Securities Regulation Daily Wrap Up, FIDUCIARY DUTIES—N.D. Cal.: Disney battles derivative suit over anti-poaching pacts, (Dec 23, 2015)

By Anne Sherry, J.D.

Disney directors hope to defeat derivative fiduciary-duty and unjust-enrichment claims based on Pixar and Lucasfilm’s participation in anti-recruiting agreements. The Disney shareholder did not demand that the board investigate the claim prior to filing suit, and the defendants counter that fundamental principles of corporate law—that a corporation is managed by its directors, who are presumed to act loyally and in good faith—doom the complaint (Towers v. Iger, December 21, 2015).

The allegations center around agreements among the animation studios and other companies not to poach each other’s employees and to share compensation information. These alleged antitrust violations primarily occurred before Disney acquired Pixar and Lucasfilm in 2006 and 2012, respectively. In 2009, the Department of Justice began investigating the recruiting violations, culminating in civil complaints and settlements with Adobe, Apple, Google, Intel, Intuit, Pixar, and Lucasfilm the following year. Those resolutions prohibited the companies from agreeing not to recruit employees, but they did not impose any fine or other financial penalty, nor include a judicial finding or admission of wrongdoing.

In September 2014, former animation employees filed a class action over the anti-poaching practices. After obtaining access to some of Disney’s books and records via a Section 220 request, the plaintiff filed a derivative complaint in September 2015. Disney seeks dismissal on two bases: first, the plaintiff failed to establish that demand on the board was excused; second, the complaint fails to state a claim.

High burden for oversight claim. The defendants argue that the plaintiff’s lawsuit amounts to an oversight claim alleging the board failed to take action. Because no specific business judgment is challenged, under Delaware law, demand futility is assessed under the Rales rather than Aronson test. To satisfy Rales, the plaintiff must create a reasonable doubt that the board could have properly exercised its independent and disinterested business judgment in responding to a demand. This threshold requires particularized factual allegations demonstrating the board faces a substantial likelihood of liability. In turn, under Delaware law, the plaintiff must prove the director’s conduct rises to the level of bad faith, the defendants maintain.

The plaintiff’s allegations that the board failed to institute and maintain an adequate system of controls and that a majority of the board faced a substantial likelihood of liability for those controls failures and for presiding over knowingly illegal conduct fell short of this high burden. Indeed, the defendants assert, the plaintiff affirmatively alleges the presence of oversight systems and controls. Furthermore, there was no admission or judicial determination of any antitrust violation. Even if there had been, demand futility requires pleading particular facts showing that directors were conscious of their failings. The mere assumption that a board had knowledge of potential wrongdoing cannot sustain an oversight claim.

The directors also do not face a substantial likelihood of liability for disclosure violations—the complaint does not identify any misstatement, nor does it make a particularized pleading specific to each board member. In addition, any predicate claims for oversight liability became time-barred more than two years before the complaint was filed. For substantially the same reasons, the defendants allege, the complaint fails to state a claim.

The case is No. 15-cv-04609.

Attorneys: Michael James Nicoud (Robbins Arroyo LLP) for Eugene F. Towers. Allen Ruby (Skadden, Arps, Slate, Meagher & Flom LLP) for Robert A. Iger and The Walt Disney Co.

Companies: The Walt Disney Co.; Adobe Systems Inc.; Apple Inc.; Google Inc.; Intel Corp.; Intuit Inc.; Pixar

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