Filed 12/11/17
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SIXTH APPELLATE DISTRICT
APPLE INC. et al., H044133
(Santa Clara County
Petitioners, Super. Ct. No. 1-14-CV262174)
v.
THE SUPERIOR COURT OF SANTA
CLARA COUNTY,
Respondent;
THE POLICE RETIREMENT SYSTEM
OF ST. LOUIS et al.,
Real Parties in Interest.
This writ petition presents an issue of first impression concerning the demand
futility pleading requirement in a shareholder derivative suit under California law. The
question is whether a plaintiff alleging derivative claims in an amended complaint
following the grant of leave to amend must plead demand futility with respect to the
board of directors in place as of the filing of the amended complaint or the initial
complaint, when the composition of the board of directors has changed in the interim.
Petitioners Apple Inc. (Apple), Timothy Cook, Millard Drexler, and Arthur
Levinson (together “petitioners”) argue that fundamental principles of corporate law
require the court to assess demand futility as to the board in place when the amended
complaint is filed, consistent with the rule enunciated by the Delaware Supreme Court in
Braddock v. Zimmerman (2006) 906 A.2d 776 (Braddock). Respondent Santa Clara
County Superior Court declined to apply the Braddock rule, citing the absence of any
published California authority on the issue. The superior court overruled petitioners’
demurrer after finding that the amended complaint adequately alleged demand futility as
to the board in place when the original action was filed. Plaintiffs and real parties in
interest the Police Retirement System of St. Louis, John Krawczyk, II, and John Barto
(together “plaintiffs”) argue that the court applied the correct rule and, in any event, that
the amended complaint adequately pleads demand futility regardless of which board of
directors is considered.
We conclude that Braddock is consistent in relevant respects with California law
and that, under the circumstances of this case, the respondent superior court should have
assessed the pleading of demand futility with respect to the board of directors in place at
the time the amended complaint was filed.
I. OVERVIEW OF APPLICABLE LEGAL PRINCIPLES
The issues presented herein may be better understood in view of certain principles
of corporate law and shareholder derivative suits. We begin with the summary of these
principles set forth in Bader v. Anderson (2009) 179 Cal.App.4th 775 (Bader).
As a general rule, “[m]anagement of a corporation, including decisions concerning
the prosecution of actions, is vested in its board of directors. When the board refuses to
enforce corporate claims, however, the shareholder derivative suit provides a limited
exception to the rule that the corporation is the proper party plaintiff. In deference to the
managerial role of directors and in order to curb potential abuse, the shareholder asserting
a derivative claim must make a threshold showing that he or she made a presuit demand
on the board to take the desired action. This demand requirement was recognized over
120 years ago by the Supreme Court (see Hawes v. [City of Oakland] (1881) 104 U.S.
450), and is codified in California (see Corp. Code, § 800, subd. (b)(2); hereafter,
§ 800(b)(2)).[1] Under section 800(b)(2), a plaintiff must plead ‘with particularity’ the
attempts that were made to secure board action before bringing suit, or, alternatively, the
factual basis upon which the plaintiff believes that a demand on the board was
1
Unspecified statutory references are to the Corporations Code.
2
unnecessary, i.e., that a demand would have been futile. Difficulties often arise in
shareholder derivative suits in resolving whether the plaintiff has alleged sufficient facts
supporting demand futility, thereby obviating the need for a prior demand on the board
and the concomitant opportunity for the directors to decide whether to pursue litigation
on the corporation’s behalf.” (Bader, supra, 179 Cal.App.4th at p. 782.)
Because the role of managing the business of the corporation is vested in its board
of directors, not its shareholders (Grosset v. Wenaas (2008) 42 Cal.4th 1100, 1108
(Grosset)), a shareholder seeking redress on behalf of the corporation for alleged
mismanagement by corporate officers “ ‘must make an earnest, not a simulated effort,
with the managing body of the corporation, to induce remedial action on their part, and
this must be apparent to the court.’ ” (Bader, supra, 179 Cal.App.4th at p. 789.) The
presuit demand requirement provides “ ‘a limited exception to the usual rule that the
proper party to bring a claim on behalf of a corporation is the corporation itself, acting
through its directors or the majority of its shareholders. . . .’ ” (Ibid.) It serves primarily
“ ‘ “to protect the managerial freedom of those to whom the responsibility of running the
business is delegated . . . .” ’ ” (id. at pp. 789-790) and “to prevent the abuse of the
derivative suit remedy.” (Id. at p. 790.)
In accordance with this purpose, California law requires the plaintiff who files a
shareholder derivative suit to “allege[] in the complaint with particularity plaintiff’s
efforts to secure from the board such action as plaintiff desires, or the reasons for not
making such effort, and allege further that plaintiff has either informed the corporation or
the board in writing of the ultimate facts of each cause of action against each defendant or
delivered to the corporation or the board a true copy of the complaint which plaintiff
proposes to file.” (§ 800(b)(2).) Demand futility under section 800(b)(2) thus requires a
plaintiff who alleges “reasons for not making such effort” to plead, with particularity, the
circumstances excusing her from making a demand. (Ibid.)
3
Bader explained that few California cases have delineated the circumstances
constituting demand futility, but “given the requirement under section 800(b)(2) that
allegations be made ‘with particularity,’ it is clear that general averments that the
directors were involved in a conspiracy or aided and abetted the wrongful acts
complained of will not suffice . . . . [Citation.] Likewise, a general claim that there is
nationwide structural bias common to corporate boards will not excuse the making of a
demand before bringing a derivative suit. [Citation.] Rather, ‘the court must be apprised
of facts specific to each director from which it can conclude that that particular director
could or could not be expected to fairly evaluate the claims of the shareholder plaintiff.’ ”
(Bader, supra, 179 Cal.App.4th at p. 790.)
California courts commonly look to two tests enunciated by the Delaware
Supreme Court for determining the adequacy of the pleading of demand futility. Where a
decision of the board of directors is challenged in the derivative suit, the Aronson test
asks “whether, under the particularized facts alleged, a reasonable doubt is created that:
(1) the directors are disinterested and independent [or] (2) the challenged transaction was
otherwise the product of a valid exercise of business judgment.” (Aronson v. Lewis (Del.
1984) 473 A.2d 805, 814 (Aronson); 2 accord Bader, supra, 179 Cal.App.4th at p. 791;
Oakland Raiders v. National Football League (2001) 93 Cal.App.4th 572, 587 (Oakland
Raiders).) But where “the board that would be considering the demand did not make a
business decision which is being challenged in the derivative suit” (Rales v. Blasband
(Del. 1993) 634 A.2d 927, 933-934 (Rales)), the Rales test asks whether “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. If the derivative plaintiff satisfies this burden, then demand will
2
The Delaware Supreme Court overruled Aronson on another point not relevant to
our discussion here. (See Brehm v. Eisner (Del. 2000) 746 A.2d 244, 254-255.)
4
be excused as futile.” (Rales, supra, at p. 934; accord Bader, supra, at pp. 791-792
[summarizing Rales].)
These principles are not in debate here. But neither do they answer whether
California law requires the plaintiff to reassert demand futility upon the filing of an
amended derivative complaint when the composition of the board of directors has
changed. In the absence of California authority, the parties dispute the applicability of
Delaware case law addressing that scenario, as set forth in Braddock.
The Delaware Supreme Court in Braddock considered under what circumstances a
shareholder is required to make demand or plead demand futility when filing an amended
derivative complaint. Following the precept that boards of directors manage the affairs of
corporations and, by extension, must be given the opportunity through the demand
requirement to rectify an alleged wrong or control any litigation that arises, the court
ruled that a change in the composition of a previously conflicted board is relevant insofar
as it may determine whether, “as of the time the complaint was filed, the board of
directors could have properly exercised its independent and disinterested business
judgment in responding to a demand.” (Braddock, supra, 906 A.2d at p. 785.) The court
found this to be true, however, “only as to derivative claims in the amended complaint
that are not already validly in litigation.” (Id. at p. 786.) Braddock thus stands for the
proposition that the demand inquiry in an amended derivative complaint following a
dismissal without prejudice “must be assessed by reference to the board in place at the
time when the amended complaint is filed.” (Ibid.)
We consider Braddock’s application under California law after reviewing the
pertinent facts and detailed procedural history of this case.
II. FACTUAL AND PROCEDURAL BACKGROUND
A. COMPLAINT ALLEGATIONS
Plaintiffs, who are Apple shareholders, bring this consolidated derivative action on
behalf of nominal defendant Apple. The heart of plaintiffs’ case is Apple’s alleged
5
pursuit and enforcement of anticompetitive agreements with other Silicon Valley
companies to prohibit the recruitment or “cold calling” of each other’s employees.
Plaintiffs allege that certain current and former members of Apple’s board of directors
were aware of or tacitly approved of Apple’s practices and breached their fiduciary duties
by enabling or permitting these illegal agreements over many years.
The action at bar consolidates three individual shareholder derivative lawsuits
filed in March, April, and July 2014. It follows the settlement of an action filed by the
Department of Justice in 2010 against Apple, Adobe, Google, Intel, Intuit, and Pixar
based on “ ‘violations of the federal antitrust laws,’ ” which plaintiffs allege the Apple
board never disclosed to shareholders in any proxy statement or regulatory filings, and
several federal class action lawsuits brought by employees of Apple and other technology
companies, which were consolidated under the caption In re High-Tech Employee
Antitrust Litigation, No. 11-CV-2509-LHK (N.D. Cal.) and settled in March 2015.
After the superior court sustained with leave to amend demurrers to plaintiffs’
consolidated shareholder derivative complaint, filed in September 2014 (“initial
complaint”) and amended consolidated shareholder derivative complaint, filed in June
2015 (“amended complaint”), plaintiffs filed a second amended consolidated shareholder
derivative complaint in April 2016 (“operative complaint”). The operative complaint
names nominal defendant Apple and individual defendants Timothy Cook, William
Campbell, Millard Drexler, Eric Schmidt, and Arthur Levinson. 3 Of five causes of action
asserted in the operative complaint, only two remain in issue for purposes of this writ
petition. 4 These are the first and fifth causes of action against the individual defendants
for breach of fiduciary duty and for indemnification and contribution.
3
Only defendants Cook, Drexler, Levinson, and Apple are petitioners herein.
4
The superior court sustained without leave to amend petitioners’ demurrer to the
operative complaint as to the three other causes of action.
6
According to the operative complaint, top executives and directors at Apple
beginning in approximately 2005 entered non-solicitation agreements with executives at
companies such as Adobe, Google, and Intel, which had the effect of regulating
competition for talent and suppressing salaries and job mobility. Apple co-founder and
former CEO Steve Jobs was passionate and outspoken about preventing companies who
worked with Apple from poaching Apple’s technical team members. Jobs “was vocal
that companies working together should not hire each other’s employees and that there
should not be cross-fertilization of technical knowledge.” Pressure tactics implemented
by Jobs and reinforced at high levels eventually resulted in “similar anticompetitive
agreements, policies, or practices” with “approximately twenty-five other companies,”
including several outside the technology sector.
Plaintiffs allege that Apple was particularly effective at driving these collusive
agreements because it shared common directors and senior advisors with other
companies. For example, plaintiffs cite a “Hands Off (Do Not Call List)” circulated
among Apple employees in July 2009, which specified companies that were off-limits to
recruitment, including several denoted as sharing a common board member, as well as
deposition testimony allegedly confirming that certain defendants’ respective positions at
those companies brought the companies within Apple’s “Do Not Call” policy. Plaintiffs
allege that based on overlapping board memberships, close relationships between the
companies, and Jobs’S “vocal disapproval of employees changing companies, there can
be no doubt that the entire [Apple] Board knew about the agreements and facilitated the
unlawful conspiracy.” Plaintiffs further impute knowledge of the agreements to the
directors who served on the board’s compensation committee. The committee was
responsible for overseeing the development of compensation programs for employees and
regularly “evaluated the competitiveness of Apple’s compensation practices in
comparison to peer technology companies.” Given each board member’s alleged role in
participating in or allowing the illegal agreements, plaintiffs claim that “any demand” on
7
the Apple board to institute the derivative action against the individual defendants “is
excused” and would have been “a futile and useless act . . . .”
B. PLEADING OF DEMAND FUTILITY ON APPLE’S 2014 BOARD OF DIRECTORS
Plaintiffs’ initial complaint named nominal defendant Apple and the same
individual defendants (Cook, Campbell, Drexler, Schmidt, and Levinson) as the later,
operative complaint. It alleged that when the original shareholder derivative suits were
filed, Apple’s board of directors had eight members: defendants Cook, Campbell,
Drexler, and Levinson, and non-defendants Robert Iger, Albert Gore, Jr., Andrea Jung,
and Ronald Sugar (hereafter the “2014 Board”).
Plaintiffs generally alleged that any demand before filing the initial complaint
would have been futile because the 2014 Board had proceeded “with eyes closed shut,”
abdicating its responsibility to ensure that business decisions complied with applicable
laws and ignoring the significant liability exposure for the company and adverse effect
that Apple’s anticompetitive agreements had on attracting highly skilled employees.
Plaintiffs specifically alleged demand futility as to defendants Campbell, Drexler,
Levinson, Cook, and non-defendant Iger based on each directors’ entrenchment in the
company and personal and professional relationships with other members of the board, as
well as their roles at several key companies that purportedly had entered into restrictive
hiring agreements with Apple.
Petitioners 5 filed a demurrer, which the trial court sustained with leave to amend,
finding that plaintiffs had not alleged that non-defendants Jung or Gore were disinterested
and that “the allegations do not sufficiently demonstrate with particularity that a majority
of directors participated in or approved the wrongdoing.”
Plaintiffs then filed the amended complaint with causes of action for (1) breach of
fiduciary duty and (2) indemnification and contribution. They alleged demand futility
5
Petitioners were joined by defendant Schmidt in the filing of each successive
demurrer mentioned herein.
8
with respect to Apple’s 2014 Board, in place when the original derivative actions were
filed.
Petitioners demurred to the amended complaint. Although the notice of demurrer
set forth two grounds for demurrer—failure to state facts sufficient to establish standing
and excuse plaintiffs’ failure to make a demand, and/or failure to state a cause of action—
petitioners argued only the standing and demand futility ground. They declared that since
the filing of the original derivative actions, defendants Campbell and Drexler had left
Apple’s board, and Susan Wagner had joined the board. Petitioners argued that as a
matter of law, demand futility must be analyzed as of the filing of the then-current
(amended) complaint filed in June 2015, not with respect to the board in place when the
prior, legally insufficient claims were filed. Petitioners contended that the “compelling
logic” of the Delaware Supreme Court’s decision in Braddock should apply under the
extraordinary circumstances of a derivative action that seeks to divest a company’s board
of its authority to consider and oversee litigation.
The superior court declined to apply Braddock, noting that Apple was a California
corporation and petitioners had failed to cite “any California authority supporting” their
argument that the relevant board was that in place as of the filing of the amended
complaint. The court also sought to distinguish Braddock, noting that its order sustaining
petitioners’ prior demurrer to the initial complaint did not “ ‘dismiss’ ” the action, but
simply sustained the demurrer with express leave to amend.
The superior court nonetheless found that the amended complaint failed to state
sufficient, particularized facts to excuse demand as to a majority of the 2014 Board. The
court emphasized that general allegations of involvement in a conspiracy, based on the
inference that a majority of the board expressly or tacitly approved the anticompetitive
agreements and practices, are not sufficient to establish demand futility under California
law. The court sustained the demurrer with leave to amend on that ground but overruled
the demurrer on the alternative ground of failure to state facts sufficient to constitute a
9
cause of action, noting it was “entirely unsupported” by any argument in petitioners’
papers.
Plaintiffs filed the operative complaint in April 2016, again alleging demand
futility with respect to the 2014 Board. Petitioners’ demurrer to the operative complaint
argued that plaintiffs had failed to allege demand futility with sufficient particularity and,
based on the reasoning of Braddock, should have alleged demand futility with respect to
the current board. Specifically, since the filing of the original actions and the amended
complaint, Susan Wagner had replaced defendant Campbell, and James Bell had replaced
defendant Drexler. Petitioners contended that the operative complaint failed to allege
demand futility as to non-defendant directors Wagner, Bell, and Sugar, and alleged only
conclusory facts regarding non-defendant directors Jung, Gore, and Iger. Petitioners
maintained that the “lack of material allegations against six of Apple’s eight” board
members was “alone sufficient to defeat” plaintiffs’ claims, though the operative
complaint also failed to plead demand futility as to the 2014 Board. Plaintiffs further
demurred to the operative complaint causes of action on the ground of failure to state
facts sufficient to constitute a cause of action.
C. ORDER ON THE OPERATIVE COMPLAINT
In a detailed written order, the superior court overruled the demurrer to the first
and fifth causes of action for breach of fiduciary duty and indemnification on the ground
of demand futility and standing, but rejected the demurrer to those causes of action for
failure to state a claim, noting it had overruled petitioners’ prior demurrer on that ground
for having failed to offer any argument in support. The court sustained without leave to
amend the demurrer to the other three causes of action, finding the asserted claims were
beyond the scope of the prior order granting leave to amend.
On the issue of demand futility, the court adhered to its earlier conclusion that
demand futility is assessed as of the time a derivative action is filed, noting that
petitioners “still cite no authority” applying Braddock under California law. The court
10
found that plaintiffs had specifically alleged demand futility as to defendants Campbell,
Cook, and Levinson. In a footnote, the court further found that particularized facts
regarding defendant Drexler and non-defendant Iger supported a “reasonable inference”
that demand was futile as to those two directors. Regarding the board generally, the court
stated that “specific allegations of widely-known misconduct spanning many years and
involving numerous Silicon Valley companies with shared board members, coupled with
the direct evidence of knowledge and participation by some Apple board members,
support an inference that a majority of the board knew of and condoned these agreements
and establishes demand futility for purposes of demurrer.” The court concluded that the
operative complaint met the demand excusal requirement for at least half of the 2014
Board, allowing the first and fifth causes of action to proceed.
Petitioners sought writ relief from this court directing the respondent superior
court to vacate its order overruling the demurrer and to enter a new order sustaining the
demurrer as to the first and fifth causes of action. We issued an order to show cause and
stayed the superior court proceedings, and requested briefing from the parties.
III. DISCUSSION
A. PROPRIETY OF WRIT RELIEF
“An order overruling a demurrer is not directly appealable, but may be reviewed
on appeal from the final judgment. [Citation.] Appeal is presumed to be an adequate
remedy and writ review is rarely granted unless a significant issue of law is raised, or
resolution of the issue would result in a final disposition as to the petitioner.” (Casterson
v. Superior Court (2002) 101 Cal.App.4th 177, 182.) “Although appellate courts are
loath to exercise their discretion to review rulings at the pleading stage, they will do so
where the circumstances are compelling and the issue is of widespread interest. (Brandt
v. Superior Court (1985) 37 Cal.3d 813, 816.)” (County of Santa Clara v. Superior Court
(2009) 171 Cal.App.4th 119, 126.)
11
Writ review is appropriate here to help ensure the pleading of demand futility in
derivative suits involving California corporations is consistent in relevant respects with
California corporate law—including with case authority that looks to Delaware law on
related issues in derivative litigation. Plaintiffs argue, unconvincingly, that writ relief is
inappropriate because an appeal would be available following a judgment in this case,
and any claimed harm due to petitioners’ purported loss of the right to control the
company’s litigation is not irreparable and could be addressed by appointment of “ ‘a
special litigation committee of independent directors to investigate the challenged
transaction.’ ” (Patrick v. Alacer Corp. (2008) 167 Cal.App.4th 995, 1005 (Patrick).)
But as Patrick makes clear, a board’s ability to appoint a special litigation committee to
investigate the merits of the derivative claim and potentially assert the special litigation
committee defense does not alter or negate its right to contest the derivative plaintiff’s
standing in the first instance.
The standing requirements for a derivative action, including the demand
requirement, “reflect the limited adverse relationship between the shareholder plaintiff
and the corporation.” (Patrick, supra, 167 Cal.App.4th at p. 1004.) It follows that while
the corporation cannot “challenge the merits of a derivative claim filed on its behalf and
from which it stands to benefit,” it “may assert defenses contesting the plaintiff’s right or
decision to bring suit, such as asserting the shareholder plaintiff’s lack of standing or the
[special litigation committee] defense.” (Id. at p. 1005, emphasis added.) Patrick
outlines these dual avenues of recourse but says nothing about the availability of writ
relief if the standing issue is wrongly decided. This distinction is important since
appointment of a special litigation committee may presuppose that other members of the
board are interested. (See Oakland Raiders, supra, 93 Cal.App.4th at p. 590 [“failure to
appoint a special litigation committee to investigate the claims made in a derivative suit
cannot raise an inference of demand futility because there is no necessity to appoint a
special litigation committee if the board itself is disinterested”]; Desaigoudar v.
12
Meyercord (2003) 108 Cal.App.4th 173, 184-185 [the “common practice” in shareholder
derivative suits alleging wrongdoing on the part of a majority of directors is for the board
to appoint a special litigation committee of independent directors to investigate the
challenged transaction].)
The question presented in this case is whether the superior court utilized the
correct framework to analyze the alleged interest of the members of the board, and thus
whether plaintiffs have properly pleaded demand futility and can proceed with the
derivative litigation. Because appointment of a special litigation committee would not
resolve that question, the extraordinary remedy of writ review is appropriate.
B. STANDARD OF REVIEW
We review an order overruling a demurrer de novo, accepting as true all facts
properly pleaded in the complaint in order to determine whether the demurrer should be
overruled. (Casterson v. Superior Court, supra, 101 Cal.App.4th at pp. 182-183.) The
settled rules for reviewing the sufficiency of a complaint apply: “ ‘ “We treat the
demurrer as admitting all material facts properly pleaded, but not contentions, deductions
or conclusions of fact or law. [Citation.] We also consider matters which may be
judicially noticed.” [Citation.] Further, we give the complaint a reasonable
interpretation, reading it as a whole and its parts in their context.’ ” (Bader, supra, 179
Cal.App.4th at p. 786, quoting Blank v. Kirwan (1985) 39 Cal.3d 311, 318.)
Accordingly, we review de novo the allegations of the operative complaint against
the particularized demand futility pleading requirement applicable to shareholder
derivative litigation and with respect to the relevant board of directors at Apple.
C. ANALYSIS
Petitioners contend that the superior court erred in two ways: first, by declining to
adopt the reasoning of Braddock and instead assessing demand futility with respect to the
board of directors in place when the derivative litigation commenced; and second, by
13
inferring that demand would have been futile as to an unspecified majority of the Apple
board even though plaintiffs alleged particularized facts as to only three directors.
Plaintiffs respond that this court need not reach the issue of whether Braddock
applies under California law, because (1) they have adequately alleged demand futility
regardless of which board of directors is considered, and (2) the reasoning and factual
circumstances of Braddock are distinguishable since that case involved “the existence of
a new independent board of directors” (Braddock, supra, 906 A.2d at p. 786) following
dismissal of the prior complaint, whereas in this case only two out of the eight members
of Apple’s board of directors had changed as of the filing of the operative complaint,
which was based on the grant of leave to amend. Plaintiffs also contend that petitioners
have not established the timing of any changes to the Apple board. They argue that
although the superior court took judicial notice of certain Securities and Exchange
Commission (SEC) filings describing the changes to the Apple board, such notice
extended only to the existence and content of the documents, not to their truth.
1. Composition of the Apple Board of Directors
As a preliminary matter, we reject the argument that the writ petition may be
denied because petitioners failed to establish the changes to Apple’s board. Plaintiffs
acknowledge that the superior court granted judicial notice of certain regulatory filings
submitted in support of the demurrer. 6 The court expressly limited notice “to the
existence and content” of the documents and made no finding as to “the truth of
statements in these documents.”
6
The superior court granted petitioners’ request for judicial notice of certain forms
filed by Apple with the SEC, including copies of the following: (1) form 8-K, dated
July 15, 2014, announcing the retirement of William Campbell from the board, and the
appointment of Susan Wagner to the board “concurrently with” Campbell’s retirement;
(2) excerpt of Apple’s definitive proxy statement (schedule 14A), dated January 22,
2015, announcing that Millard Drexler would retire from Apple’s board as of the annual
meeting on March 10, 2015, leaving one vacancy; and (3) form 8-K, dated October 1,
2015, announcing the appointment of James Bell to the board.
14
The superior court’s ruling is consistent with the general rule that judicial notice of
a document does not extend to the truthfulness of its contents or the interpretation of
statements contained therein, if those matters are reasonably disputable. (C.R. v. Tenet
Healthcare Corp. (2009) 169 Cal.App.4th 1094, 1103-1104; Fremont Indemnity Co. v.
Fremont General Corp. (2007) 148 Cal.App.4th 97, 113 (Fremont).) Our Supreme Court
noted this limitation in StorMedia Inc. v. Superior Court (1999) 20 Cal.4th 449
(StorMedia), explaining: “In ruling on a demurrer, a court may consider facts of which it
has taken judicial notice. (Code Civ. Proc., § 430.30, subd. (a).) This includes the
existence of a document. When judicial notice is taken of a document, however, the
truthfulness and proper interpretation of the document are disputable. [Citation.] A
reviewing court may consider facts judicially noticed by the trial court or those which the
trial court properly could have noticed. (Evid. Code, § 459.)” (Id. at p. 457, fn. 9.)
While the truthfulness or proper interpretation of a judicially-noticed document is
disputable, we are not persuaded that such a dispute exists here. Plaintiffs did not contest
or question petitioners’ showing regarding the composition of Apple’s board until this
writ proceeding. We might assume this was because the superior court indicated it would
assess demand futility with respect to the 2014 Board. Yet even in this court, plaintiffs
offer no alternate interpretation of the SEC filings and point to no contrary evidence to
suggest the timing of changes to the board is in dispute. This stands in contrast to cases
involving the erroneous use of judicial notice on demurrer, where a document is subject
to conflicting interpretations and the ruling on demurrer improperly determines disputed
facts. (See, e.g., Fremont, supra, 148 Cal.App.4th at pp. 112-115 [trial court erred by
taking judicial notice of disputed letter agreement and interpreting the document].)
The taking of judicial notice of Apple’s SEC filings establishes only their
existence and reported contents, and more closely resembles cases in which there is no
factual dispute concerning the matter to be noticed. (See, e.g., StorMedia, supra, 20
Cal.4th at p. 457, fn. 10 [confirming allegations in the complaint by referencing a
15
judicially-noticed employee stock purchase plan that showed the “ ‘exercise date’ on
which stock was sold to participants”]; Joslin v. H.A.S. Ins. Brokerage (1986) 184
Cal.App.3d 369, 375 [trial court could consider facts that were disclosed by the
judicially-noticed deposition and were not disputed].) We therefore accept, for purposes
of the writ petition, petitioners’ showing that between the filing of the original derivative
actions in 2014 and the filing of the operative complaint in April 2016, defendants
Drexler and Campbell departed from the eight-member board of directors, and
non-defendants Susan Wagner and James Bell joined the board. 7
Since the superior court determined that plaintiffs sufficiently alleged demand
futility as to five of the eight Apple directors (Campbell, Cook, Levinson, Drexler, and
Iger) based on the composition of 2014 Board, but only three of these five directors
remained on the board as of the filing of the operative complaint—constituting less than a
majority—it is critical to identify which board is relevant for assessing demand futility.
2. The Rationale of the Delaware Supreme Court in Braddock
Applies to the Pleading of Demand Futility Under California Law
The superior court founded its demand futility analysis on the principle that “under
California law, demand futility is assessed as of the time a derivative action is initially
filed.” The court drew its conclusion in part from this court’s decision in Bader. As we
shall explain, the superior court’s conclusion was not incorrect but was incomplete under
the circumstances. The principles governing derivative litigation under California law
lead us to conclude, consistent with Braddock, that when a trial court declares derivative
claims to be legally insufficient and grants leave to amend, the demand requirement must
7
This chart compares the board as of the filing of the original derivative actions
(2014 Board) and the operative complaint. The named defendants are in boldface type.
Composition of Apple’s Board of Directors
As of the original Sugar Jung Gore Iger Campbell Drexler Levinson Cook
derivative actions:
As of the operative Sugar Jung Gore Iger Wagner Bell Levinson Cook
complaint:
16
be reassessed against the disinterest and independence of the board of directors in place
when the amended derivative claims are filed.
a. The Reasoning in Braddock Is Consistent with California Law
As discussed in section I, Bader adopted the Delaware Supreme Court’s tests for
the pleading of demand futility, set forth in Aronson and Rales. Bader explained that
where the derivative claims challenge an affirmative decision or act of the board, the
adequacy of the pleading is determined by the two-pronged test from Aronson. (Bader,
supra, 179 Cal.App.4th at pp. 790-791.) Under that test, “ ‘[f]utility is gauged by the
circumstances existing at the commencement of a derivative suit.’ ” (Id. at p. 791,
quoting Aronson, supra, 473 A.2d at p. 810.) This passage supports the general rule that
demand futility is measured as of the time the derivative action is filed.
But as Bader recognized, Delaware courts do not apply the Aronson test
mechanically. Thus, where the challenged conduct did not arise from board action, the
court applies the alternate test from Rales, which “inquires ‘whether the board that would
be addressing the demand can impartially consider its merits without being influenced by
improper considerations.’ ” (Bader, supra, 179 Cal.App.4th at p. 791, quoting Rales,
supra, 634 A.2d at p. 934.) That test asks whether the allegations “ ‘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.’ ” (Bader, supra, at pp. 791-792.) The Rales test highlights the specificity of
the demand inquiry in relation to the nature of the conduct challenged and the board’s
alleged role, if any, in that conduct.
Bader applied California law, 8 yet relied on Rales and Aronson to define the
demand futility inquiry. The court explained in dicta that although there was “little to
suggest that” Delaware law controlled the assessment of demand futility with respect to
8
Like here, the shareholder derivative action in Bader was brought nominatively
on behalf of Apple, a California corporation. (Bader, supra, 179 Cal.App.4th at p. 782.)
17
the board of a California corporation, “Delaware corporate law is not inconsistent with
California law” relevant to shareholder derivative suits and demand futility and may be
“instructive.” (Bader, supra, 179 Cal.App.4th at p. 791, fn. 5.) We abide by this
assessment in considering the applicability of Braddock. Since no California authority
has addressed the issue before us, and California’s demand requirement standards closely
track Delaware law, 9 we turn to the Delaware Supreme Court’s analysis in Braddock.
Braddock was a shareholder derivative action in which the plaintiff’s first
amended complaint was dismissed in its entirety, without prejudice, for failing to comply
with the demand requirement of Delaware’s Court of Chancery rule 23.1. 10 (Braddock,
supra, 906 A.2d at p. 779.) Nearly two years later, the plaintiff sought leave to file a
second amended complaint. By that time, five members of the board of directors had
been replaced, and two new board seats had been created and filled, resulting in a
9
This court has previously noted, when assessing demand futility, that courts can
“properly rely on corporate law developed in the State of Delaware given that it is
identical to California corporate law for all practical purposes.” (Oakland Raiders,
supra, 93 Cal.App.4th at p. 586, fn. 5; see also Shields v. Singleton (1993) 15
Cal.App.4th 1611, 1621 (Shields) [analyzing demand futility under California law but
noting the parties viewed both states’ laws as substantially the same].)
So too, when parties dispute whether California or Delaware law governs a
derivative action, courts may find it unnecessary to resolve the choice of law dilemma
because the outcome under both is the same. (See, e.g., Schuster v. Gardner (2005) 127
Cal.App.4th 305, 312 [deeming complaint a derivative action “under either California or
Delaware law”].) Our Supreme Court took this approach in analyzing a shareholder’s
standing to pursue derivative claims on behalf of a Delaware corporation that was based
in San Diego. (Grosset, supra, 42 Cal.4th at pp. 1104, 1106-1107.) The court found it
unnecessary to resolve the dispute over the application of Delaware or California law,
concluding “that California law, like Delaware law, generally requires a plaintiff in a
shareholder’s derivative suit to maintain continuous stock ownership throughout the
pendency of the litigation.” (Id. at p. 1119.)
10
Delaware’s Court of Chancery rule 23.1(a) states in relevant part that in a
derivative action brought by shareholders of a corporation, the complaint shall “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.”
18
13-member board that included only six of the former members. (Braddock, supra, at
p. 779.) The defendants opposed leave to file the second amended complaint, arguing in
part that demand futility had to be assessed with respect to the new board, since the
majority was disinterested and capable of independently consider the plaintiff’s claims.
(Braddock, supra, at p. 780.) The Court of Chancery, however, ruled that because the
single count in the second amended complaint was alleged in the first amended
complaint, it remained “ ‘validly in litigation’ ” and, therefore, demand was properly
excused based on the board that was in place at the time of the first amended complaint.
(Braddock, supra, at p. 780.)
The Delaware Supreme Court reversed. It held that “the Court of Chancery should
have assessed demand futility . . . with regard to the board that was in place at the time”
the second amended complaint was filed. (Braddock, supra, 906 A.2d at p. 786.) The
court explained that demand futility must be determined pursuant to the standards
articulated in Aronson or in Rales. (Id. at p. 784.) The demand requirement should not
be construed so “ ‘as to stall the derivative suit mechanism where it has been properly
initiated’ or to ‘interrupt litigation.’ ” (Id. at p. 785.) But when “the original complaint
was either not well pleaded as a derivative action or did not satisfy the legal test for
demand excusal,” the court reasoned that “the existence of a new independent board of
directors is relevant” to the “derivative claims in the amended complaint that are not
already validly in litigation.” (Id. at p. 786.)
The court specified three conditions that “must exist to excuse a plaintiff from
making demand . . . when a complaint is amended after a new board of directors is in
place: first, the original complaint was well pleaded as a derivative action; second, the
original complaint satisfied the legal test for demand excusal; and third, the act or
transaction complained of in the amendment is essentially the same as the act or
transaction challenged in the original complaint.” (Braddock, supra, 906 A.2d at p. 786.)
Since claims that have been dismissed without prejudice and with leave to amend are
19
“not validly in litigation,” the Braddock court concluded that a plaintiff who files an
amended complaint under those circumstances must comply with the demand
requirement “by reference to the board in place at the time when the amended complaint
is filed.” (Ibid.)
Petitioners urge this court to adopt the rule set forth in Braddock as a matter of
California law. They maintain that Braddock simply extended the general rule, followed
in Delaware and in California, that a plaintiff bringing a derivative suit must make
demand on the company’s board to take legal action or show that it would have been
futile to do so at the time the case was initiated. They argue that Braddock reinforces the
policy behind the demand requirement, imposes no improper burden on plaintiffs, and
ensures consistency with courts applying Delaware law and the laws of other states.
In response, plaintiffs dispute the relevance of Braddock—suggesting that
Delaware cases do not reveal a clear doctrine as to the demand requirement when an
amended complaint is filed—and seek to distinguish Braddock as setting forth a narrow
exception that does not apply under the circumstances in this case.
We find that Braddock expresses a narrow extension of the general rule and
furthers the “fundamental purpose of a derivative action,” which “is to provide a means
by which a stockholder may seek to enforce the rights of a corporation when the
corporate board refuses to do so.” (Grosset, supra, 42 Cal.4th at p. 1114.) Plaintiffs
offer no compelling reason—and we have identified none—for departing from
Braddock’s sound conclusion that when an amended complaint asserts derivative claims
that are not already validly in litigation, the demand requirement pertains to the board of
directors in place at that time. (Braddock, supra, 906 A.2d at p. 786.)
The narrow application of Braddock belies plaintiffs’ claim that implementing its
rule will allow corporate defendants to file seriatim demurrers with each amended
complaint and require the court to revisit the threshold demand futility issue. To begin, a
derivative plaintiff under California law already must make a demand on the company’s
20
board to take legal action or show that it would have been futile to do so at the time the
case is initiated. (§ 800(b)(2).) If the suit is properly initiated and the derivative claims
are validly in issue, the presuit demand requirement has been met; hence, the filing of an
amended complaint arising from those same claims will not trigger reassessment of the
demand requirement.
Braddock reiterated this point by citing an earlier Court of Chancery ruling:
“ ‘When claims have been properly laid before the court and are in litigation, neither [the
demand requirement] nor the policy it implements requires that a court decline to permit
further litigation of those claims upon the replacement of the interested board with a
disinterested one . . . . [¶] . . . [A]n amendment or supplement to a complaint that
elaborates upon facts relating to acts or transactions alleged in the original pleading, or
asserts new legal theories of recovery based upon the acts or transactions that formed the
substance of the original pleading, would not . . . require a derivative plaintiff to bring
any part of an amended or supplemental complaint to the board prior to filing.’ ”
(Braddock, supra, 906 A.2d at p. 785.)
Only if the trial court has deemed the complaint inadequate—either for failure to
state a claim or failure to meet the demand requirement, and the plaintiff reasserts the
derivative claims in an amended complaint to avoid dismissal—will the rule apply.
Braddock preserves this distinction by identifying the circumstances in which a plaintiff
filing an amended derivative complaint need not make demand—or plead its futility—
with respect to a new board. Under this rubric, a plaintiff who demonstrates that the
original complaint was well pleaded as a derivative action, that it satisfied the legal test
for demand excusal, and that the amendment pertains to the same act or transaction
challenged in the original complaint, need not reassert demand futility with respect to the
new board. (Braddock, supra, 906 A.2d at p. 786; see also Uni-Marts ex rel. Dairy Mart
Convenience Stores v. Stein (Del. Ch. 1996) 1996 Del. Ch. Lexis 95; In re Fuqua Indus.
Shareholder Litig. (Del. Ch. 1997) 1997 Del. Ch. Lexis 72 at p. 55 [if demand is excused
21
as of the filing of the initial complaint, the existence of a disinterested board as of the
filing of the amended complaint “affects only those claims not already validly in
litigation”].) 11
Plaintiffs suggest that Braddock did not establish a clear doctrine for Delaware
cases, which continue to gauge demand futility as of the time the original derivative
complaint is filed. Even if we were to overlook that Braddock was decided by the
Delaware Supreme Court, which “is of course the final arbiter on matters of Delaware
law” (Feeley v. NHAOCG, LLC (Del. Ch. 2012) 62 A.3d 649, 663), the two unpublished
cases that plaintiffs cite neither question nor contradict Braddock. One case is inapposite,
as it addresses the pleading of demand futility at the subsidiary level in a double
derivative action when the company obtained subsidiary status only after the plaintiff
initiated the action (Belendiuk v. Carrión (Del. Ch. 2014) 2014 Del. Ch. Lexis 126 at *8),
and the other directly applies Braddock and, in fact, stands for the opposite proposition
stated by plaintiffs. In that case, the court found the original derivative claims were not
validly in litigation when the plaintiffs amended their complaint; thus the plaintiffs were
required to make demand at the time they filed the second amended complaint, or to
plead that demand would be futile at that time. (In re Affiliated Computer Servs.
S’holders Litig. (Del. Ch. 2009) 2009 Del. Ch. Lexis 35.) Furthermore, courts in
11
Certain authority cited herein is unpublished. We note that although an
unpublished California case opinion may not be cited or relied upon (Cal. Rules of Court,
rule 8.1115), citing unpublished opinions from other jurisdictions for their persuasive
value does not violate this rule. (See In re Farm Raised Salmon Cases (2008) 42 Cal.4th
1077, 1096, fn. 18 [“Citing unpublished federal opinions does not violate our rules”];
Lebrilla v. Farmers Group, Inc. (2004) 119 Cal.App.4th 1070, 1077 [explaining that
opinions from other jurisdictions—some which have different publication criteria than
California—can be cited without regard to their publication status and may be regarded
as persuasive].)
22
jurisdictions that look to or follow Delaware law with respect to determining demand
futility have consistently applied Braddock. 12
Braddock thus remains authority under Delaware law and is consistent with the
principles behind the demand requirement in California. Viewed as a matter of standing,
a determination on demurrer that a plaintiff has failed to adequately allege demand
futility means the plaintiff has yet to establish standing to pursue the derivative claims.
As the Court of Appeal explained, “[F]or a plaintiff to have standing to file a derivative
action, it must allege the corporation knew about the claim and was urged to pursue it to
no avail or, in any event, the corporation would not have pursued the claim.” (Patrick,
supra, 167 Cal.App.4th at pp. 1004-1005.) It follows that a plaintiff reasserting
derivative claims in an amended complaint, after a sustained demurrer on demand futility
grounds, remains subject to the standing requirement and must allege demand futility
with respect to the board that would be addressing demand at that time. (See Bader,
supra, 179 Cal.App.4th at p. 791 [court “inquires ‘whether the board that would be
addressing the demand can impartially consider its merits without being influenced by
improper considerations’ ”].) To conclude otherwise would dilute the function of the
demand requirement, which serves to protect the managerial freedom of the board and to
prevent abuse of the derivative suit remedy, since the prior pleading never met the basic
demand precondition to “institut[ing] or maintain[ing]” a derivative claim (§ 800,
subd. (b)).
We believe this conclusion harmonizes with the California Supreme Court’s
consideration of standing in a somewhat related context involving continuous stock
12
Examples include La. Mun. Police Emples. Ret. Sys. v. Wynn (9th Cir. 2016)
829 F.3d 1048, 1058 (applying Nevada law), In re Regions Morgan Keegan Sec. v.
Morgan Asset Mgmt., Inc. (W.D. Tenn. 2010) 694 F.Supp.2d 879, 884 (applying
Maryland law), In re Abbott Depakote S’holder Derivative Litig. (N.D. Ill. 2013) 2013
U.S. Dist. Lexis 78841, at page 21, footnote 7 (applying Illinois law), and Staehr v.
Western Capital Res., Inc. (D. Minn. 2011) 2011 U.S. Dist. Lexis 72793, at *5 (applying
Minnesota law).
23
ownership in a derivative action. The high court considered whether the plaintiff in a
derivative suit had standing to continue litigating the action after involuntarily losing his
stock in the nominal defendant corporation due to a merger. (Grosset, supra, 42 Cal.4th
at p. 1104.) The court observed that while the language of section 800, subdivision (b)
“d[id] not clearly impose” a continuous ownership requirement, there were “other
considerations” that supported or even compelled an interpretation of the statute to
require continuous ownership. (Grosset, supra, at p. 1114.) These included “the
statutory purpose to minimize abuse of the derivative suit” and “the basic legal principles
pertaining to corporations and shareholder litigation.” (Ibid.) The court reiterated that
the authority to pursue a claim on a corporation’s behalf rests with the board of directors.
(Ibid.) A stockholder can seek to enforce the corporation’s rights in a derivative suit, but
“[t]he fact remains that a derivative claim belongs to the corporation, not to the plaintiff
asserting the claim on the corporation’s behalf.” (Id. at p. 1118.) The court concluded
that because the plaintiff no longer owned stock in the corporation, he did not have
standing to continue litigating the derivative action. (Id. at p. 1119.)
We similarly find that although the pleading requirement imposed by
section 800(b)(2) does not address the precise circumstances arising here, it constrains
the derivative mechanism to those occasions in which the board, properly presented with
a demand, either refuses to act or would be disabled from acting due to majority interest
or lack of independence. For the mechanism to function, derivative claims not already
validly in litigation should be subject to the same requirement at the time they are filed.
b. The Demand Requirement Must Be Reassessed if (1) the Derivative
Claims Were Not Validly in Litigation, and (2) Changes to the Board
Affect the Alleged Futility of Demand as to Those Claims
We need look no further than the circumstances of this case for a suitable example
of how Braddock’s reasoning applies under California law.
As discussed earlier, the superior court sustained petitioners’ demurrers to the
initial complaint and amended complaint, finding as to each that plaintiffs had failed to
24
adequately allege demand futility, and granted leave to amend. The court further noted
that it was overruling the demurrer to the amended complaint on the ground of failure to
state a cause of action. Plaintiffs contend based on this latter ruling that their derivative
claims were validly in litigation when they filed the operative complaint. They argue that
procedural differences between a sustained demurrer with leave to amend under
California law, and the grant of a motion to dismiss under Delaware law, negate any
application of Braddock here, and that Braddock applies only where there is a new and
independent board in place that can consider a demand. These arguments are unavailing.
Contrary to plaintiffs’ assertion that the superior court found plaintiffs’ amended
complaint had adequately pled causes of action for breach of fiduciary duty and unjust
enrichment, the court stated only that it was overruling the demurrer on that ground,
which was “entirely unsupported” by any argument in petitioners’ papers. The effect of
this ruling, according to the superior court, was to disqualify petitioners’ later effort to
demur to those two causes of action for failure to state a claim in the operative
complaint; 13 it did not transform the derivative claims, which were declared infirm for
failing to comply with the statutory precondition to make demand or sufficiently allege
the futility of doing so, to be “validly in litigation.” Because plaintiffs failed to satisfy
the legal test for demand excusal, and the superior court sustained the demurrer to the
amended complaint as to both causes of action on that ground, the derivative claims were
not “validly in litigation” when plaintiffs filed the operative complaint. (See Braddock,
supra, 906 A.2d at p. 786.)
13
The superior court on this issue explained that “[a] party may not demur to an
amended complaint on grounds that could have been raised by demurrer to an earlier
version of the complaint. (Code Civ. Proc., § 430.41, subd. (b).)” The court noted that it
had overruled the prior demurrer to plaintiffs’ claims for breach of fiduciary duty and
indemnification because it was “ ‘entirely unsupported by any argument in [petitioners’]
papers.’ ”
25
Nor does the operation of California procedural law preclude application of the
reasoning in Braddock. Plaintiffs point out that the sustaining of a demurrer with leave to
amend does not result in dismissal of the complaint. Nothing in Braddock suggests,
however, that its application is limited to circumstances in which a complaint has been
dismissed without leave to amend. 14 The determinative issue is the legal effect of the
demurrer order prior to the filing of an amended complaint—specifically whether
“[i]t constitutes a judicial determination that the original complaint was either not well
pleaded as a derivative action or did not satisfy the legal test for demand excusal.”
(Braddock, supra, 906 A.2d at p. 786.) The order sustaining petitioners’ demurrer to the
amended complaint, with leave to amend, constituted a judicial determination that the
amended complaint did not meet the legal requirements for demand excusal set forth in
section 800(b)(2). Consequently, for purposes of assessing demand futility upon the
filing of an amended complaint, “even if the act or transaction complained of in the
amendment is essentially the same conduct that was challenged” in the prior complaint,
the proper inquiry is “by reference to the board in place at the time when the amended
complaint” was filed. (Braddock, supra, at p. 786.)
Plaintiffs also seek to limit Braddock factually, based on the degree of board
turnover between filings of the initial and amended complaints. They contend that
Braddock only applies when there is the equivalent of “a new independent board of
directors” to consider a demand. (Braddock, supra, 906 A.2d at p. 786.)
14
Plaintiffs incorrectly assert that Braddock was premised upon a dismissal of the
complaint without leave to amend. In fact, the Court of Chancery dismissed the first
amended complaint without prejudice for failure to comply with the demand requirement.
(Braddock, supra, 906 A.2d at pp. 779, 782.) The Braddock court addressed some
confusion about the finality of the dismissal order, due in part to a then-recent change to
the Delaware Court of Chancery procedural rules, and noted that while the dismissal
without prejudice failed to expressly authorize an amended filing by a certain date, the
order “must be construed as if it had expressly granted” the plaintiff leave to file an
amended complaint. (Id. at p. 783.)
26
We do not interpret Braddock so narrowly. Although changes to the board of
directors in Braddock rendered a “seven-member majority of new directors” at the time
the plaintiff filed the amended complaint (Braddock, supra, 906 A.2d at p. 779), the
relevant holding was not tied to a threshold change in board composition. Rather, the
rationale behind the rule in Braddock was to enable the board in place at the time of the
filing of an amended complaint to exercise its authority over the affairs of the corporation
by reviewing the derivative claims not yet “validly in litigation.” (Id. at p. 786.)
Plaintiffs cite several cases in support of the proposition that Braddock applies
only when a majority of the board has changed. Two of these cases predate Braddock but
are nonetheless consistent with its holding; in both, the court analyzed the demand
pleading with respect to the earlier-composed board because the amended complaint did
not raise any derivative claims that were not already validly in litigation. (See Cal.
Public Emples. Ret. Sys. v. Coulter (Del. Ch. 2002) 2002 Del. Ch. Lexis 144; In re Fuqua
Indus. Shareholder Litig., supra, 1997 Del. Ch. Lexis 72.) The third case, Cambridge
Ret. Sys. v. Bosnjak (Del. Ch. 2014) 2014 Del. Ch. Lexis 107, postdates Braddock but is
wholly inapposite because it involved a challenge to the originally-filed complaint. The
court applied a straightforward demand excusal analysis under Aronson and had no
reason to mention or consider Braddock. (Id. at *3-*4.)
As this case demonstrates, a lesser change in board composition can alter the
analysis. 15 The superior court found the demand futility allegations adequate as to five of
15
We also note that various courts have applied Braddock irrespective of the
extent of change in the board’s composition. (See, e.g., Zoumboulakis v. McGinn
(N.D.Cal. 2015) 148 F.Supp.3d 920, 926 [four new directors out of nine]; In re Maxim
Integrated Products, Inc., Deriv. Lit. (N.D.Cal. 2008) 574 F.Supp.2d 1046, 1059 [one
new director out of five]; Johnston v. Box (Mass. 2009) 903 N.E.2d 1115, 1126-1127
[allowing amendment to the complaint would be futile because the board “as presently
constituted is now independent and disinterested”]; see also La. Mun. Police Emples. Ret.
Sys. v. Wynn, supra, 829 F.3d at p. 1055 [listing the eight directors in place when the
amended complaint was filed]; id. at p. 1058 [which under Braddock constitute the
“relevant board”].)
27
Apple’s eight directors who comprised the 2014 Board: defendants Campbell, Cook,
Levinson, and Drexler, and non-defendant Iger. Even assuming the court’s conclusion
was correct as to those individuals, the turnover of two of the directors (defendants
Campbell and Drexler) potentially undermined plaintiffs’ demand excusal claim, leaving
only three of eight directors (Cook, Levinson, and Iger) who were ostensibly unable to
consider a demand as of the filing of the operative complaint.
In sum, we conclude that the reasoning of Braddock is consistent with the
governing and limiting principles of California law on derivative actions. Where, as here,
an amended complaint alleges derivative claims that were previously deemed legally
insufficient, the demand requirement must be assessed in relation to the board of directors
in place when the amended complaint is filed.
3. The Superior Court Erred in Assessing Demand Futility with Respect to
the 2014 Board
Our conclusion that the reasoning in Braddock applies here, where an amended
complaint alleges derivative claims that were not already validly in litigation, compels us
to find that the superior court erred in overruling the demurrer to the operative complaint.
The court should have analyzed plaintiffs’ demand futility allegations with respect to the
board of directors in place when the operative complaint was filed in April 2016. To the
extent the court analyzed demand futility with respect to the 2014 Board, the court failed
to enforce the demand requirement under the circumstances presented. We further find
that the operative complaint does not excuse demand on Apple’s board of directors as it
existed when the operative complaint was filed (hereafter “the 2016 Board”).
As the superior court noted in its order, plaintiffs’ direct allegations of demand
futility extend to defendants Campbell, Cook, and Levinson, based on evidence that they
knew of and consented to or acted upon the non-recruitment policies. Assuming without
deciding that the allegations are adequate to establish demand futility as to these three
28
individuals, 16 only Cook and Levinson remained on the 2016 Board. The six other
directors serving on the 2016 Board are non-defendants Iger, Gore, Jung, Sugar, Wagner,
and Bell. To plead demand futility, plaintiffs must allege that at least two of these six
directors (in addition to Cook and Levinson) would not be able to render a disinterested
and independent decision on a demand made in April 2016. Plaintiffs acknowledge in
their return in opposition to the writ petition, however, that they have not alleged demand
futility as to Sugar, Wagner, and Bell, leaving Iger, Gore, and Jung as the only remaining
candidates at this juncture. The pertinent question thus becomes whether the operative
complaint sufficiently alleges demand futility as to directors Iger, Gore, and/or Jung.
Petitioners maintain that plaintiffs cannot allege demand excusal with respect to
these directors and instead resort to generalized allegations that are insufficient as a
matter of law. They contend that the superior court improperly relied on generalized
allegations to infer futility as to a majority of the Apple board, flouting the requirement
that a plaintiff establish demand futility through particularized allegations on a
director-by-director basis. Petitioners also challenge the notion that general knowledge
of Apple’s non-solicitation practices—if such knowledge could be attributed to Iger,
Gore, and/or Jung—renders the director incapable of fairly evaluating claims related to
those practices. They argue that while non-solicitation agreements between companies
may implicate antitrust issues, knowledge of a unilateral policy by Apple to refrain from
cold-calling (e.g., Apple’s “Hands Off (Do Not Call)” list) invokes no antitrust concerns.
Plaintiffs respond that the allegations of the operative complaint are sufficient to
establish demand futility as to a majority of the 2016 Board, including Iger, Gore, and
Jung. They argue that since knowledge can be established by circumstantial evidence,
they only need to plead facts sufficient to support an inference of reasonable doubt that
16
Petitioners argue vigorously that the superior court did not properly analyze
plaintiffs’ allegations regarding directors Levinson and Cook. We recognize that
petitioners do not concede demand futility as to these or any of the board members
serving in April 2016.
29
the director in question can act impartially, citing Sandys v. Pincus (Del. 2016) 152 A.3d
124 (Sandys). They further argue that knowledge on the part of certain directors can
support an inference as to the other directors, citing Saito v. McCall (Del. Ch. 2004) 2004
Del. Ch. Lexis 205 (Saito), overruled on other grounds by Lambrecht v. O’Neal (Del.
2010) 3 A.3d 277, 293. Plaintiffs contend on this basis that it was reasonable for the
superior court to draw inferences from particularized facts about certain board members’
knowledge of and complicity in the anti-recruitment agreements.
Plaintiffs are correct that knowledge may be established by circumstantial
evidence (see Grimshaw v. Ford Motor Co. (1981) 119 Cal.App.3d 757, 787) and may
depend on courts drawing logical and reasonable inferences (see Evid. Code, § 600,
subd. (b); Phillips v. Honeywell Internat. Inc. (2017) 9 Cal.App.5th 1061, 1078). But this
general precept does not displace statutory law that requires the particularized pleading of
demand futility. “[G]iven the requirement under section 800(b)(2) that allegations be
made ‘with particularity,’ it is clear that general averments that the directors were
involved in a conspiracy or aided and abetted the wrongful acts complained of will not
suffice . . . . [Citation.] . . . Rather, ‘the court must be apprised of facts specific to each
director from which it can conclude that that particular director could or could not be
expected to fairly evaluate the claims of the shareholder plaintiff.’ [Citation.] Thus, the
court, in reviewing the allegations to support demand futility, must be able to determine
on a director-by-director basis whether . . . each possesses independence or disinterest
such that he or she may fairly evaluate the challenged transaction.” (Bader, supra, 179
Cal.App.4th at p. 790.)
Where, as here, the derivative claim stems from conduct that did not involve a
decision of the board, the Rales test applies. Plaintiffs were “required to allege facts
‘with particularity’ (§ 800(b)(2)) sufficient to ‘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.’ ”
30
(Bader, supra, 179 Cal.App.4th at p. 797.) Broad or conclusory allegations are
insufficient (Shields, supra, 15 Cal.App.4th at p. 1621), as are “facts relating to the
structural bias common to corporate boards . . . .” (Oakland Raiders, supra, 93
Cal.App.4th at p. 587.) Hence, “the court must be apprised of facts specific to each
director from which it can conclude that that particular director could or could not be
expected to fairly evaluate the claims of the shareholder plaintiff.” (Shields, supra, at
p. 1622; see also Rales, supra, 634 A.2d at pp. 935-936 [whether the board can
impartially consider a demand depends on the members’ ability to act independently and
free of personal interest in light of the allegations confronting them].)
“A director will be deemed not to be disinterested if the facts alleged
‘demonstrat[e] a potential personal benefit or detriment to the director as a result of the
decision.’ ” (Bader, supra, 179 Cal.App.4th at p. 792; see also Rales, supra, 634 A.2d at
p. 936.) Lack of independence means that a director is susceptible to “ ‘extraneous
considerations or influences’ ” rather than the “ ‘corporate merits of the subject before the
board.’ ” (Bader, supra, at p. 792.) It is not enough to claim that “directors lack
independence because they are dominated by” or were “ ‘ “personally selected” ’ ” by a
controlling shareholder. (Ibid.) Rather, “the plaintiff is required to present specific facts
showing ‘that through personal or other relationships the directors are beholden to the
controlling person.’ ” (Ibid., quoting Aronson, supra, 473 A.2d at p. 815.) Because the
“ ‘threat of personal liability for approving a questioned transaction’ by itself is
insufficient to refute the disinterestedness or independence of a director” (Bader, supra,
at p. 792), “ ‘[a] plaintiff may not “bootstrap allegations of futility” by pleading merely
that “the directors participated in the challenged transaction or that they would be
reluctant to sue themselves.” [Citation.]’ (In re Sagent Technology, Inc., Derivative
Litig. (N.D.Cal. 2003) 278 F.Supp.2d 1079, 1089.)” (Id. at pp. 792-793.)
We independently review the sufficiency of the demand futility pleading. (Bader,
supra, 179 Cal.App.4th at p. 786.) Plaintiffs’ allegations focus substantially on the
31
threatening force that Apple co-founder and CEO Steve Jobs exerted in negotiating and
enforcing non-solicitation agreements with heads of companies, including many that
appeared on Apple’s “Hands Off” list and his “ ‘tight control’ ” over the Apple directors
and outspoken belief that companies in business relationships should not hire each other’s
technical people. Plaintiffs claim that particularized allegations showing that defendants
Campbell, Levinson, and Schmidt knew about Apple’s policies and practices, combined
with Jobs’ aggressive backing of the policies and sway over board members, are
sufficient to establish knowledge on the part of the entire Apple board.
Plaintiffs further rely on allegations of the directors’ close personal and business
ties with Jobs, particularly as to Cook, Levinson, and Iger, who became Disney’s CEO in
2005 and formed a relationship with Jobs around that time, when he approached Jobs
(who was then Pixar’s CEO) about a Disney/Pixar acquisition. Plaintiffs allege that Iger
and Jobs maintained a close personal relationship thereafter, evidenced by Iger’s
willingness to keep secret Jobs’ recurrence of cancer in 2006 despite his fiduciary duty to
Disney to disclose matters material to Disney’s Pixar acquisition. Plaintiffs contend that
these allegations support the inference that the board knew about the anticompetitive
policies and suggest the directors “could not be impartial in deciding to bring a lawsuit
which would tarnish” Jobs’s legacy.
Plaintiffs also assert that the directors’ direct supervision of recruiting and
compensation at Apple supports the inference that they were not disinterested and knew
of the anticompetitive practices. The operative complaint alleges that the compensation
committee, which included directors Levinson, Gore, and later Jung, was responsible for
overseeing the development of compensation programs for all employees and for
approving the overall salary budget and merit increase budget. The committee “regularly
discussed the need to attract and retain employees and evaluated the competitiveness of
Apple’s compensation practices in comparison to peer technology companies,” including
in correspondence with Apple’s vice-president for human resources and with the help of
32
an outside consultant retained in 2004 to conduct a compensation program market study.
Plaintiffs refer to SEC filings quoted in the operative complaint and signed by several
defendants and director Gore, which acknowledged Apple’s need to attract and retain
skilled personnel and cited the intense competition for personnel in the information
technology industry. Plaintiffs also refer to proxy statements in which the directors
solicited stockholder approval of stock-based compensation programs to increase
competitiveness and allegedly made misleading statements about employee retention
practices and competition.
We find these allegations, viewed in their context and in light of the complaint as a
whole (Bader, supra, 179 Cal.App.4th at p. 786), insufficient to support an inference of
lack of disinterest or independence, at least as to directors Gore and Jung. The
allegations regarding Gore and Jung do not extend beyond each of their general roles as a
director and member of the compensation committee. The facts alleged about the
committee’s activities are unremarkable (e.g., overseeing compensation programs,
approving salary and merit increase budgets, soliciting market research on Apple’s
competitiveness in compensation programs, and seeking shareholder approval for
increasing employee stock-based compensation) and do not suggest the committee was
informed—either directly or indirectly—of the agreements.
For example, the allegations that plaintiffs claim support an inference that Gore
“knew or was reckless in not knowing about the anticompetitive agreements and practices
at Apple” include Gore’s attendance at meetings in which recruiting and retention issues
were discussed, e-mail correspondence in which Apple’s vice-president for human
resources informed the committee about the competitiveness of Apple’s compensation
and benefits programs and requested consent “ ‘to increase our annual grant pool . . . ,’ ”
and Gore’s presence at the May 2006 board meeting when Jobs informed the board of
33
what the complaint calls the “Apple/Pixar (Disney) Agreement.” 17 Without more, neither
the general activities of the compensation committee, nor the detailed allegations
regarding an Apple/Pixar agreement or Disney’s 2006 acquisition of Pixar, support an
inference that Gore knew of, let alone participated—as plaintiffs claim—in the alleged
conspiracy. The same is true for director Jung, who plaintiffs simply allege “was also on
the Compensation Committee in 2008.”
We also are not persuaded that knowledge of Apple’s non-solicitation practices
and allegedly anticompetitive agreements with other companies can be imputed to Gore
and Jung, for purposes of establishing demand futility, merely because they served on the
board or the compensation committee alongside directors who are the subject of more
direct allegations. Plaintiffs’ reliance on a footnote in an unpublished Court of Chancery
case for this proposition is unavailing. (See Saito, supra, 2004 Del. Ch. Lexis 205, at
*33, fn. 68 [inferring that several directors’ awareness of accounting irregularities “was
communicated to other” board members in connection with a merger].) Whereas here,
the allegations pertaining to the compensation committee suggest standard activities to
oversee and adjust Apple’s compensation practices in a highly competitive industry, the
allegations in Saito indicated that accounting practices amounting to “at least a $40 to
$55 million problem” were discussed by the audit committee in the midst of merger
negotiations and were conveyed to the board of the merger partner, which nonetheless
failed to react. (Id. at *34.) In the absence of any facts to suggest the compensation
committee was informed of Apple’s non-solicitation practices affecting recruitment and
hiring, there is no basis to infer knowledge on the part of Gore or Jung.
17
Quoting from the meeting minutes, the operative complaint states that Jobs
informed the entire board, including director Gore, “ ‘on the status of the acquisition of
Pixar by Disney and any potential impact on [Apple]’s relationship with Disney. Mr.
Jobs indicated that the acquisition had closed effective as of May 5, 2006 and that he had
joined Disney’s board of directors.’ ” The allegations that follow include that Pixar
“appeared” on Apple’s “Hands Off (Do Not Call List)” in July 2009, and suggest that an
Apple/Pixar non-solicitation agreement was in effect several years prior.
34
To be clear, our conclusion regarding Gore and Jung is based on the absence of
any particularized factual allegations to support an inference of even general knowledge
about the purportedly anticompetitive agreements with other companies, let alone
knowledge or involvement sufficient to disable them from fairly considering plaintiffs’
claims. This is particularly true where Gore and Jung held no “overlapping” board
positions with companies listed on Apple’s “Hands Off” list, are not alleged to have had
close personal or business relationships with individuals directly implicated by plaintiffs’
allegations, and are not alleged to lack independence or to suffer “ ‘a substantial
likelihood’ ” of liability in connection with the anticompetitive conduct. 18 (See Bader,
supra, 179 Cal.App.4th at p. 798; see also Rales, supra, 634 A.2d at p. 936.)
This context-specific conclusion should not be interpreted too broadly in light of
petitioners’ contentions regarding the superior court’s use of inference. Courts evaluating
demand futility at the pleading stage can draw reasonable inferences as to director
interest when adequately founded on particularized allegations. (See Brehm v. Eisner,
supra, 746 A.2d at p. 255 [“[p]laintiffs are entitled to all reasonable factual inferences
that logically flow from the particularized facts alleged, but conclusory allegations are
not considered as expressly pleaded facts or factual inferences”]; Sandys, supra, 152
A.3d at p. 128 [while the plaintiff “ ‘is bound to plead particularized facts in pleading a
derivative complaint,’ ” the court assessing the sufficiency of the derivative complaint is
“ ‘bound to draw all inferences from those particularized facts in favor of the plaintiff,
not the defendant’ ”]; see also City of Stockton v. Superior Court (2007) 42 Cal.4th 730,
18
We note that despite the superior court’s order stating generally that direct
allegations of knowledge on the part of certain board members supported an inference as
to “the entire board,” the court’s order did not specifically reference Gore (in contrast
with its footnote conclusions as to Drexler and Iger). Further, the court indicated at the
demurrer hearing that it was “really not persuaded” of the adequacy of the demand
futility allegations with respect to Gore.
35
747 [noting the “ordinary standards of demurrer review still apply” upon writ review of
an order overruling a demurrer].)
Thus, particularized allegations of pervasive and continued corporate misconduct
can support an inference of board knowledge and intentional disregard for purposes of
assessing demand futility, particularly where the conduct relates to a product or policy
“critical to a company’s success” or “of special importance to it.” (Rosenbloom v. Pyott
(9th Cir. 2014) 765 F.3d 1137, 1154.) The Ninth Circuit Court of Appeals, interpreting
Delaware case law, recently reaffirmed this principle in Rosenbloom, which the superior
court cited as support for its conclusion that direct allegations regarding knowledge of
Apple’s non-recruitment practices and agreements on the part of a few directors supports
a pleading stage inference that the other board members “knew of and condoned” the
agreements. But whereas “a battery of particularized factual allegations” in Rosenbloom
suggested that the board of the nominal defendant pharmaceutical company approved a
strategic plan premised on the unlawful promotion of off-label sales of the drug Botox
and closely monitored the increase in off-label sales over a period of years (id. at
p. 1152), plaintiffs’ allegations in this case do not support an inference of either
centralized action or conscious inaction on the part of the Apple board. At most, we
concur with the superior court’s inclination that particularized allegations regarding
director Iger—based on his relationship with Jobs and on the testimony of Apple’s vice
president for human resources, which suggested the timing of Apple’s non-solicitation
agreement with Pixar was linked with Disney’s acquisition of Pixar and Jobs’s “ ‘coming
on the board at Disney’ ”—supported a “reasonable inference” that Iger “knew of the
non-solicitation agreements” and consented to the practice as CEO and board member of
the parent company of Pixar.
Since the operative complaint does not allege that demand would have been futile
as to directors Sugar, Wagner, and Bell, and we have found the allegations insufficient to
disqualify directors Gore and Jung from fairly exercising “ ‘independent and disinterested
36
business judgment in responding to a demand’ ” (Bader, supra, 179 Cal.App.4th at
p. 797), we conclude that plaintiffs have failed to adequately plead excuse from the
demand requirement (§ 800(b)(2)) as to a majority of Apple’s eight-member board of
directors. Consequently, petitioners’ demurrer to the operative complaint must be
sustained.
4. Leave to Amend
In considering whether the demurrer should be sustained without leave to amend,
we observe on the one hand that plaintiffs have not proposed how they would amend the
operative complaint if the pleading is deemed inadequate with respect to the 2016 Board.
It is generally the plaintiff’s burden to “ ‘show in what manner he can amend his
complaint and how that amendment will change the legal effect of his pleading.’ ”
(Goodman v. Kennedy (1976) 18 Cal.3d 335, 349; see also Align Technology, Inc. v. Tran
(2009) 179 Cal.App.4th 949, 971.)
We cannot conclude on the record before us, however, that there is no reasonable
possibility that plaintiffs can allege demand futility as to the required number of Apple
board members. (Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 39
[leave to amend must be granted where “there is a reasonable possibility that the defect
can be cured by amendment”].) Given the procedural posture of the case and the superior
court’s early indication that it would assess demand futility as of the time the original
derivative actions were filed, plaintiffs were never directed to the correct point of
reference for their pleading.
We take guidance on this point from our Supreme Court, which has explained that
while “[d]enial of leave to amend is not unusual following writ review of an overruled
demurrer, . . . [citations] . . . , leave to amend is properly granted where resolution of the
legal issues does not foreclose the possibility that the plaintiff may supply necessary
factual allegations. [Citation.] If the plaintiff has not had an opportunity to amend the
complaint in response to the demurrer, leave to amend is liberally allowed as a matter of
37
fairness, unless the complaint shows on its face that it is incapable of amendment.” (City
of Stockton v. Superior Court, supra, 42 Cal.4th at p. 747.) Because the operative
complaint “does not on its face foreclose any reasonable possibility of amendment,” we
will direct the superior court to grant plaintiffs leave to amend, should they seek to do so.
(Ibid.)
IV. DISPOSITION
Let a peremptory writ of mandate issue directing respondent superior court to
vacate its order of October 5, 2016, overruling petitioners’ demurrer to the first and fifth
causes of action of the second amended consolidated shareholder derivative complaint,
and to enter a new order sustaining the demurrer as to those causes of action, with leave
to amend. The temporary stay order is vacated. Costs in this original proceeding are
awarded to petitioners.
38
Premo, J.
WE CONCUR:
Elia, Acting P.J.
Grover, J.
Apple Inc. et al. v. Superior Court (Police Retirement System of St. Louis et al.)
H044133
Trial Court: Santa Clara County Superior Court
Superior Court No. 1-14-CV262174
Trial Judge: Hon. Peter H. Kirwan
Counsel for Petitioners: O’Melveny & Myers
Apple Inc. Seth A. Aronson
Timothy D. Cook Michael F. Tubach
Millard Drexler
Arthur D. Levinson Sidley Austin
Norman J. Blears
Counsel Respondent: None on record
Superior Court of Santa Clara County
Counsel for Real Parties in Interest: Robbins Arroyo
The Police Retirement System of Brian J. Robbins
St. Louis Kevin A. Seely
John F. Krawczyk Gina Stassi
John Barto Michael J. Nicoud
Cotchett, Pitre & McCarthy
Joseph W. Cotchett
Nancy L. Fineman
Mark C. Molumphy
Camilo Artiga-Purcell
Apple Inc. et al. v. Superior Court (Police Retirement System of St. Louis et al.)
H044133