NOT FOR PUBLICATION
UNITED STATES COURT OF APPEALS FILED
FOR THE NINTH CIRCUIT APR 02 2012
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
SANJAY ISRANI, No. 10-16726
Plaintiff - Appellant, D.C. No. 3:09-cv-0467-ECR-RAM
v.
MEMORANDUM*
ROBERT A. BITTMAN; et al.,
Defendants - Appellees.
Appeal from the United States District Court
for the District of Nevada
Edward C. Reed, District Judge, Presiding
Argued and Submitted October 13, 2011
San Francisco, California
Before: HUG, KLEINFELD, and W. FLETCHER, Circuit Judges.
Appellant Sanjay Israni, stockholder of International Game Technology
(IGT), appeals the dismissal of his derivative complaint for failure to allege
particularized facts establishing demand futility. We affirm.
*
This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
As a preliminary matter, we address Appellees’ motion to strike Appellant’s
Additional Excerpts of Record. The motion to strike is granted because Appellant
never filed or submitted the relevant documents to the court below. See Fed. R.
App. P. 10(a); Kirshner v. Uniden Corp. of Am., 842 F.2d 1074, 1077 (9th Cir.
1988).
A shareholder bringing a derivative action to enforce a right of the
corporation must either make a demand on the corporation’s directors to take
corrective action, or state with particularity reasons why demand would be futile.
Fed. R. Civ. P. 23.1. We look to the law of the state of incorporation to determine
when demand would be futile. In re Silicon Graphics, Inc. Sec. Litig., 183 F.3d
970, 990 (9th Cir. 1999). IGT is incorporated in the State of Nevada, so Nevada
law defines demand futility here. Nevada courts look to Delaware law for
guidance on requirements for pleading demand futility. See Shoen v. SAC Holding
Corp., 137 P.3d 1171, 1184 (Nev. 2006). This Court reviews a district court’s
dismissal of a shareholder derivative suit based on failure to make a demand or
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properly allege demand futility for an abuse of discretion.1 Potter v. Hughes, 546
F.3d 1051, 1056 (9th Cir. 2008).
Under Delaware law, demand futility is established when the complaint
pleads particularized facts demonstrating “(1) in those cases in which the directors
approved the challenged transactions, a reasonable doubt that the directors were
disinterested or that the business judgment rule otherwise protects the challenged
decisions; or (2) in those cases in which the challenged transactions did not involve
board action or the board of directors has changed since the transactions, a
reasonable doubt that the board can impartially consider a demand.” Shoen, 137
P.3d at 1184. The nine members of IGT’s board of directors at the time the
underlying lawsuit was filed, who therefore would have been charged with
considering a demand, were directors Bittman, Burt, Hart, Mathewson, Matthews,
Miller, Rentschler, Roberson, and Satre. Here, the complaint pleaded director
interest based on: (1) director approval of a revised employment agreement for Mr.
1
We question whether abuse of discretion review is appropriate. The
Second and Ninth Circuits recently expressed doubt about the propriety of
applying an abuse of discretion standard to a motion to dismiss for failure to
sufficiently allege demand futility but declined to reach the issue because it was
not dispositive in the case. Scalisi v. Fund Asset Mgmt., L.P., 380 F.3d 133, 137
n.6 (2d Cir. 2004); Laborers Intern. Union of N. Am. v. Bailey, 310 Fed. Appx.
128, 130 n.1 (9th Cir. Jan. 23, 2009). However, a de novo standard of review
would not change the outcome of this case so it is therefore currently unnecessary
to decide this issue.
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Matthews, IGT’s former CEO and chairman of IGT’s board of directors; (2) high
director compensation; (3) director membership on IGT’s Audit and Governance
Committees; (4) director employment with IGT; and (5) alleged insider trading by
three IGT directors.
Appellant argues that certain directors were incapable of objectively
evaluating a demand because they approved Mr. Matthews’ employment contract.
Appellant’s theory is that these directors were advancing Mr. Matthews’ interests
in an effort to have their own compensation increased. Appellant’s conclusory
argument is insufficient to raise a reasonable doubt that the directors were
disinterested because the complaint does not include facts to explain how approval
of Mr. Matthews’ salary would influence the compensation of other directors.
Brehm v. Eisner, 746 A.2d 244, 257 (Del. 2000). Additionally, Appellant did not
raise a reasonable doubt that the directors’ actions were the valid exercise of
business judgment because “[i]t is the essence of business judgment for a board to
determine if a particular individual warrants large amounts of money.” Id. at 263
(quotation and brackets omitted). Thus, the district court properly found that the
allegations relating to Mr. Matthews’ revised employment agreement do not
establish demand futility.
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The district court also properly found that demand is not excused based on
the directors’ fees. A director’s receipt of compensation alone does not excuse
demand, and the complaint did not provide sufficient factual allegations to show
the fees here were unusual or uncustomary. Orman v. Cullman, 794 A.2d 5, 29
n.62 (Del. Ch. 2002). Appellant alleges that four IGT directors each received total
compensation between $384,498 to $419,498 for 2008. Appellant alleges IGT
directors’ total compensation is larger than IGT officers’ base salary, but offers no
information about IGT officers’ total compensation. Appellant alleges average
IGT director compensation in 2008 was higher than the average director
compensation paid at nineteen of the top twenty Fortune 500 companies.
However, Appellant offers no comparison to the compensation of directors in
companies in IGT’s industry. While we do not believe an industry-specific
comparison of director compensation is always required to raise a reasonable doubt
about director independence, we conclude no such “reasonable doubt” is raised
here, given the differences between IGT’s industry and those of the cited Fortune
500 firms. Appellant also does not compare the responsibilities of IGT directors to
the responsibilities of directors at the referenced Fortune 500 companies.
Additionally, Appellant does not explain how acceding to a shareholder demand
would jeopardize the directors’ positions. Without more, we cannot conclude that
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the director compensation here is “so lavish that a mechanical application of the
presumption would be totally at variance with reality.” Grobow v. Perot, 526 A.2d
914, 923 n.12 (Del. Ch. 1987) aff’d, 539 A.2d 180 (Del. 1988).
The district court properly found demand is not excused based on committee
membership because the complaint failed to plead facts regarding what information
the committee members saw and failed to act on.2 In re Caremark Intern. Inc.
Derivative Litig., 698 A.2d 959, 971 (Del. Ch. 1996). Additionally, the complaint
does not contain particularized facts showing that the committee members engaged
in “intentional misconduct, fraud or a knowing violation of the law,” as required
under Nevada law. NEV. REV. STAT. § 78. 138(7); In re Amerco Derivative Litig.,
252 P.3d 681, 700-01 (Nev. 2011). The district court also properly found demand
is not excused based on IGT employment of directors because the complaint did
not allege the insider directors were beholden to an interested party. In re
NutriSystem, Inc. Derivative Litig., 666 F. Supp. 2d 501, 515 (E.D. Pa. 2009)
(“Under Delaware law, merely being employed by a corporation is not, by itself,
sufficient to create a reasonable doubt as to the independence of a director.” )
2
One possible exception is the allegation that Mr. Burt participated in
insider trading while serving on the Governance Committee. However, this claim
is not determinative in deciding whether demand would have been futile.
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(citing In re Walt Disney Co. Deriv. Litig., 731 A.2d 342, 356 (Del Ch. Ct. 1998),
aff’d in pertinent part, Brehm, 746 A.2d 244).
Finally, the complaint alleged that directors Burt, Bittman, and Matthews
engaged in insider trading of IGT stock, and therefore a demand on them regarding
these activities would have been futile. The district court declined to address the
sufficiency of this allegation because it had denied all other demand futility
grounds alleged and therefore the plaintiffs could not show that a majority of the
IGT board was not impartial even if demand were excused with respect to these
three defendants. For the same reason, it is unnecessary for us to consider this
allegation.
AFFIRMED.
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