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Andersen v. Mattel, Inc.

Court of Chancery of Delaware

January 19, 2017

ROBERT C. ANDERSEN, Plaintiff,
v.
MATTEL, INC., CHRISTOPHER A. SINCLAIR, MICHAEL J. DOLAN, TREVOR EDWARDS, FRANCES D. FERGUSSON, ANN LEWNES, DOMINIC NG, VASANT M. PRABHU, DEAN A.SCARBOROUGH, DIRK VAN DE PUT, KATHY WHITE LOYD, KEVIN FARR, AND BRYAN STOCKTON, Defendants.

          Date Submitted: November 4, 2016

          Seth D. Rigrodsky, Brian D. Long, Gina M. Serra, and Jeremy J. Riley, RIGRODSKY & LONG, P.A., Wilmington, Delaware; Joseph M. Profy, Jeffrey J. Ciarlanto, and David M. Promisloff, PROFY PROMISLOFF & CIARLANTO, P.C., Philadelphia, Pennsylvania; Alfred G. Yates, Jr. and Gerald L. Rutledge, LAW OFFICE OF ALFRED G. YATES, JR., P.C., Pittsburgh, Pennsylvania; Attorneys for Plaintiff.

          Gregory P. Williams, Kevin M. Gallagher, and Sarah A. Clark, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Paul Vizcarrondo, Stephen R. DiPrima, and Courtney L. Heavey, WACHTELL, LIPTON, ROSEN & KATZ, New York, New York; Attorneys for Defendants Christopher A. Sinclair, Michael J. Dolan, Trevor Edwards, Frances D. Fergusson, Ann Lewnes, Dominic Ng, Vasant M. Prabhu, Dean A. Scarborough, Dirk Van de Put, Kathy White Loyd, Kevin Farr, and Mattel, Inc.

          David E. Ross, ROSS ARONSTAM & MORITZ LLP, Wilmington, Delaware; Attorney for Defendant Bryan Stockton.

          MEMORANDUM OPINION

          MONTGOMERY-REEVES, Vice Chancellor.

         This derivative action involves allegations that a board of directors improperly investigated and wrongfully refused to bring suit to recover up to $11.5 million, which was paid to the corporation's former chairman and chief executive officer as part of a severance package and consulting agreement. The defendant directors move to dismiss the derivative complaint under Court of Chancery Rule 23.1 for failure to allege wrongful demand refusal and Court of Chancery Rule 12(b)(6) for failure to state a claim. I hold that the complaint does not adequately plead that demand was wrongfully refused and grant the motion to dismiss.

         I. BACKGROUND

         The facts outlined in this opinion derive from Plaintiff's Verified Shareholder Derivative Complaint (the "Complaint") and the documents attached to it.

         A. Parties

         Plaintiff Robert C. Andersen owns stock in nominal defendant Mattel, Inc., a Delaware corporation ("Mattel"). Mattel designs, manufactures, and markets a range of toy products worldwide. Its stock trades on the NASDAQ under the ticker symbol MAT.

         Defendants Christopher A. Sinclair, Michael J. Dolan, Trevor Edwards, Frances D. Fergusson, Ann Lewnes, Dominic Ng, Vasant M. Prabhu, Dean A. Scarborough, Dirk Van de Put, and Kathy White Loyd were the directors of Mattel at the time of Plaintiff's Complaint (the "Director Defendants").

         Defendant Bryan Stockton was Mattel's chief executive officer ("CEO") beginning in 2012 and the chairman of the board beginning in 2013. He ceased to hold those positions on January 25, 2015.

         Defendant Kevin Farr has served as Mattel's Chief Financial Officer since 2000.

         B. Facts

         On June 30, 2009, Stockton entered into a letter agreement with Mattel under which he became a participant in the Mattel Executive Severance Plan (the "Severance Plan"). The Severance Plan entitles Stockton to severance benefits in the event that his departure from Mattel qualifies as a "Covered Termination." Section 2(e) of the Severance Plan defines a Covered Termination as follows:

"Covered Termination" shall mean that, at any time after a Participant's Eligibility Date, either (i) the Participant has resigned from Mattel for Good Reason, or (ii) the Participant's employment with Mattel is involuntarily terminated by Mattel without Cause.[1]

         Section 2(i) of the Severance Plan defines "Good Reason" as (1) a material diminution in Stockton's duties, authority, or responsibility, (2) a material diminution in or failure to pay Stockton's base salary, (3) a failure to make certain executive compensation plans available to Stockton, (4) a modification to the Severance Plan that is materially adverse to Stockton, or (5) the failure of a Mattel successor to assume the Severance Plan.[2]

         After two years of growth with Stockton as CEO, Mattel's stock price dropped substantially in 2014. On January 1, 2014, Mattel's stock price closed at $47.39 per share. By October 2, 2014, the stock price had fallen to $31.11 per share, and on October 16, 2014, Mattel announced that its net income for the third quarter of 2014 decreased 21.5% from the prior year due to significantly lower demand for Barbie dolls. On December 31, 2014, Mattel's stock price closed at $30.95 per share. In light of the poor performance, on January 25, 2015, Stockton ceased to be chairman and CEO of Mattel. The next day, Mattel announced in a press release that Stockton had "resigned as Mattel's Chairman and Chief Executive Officer and resigned from the Board of Directors."[3]

         On April 9, 2015, Mattel filed and distributed its 2015 proxy statement. The proxy statement stated that "[o]n January 25, 2015, Mr. Stockton ceased to be Chairman of the Board and CEO and his employment was terminated. His termination of employment qualified as a termination by Mattel without cause under the Severance Plan, and he received severance benefits and payments."[4] As a result of Stockton's separation from Mattel, he allegedly was paid $10 million under the Severance Plan. The April 2015 proxy statement also revealed that Stockton would be paid $125, 000 per month under a twelve-month consulting agreement with Mattel.[5]

         Because of the discrepancies in Mattel's disclosures regarding whether Stockton resigned or was terminated, Plaintiff sent a demand letter to the board of directors on April 17, 2015.[6] The letter demanded that the board:

(i) undertake (or cause to be undertaken) an independent internal investigation into Management's violations of California law, Delaware law, and/or federal law; (ii) commence a civil action against each member of Management to recover for the benefit of the Company the amount of damages sustained by the Company as a result of their breaches of fiduciary duties alleged herein; (iii) immediately terminate the Company's Consulting Agreement with Stockton; (iv) attempt to "clawback" any severance-related benefits already provided to Stockton; and (v) enter into a "freeze" or standstill agreement with Stockton until the actions demanded in this letter have concluded.[7]

         On May 4, 2015, the Mattel board responded to Plaintiff's demand through counsel and requested evidence of Plaintiff's stock ownership in Mattel, which Plaintiff provided.[8] On September 8, 2015, the board's counsel sent a second letter stating that "the Board has unanimously determined to reject [the Demand]"[9] (the "Refusal Letter"). The Refusal Letter explained that "there is no evidence to support a claimed breach of fiduciary duties."[10] Further, it acknowledged that "Stockton did, in fact, resign from his positions at the company."[11] But because the public disclosures made clear that Stockton did not leave voluntarily, "the disclosures . . . concerning Bryan Stockton's departure from the company were true and correct."[12]The letter also stated that "the severance benefits paid to Stockton were validly owed to him"; "the consulting agreement . . . would allow for an amicable transition"; and "litigation would be a distraction for the Board and senior management and would likely have an adverse impact on Mattel's business during a period in which Mattel is trying to navigate a turnaround."[13]

         Plaintiff responded to the Refusal Letter on September 17, 2015, requesting the documents reviewed in Mattel's internal investigation (or alternatively a list of the documents reviewed), a list of the individuals interviewed, any report that the board had produced, and any written summaries of the interviews.[14] The board's counsel responded on September 30, 2015, stating that counsel for the board "interviewed twenty-four people, including all of the current members of the board, the relevant current and former officers of the company, and the advisors who played a role in the underlying events."[15] According to the letter, the board's counsel "also reviewed approximately 12, 400 documents, including the relevant board materials" in the investigation.[16] Mattel did not provide the requested documents or the report.

         C. Procedural History

         On December 15, 2015, Plaintiff filed the Complaint alleging three derivative claims. Count I is a claim for breach of fiduciary duty against all Defendants; count II is a claim for unjust enrichment against Stockton; and count III is a claim for waste against the Director Defendants. Plaintiff asserts that his demand was wrongfully refused, giving him standing to bring these derivative claims. On March 24, 2016, Defendants moved to dismiss, arguing that the board's demand refusal was a proper exercise of business judgment and that the Complaint fails to state a claim upon which relief can be granted. Plaintiff opposed the motion to dismiss, and I heard oral argument on November 4, 2016.

         II. ANALYSIS

         A. Standard of Review

         A stockholder seeking to assert derivative claims on behalf of a Delaware corporation in this Court must satisfy the demand requirement in Court of Chancery Rule 23.1. Rule 23.1 states that derivative complaints "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."[17]

         Where, as here, a plaintiff makes demand on the board of directors, the plaintiff concedes that the board is disinterested and independent for purposes of responding to the demand.[18] "The effect of such concession is that the decision to refuse demand is treated as any other disinterested and independent decision of the board-it is subject to the business judgment rule."[19] Accordingly, the only issues the Court must examine in analyzing whether the board's demand refusal was proper are "the good faith and reasonableness of its investigation."[20] This Court has recently reiterated the standard a plaintiff alleging wrongful demand refusal must meet as follows:

[T]o survive a motion to dismiss under Rule 23.1 where demand has been made and refused, a plaintiff must allege particularized facts that raise a reasonable doubt that (1) the board's decision to deny the demand was consistent with its duty of care to act on an informed basis, that is, was not grossly negligent; or (2) the board acted in good faith, consistent with its duty of loyalty. Otherwise, the decision of the board is entitled to deference as a valid exercise of its business judgment.[21]

         Further, Rule 23.1 requires plaintiffs to plead wrongful demand refusal allegations with particularized facts. Thus, "[v]ague or conclusory allegations do not suffice, and this Court need not blindly accept as true all allegations, nor must it draw all inferences from them in plaintiff's favor unless they are reasonable inferences."[22]

         B.Plaintiff Fails to Plead Particularized Facts Alleging that the Board ...


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