bad faith or bias on the part of the directors.” Id.

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 {¶35} An exception to the Rule has been created which “permits a shareholder

to proceed with an independent suit without making a demand when the shareholder

can demonstrate that the demand would have been futile.” Id. at 25. In this context,

“[f]utility means that the directors’ minds are closed to argument and that they cannot

properly exercise their business judgment in determining whether the suit should be

filed.” Id. “[C]ourts have consistently rejected the idea that demand is always futile

when the directors are targeted as the wrongdoers in the suit the shareholders wish the

corporation to bring; that is, a bare allegation that the directors would not want to sue

themselves or each other does not show that demand would be futile.” Id.; compare

Carlson v. Rabkin, 152 Ohio App.3d 672, 2003-Ohio-2071, 789 N.E.2d 1122, ¶ 18 (1st

Dist.) (“[e]xamples of when a demand would be excused as futile include when all

directors are named as wrongdoers and defendants in a suit, when there is self-dealing

by the directors such that the directors gain directly from the challenged transactions, or

when there is domination of the nondefendant directors by the defendant directors”).

{¶36} “Demand futility is difficult to establish and is not just a procedural

technicality.” Monday v. Meyer, N.D.Ohio No. 1:10CV1838, 2011 WL 5974664, 4 (Nov.

29, 2011); In re Ferro Corp. Derivative Litigation, N.D.Ohio No. 1:04CV1626, 2006 WL

2038659, 5 (Mar. 21, 2006) (“establishing demand futility in Ohio is not an easy task”)

(cases cited).

{¶37} In the present case, we agree with the trial court that Sair did not make a

pre-suit demand and failed to demonstrate that such demand would have been futile.

Despite having named all Lubrizol directors as defendants, Sair has not shown with any

particularity that the directors, with the exception of Lubrizol’s President and CEO,

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James L. Hambrick, were conflicted or otherwise incapable of exercising reasonable

business judgment.

{¶38} The Second Consolidated Complaint offers the following in support of its

claim of futility: the directors benefited from the wrongdoing; were interested and/or

involved in the merger; would be forced to sue themselves; would expose themselves to

“further civil actions” if they attempted to remedy the wrongs; are incapable of exercising

“independent objective judgment” on account of being, “directly or indirectly, the

recipient[s] of remuneration paid by the Company”; and are “dominated and controlled”

on account of “their association as directors of the Company and their positions as

present or former employees.”

{¶39} There is nothing in the Second Consolidated Complaint to substantiate

these claims. As noted above, the idea that demand is futile merely because the

directors have been identified as wrongdoers has been consistently rejected by the

courts. Similarly, the notions that the directors cannot exercise independent business

judgment because they receive remuneration from the corporation or because they are

directors or employees of the corporation must be rejected as falling far short of

demonstrating demand futility.

{¶40} Sair’s claims against the directors (Hambrick excepted) is that they

violated their fiduciary duties during the merger process by failing to take a more active

part in the negotiations and by deferring to Hambrick who, according to the Complaint,

did benefit substantially from the terms of the Merger Agreement. It is not sufficient to

claim that the directors were “dominated and controlled” without providing some detail

as to why this was so. It is not sufficient to claim that the directors “directly benefitted”

from their breach of fiduciary duties without explaining what this benefit was. It is not

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sufficient to claim that the directors would be subject to further civil liability if they

attempted to remedy their failure to fulfill their duties without specifying what this liability

would be.

{¶41} Broad and vague allegations of futility have consistently been held not to

satisfy the demand requirement of Civil Rule 23.1. See Monday, 2011 WL 5974664, at

3-7; Ferro Corp., 2006 WL 2038659, at 4-8; Carlson, 152 Ohio App.3d 672, 2003-Ohio-

2071, 789 N.E.2d 1122, at ¶ 19-22; Drage, 119 Ohio App.3d at 26-32, 694 N.E.2d 479;

Doe v. Malkov, 10th Dist. Franklin No. 02AP-90, 2002-Ohio-7358, ¶ 29-30.

{¶42} The third assignment of error is without merit.

{¶43} We decline to consider Sair’s second assignment of error, which faults the

trial court for not considering the substance of her claims for breach of fiduciary duty.

Our conclusion under the third assignment of error that Sair lacked standing renders

this assignment of error moot.

{¶44} Although the trial court erred in concluding Sair lacked standing due to no

longer holding shares of corporate stock, it properly concluded that she lacked standing

by failing to comply with Civil Rule 23.1. Accordingly, the Judgment of the Lake County

Court of Common Pleas, dismissing the Second Consolidated Complaint, is affirmed.

Costs to be taxed against the parties equally.

THOMAS R. WRIGHT, J., concurs,

COLLEEN MARY O’TOOLE, J., concurs in part and dissents in part with a
Concurring/Dissenting Opinion.

________________________________________

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COLLEEN MARY O’TOOLE, J., concurs in part and dissents in part with a
Concurring/Dissenting Opinion.

{¶45} I concur with the majority’s well-reasoned disposition of Sair’s first

assignment of error. I respectfully dissent regarding its denial of her third assignment of

error. I believe the Second Consolidated Complaint contains sufficient factual

allegations to establish demand futility for purposes of Civ.R. 12(B)(6).

{¶46} Demand futility can be demonstrated for purposes of Civ.R. 23.1 if the

plaintiff pleads facts showing a corporate board of directors was dominated in its

decision making by one or more members who opposed the actions desired by the

plaintiff. Drage, supra, at 26; accord Carlson, supra, at ¶18. The Second Consolidated

Complaint contains sufficient factual allegations that the Lubrizol Board was dominated

by the company CEO, James L. Hambrick, for purposes of showing demand futility.

{¶47} The Second Consolidated Complaint alleges the Lubrizol board believed

the company’s stock was undervalued, and that performance evaluations indicated that

sustained growth would change this. (Second Consolidated Complaint at ¶44-45.) It

alleges the Board was considering other options than a merger with Berkshire

Hathaway, such as continuing the company on a standalone basis, or even acquiring

competitors. (Id. at ¶50, 66.) It alleges the Board was unsatisfied with the offer of $135

per share made by Berkshire Hathaway, and believed that $145 should be offered, but

that Mr. Hambrick argued the Board out of this. (Id. at ¶71.) It alleges that Mr.

Hambrick discouraged the Board from seeking alternative offers for Lubrizol. (Id. at

¶82-83.)

{¶48} Fundamentally, the Second Consolidated complaint alleges facts

indicating the entire process of deciding whether Lubrizol should continue on its own, or

15
sell itself to another company, was dominated by Mr. Hambrick, and that when the

Board disagreed, he would argue the Board into accepting his positions.

{¶49} Self-dealing by a corporate board can demonstrate demand futility under

Civ.R. 23.1. Drage, supra, at 26; accord Carlson at ¶18. The Second Consolidated

Complaint alleges sufficient facts, which, if accepted as true, indicate potential self-

dealing by Mr. Hambrick. It alleges that Berkshire Hathaway promised he would

continue as CEO of Lubrizol, at double the salary; that he would have autonomy in

running the company; that $15,000,000 in unvested stock options he held would vest as

a result of the merger; and that he would receive bonus “performance shares.”

(Second Consolidated Complaint at ¶79-83.)

{¶50} Thus, accepting as true the allegations that Mr. Hambrick dominated the

board, as well as those regarding the benefits he would reap from the merger with

Berkshire Hathaway, Sair sufficiently pleaded demand futility in the context of Civ.R.

23.1 and Civ.R. 12(B)(6).

{¶51} I would find merit in Sair’s third assignment of error, and analyze her

second assignment of error – i.e., whether the trial court should have considered her

argument the Board breached its fiduciary duties to the shareholders.

{¶52} I respectfully concur and dissent.

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