[No. 59932-1-I. Division One. April 7, 2008.]
[1] Dismissal and Nonsuit Failure To State Claim Review Standard of Review. A trial court's dismissal of an action under CR 12(b)(6) for failure to state a claim on which relief can be granted is reviewed de novo. [2] Dismissal and Nonsuit Failure To State Claim Test. A trial court may dismiss an action under CR 12(b)(6) for failure to state a claim on which relief can be granted if the court is able to conclude, beyond a reasonable doubt, that the claimant cannot prove any set of facts that would justify recovery. [3] Dismissal and Nonsuit Failure To State Claim Factual Basis Presumption. For purposes of a CR 12(b)(6) motion to dismiss an action for failure to state a claim on which relief can be granted, all facts alleged in the plaintiff's complaint are presumed to be true. [4] Dismissal and Nonsuit Failure To State Claim Legal Theory Legal Conclusions in Plaintiff's Complaint Effect. When ruling on a CR 12(b)(6) motion to dismiss an action for failure to state a claim on which relief can be granted, a court is not required to accept as true legal conclusions in the plaintiff's complaint. [5] Corporations Stock Stockholders Stockholder Claims Governing Law State of Incorporation. Shareholder claims involving a corporation's internal affairs are governed by the law of the state in which the corporation was incorporated. [6] Corporations Directors Personal Liability Shareholder Suit Business Judgment Rule Delaware Law. For corporations incorporated in Delaware, the Delaware business judgment rule protects corporate directors against shareholder lawsuits for business decisions that can be attributed to any rational business purpose. The business judgment rule creates a presumption that a board of directors acts independently, with due care, in good faith, and in the honest belief that its actions are in the stockholders' best interests. To bring a claim against a director, a shareholder must allege facts sufficient to overcome the presumption. Such facts must show that the board of directors, in reaching the decision challenged by the shareholder, breached any of its three primary fiduciary duties: the duty of due care, the duty of loyalty, or the duty of good faith. [7] Corporations Directors Personal Liability Breach of Duty of Care Immunity Exculpatory Clause in Certificate of Incorporation Delaware Law. Under Del. Code. Ann. title 8, § 102(b)(7), a corporation incorporated in Delaware may immunize its directors from personal liability for breach of the duty of care by means of an exculpatory clause in the corporation's certificate of incorporation. [8] Corporations Sale of Business Duty of Directors Breach Effect Delaware Law. Under Delaware law, the duty of a corporation's directors in conducting a sale of corporate control is to seek out the best value reasonably available to the stockholders. A failure to do so may amount to a breach of the directors' fiduciary duties if the sale is the result of illicit motivation (bad faith), personal interest divergent from shareholder interest (disloyalty), or a lack of due care. [9] Corporations Sale of Business Duty of Directors Breach Duty of Care Exculpatory Clause in Certificate of Incorporation Delaware Law. Under Delaware law, when a shareholder's complaint against a corporation's directors for failure to seek out the best value reasonably available to the stockholders in conducting a sale of corporate control merely alleges that the directors were grossly negligent in performing their duties in selling the corporation and does not set forth some factual basis to suspect the directors' motivations, any finding of liability will necessarily be based on breach of the duty of care, not the duty of loyalty or good faith, in which case the claim will be barred if the corporation's certificate of incorporation contains a clause under Del. Code. Ann. title 8, § 102(b)(7) immunizing its directors from personal liability for breach of the duty of care. [10] Corporations Directors Personal Liability Shareholder Suit Breach of Duty of Care Immunity Exculpatory Clause in Certificate of Incorporation Dismissal of Action for Failure To State Recoverable Claim. A shareholder action against the directors of a Delaware corporation for breach of the duty of care is subject to dismissal under CR 12(b)(6) for failure to state a claim on which relief can be granted if the corporation's certificate of incorporation contains a section 102(b)(7) clause (Del. Code. Ann. title 8, § 102(b)(7)) immunizing its directors from personal liability for breach of the duty of care. [11] Corporations Directors Personal Liability Shareholder Suit Breach of Duty of Good Faith What Constitutes Delaware Law. To establish a breach of the duty of good faith by a corporate director under Delaware law, a shareholder must show that the director's conduct was motivated by an actual intent to do harm or that the corporation's directors consciously and intentionally disregarded their responsibilities by conduct so far beyond the bounds of reasonable judgment that it seems essentially inexplicable on any grounds other than bad faith. [12] Corporations Directors Personal Liability Shareholder Suit Breach of Duty of Loyalty What Constitutes Delaware Law. Under Delaware law, the duty of loyalty by a corporate director mandates that the best interest of the corporation and its shareholders takes precedent over any interest possessed by a director and not shared by the stockholders generally. To plead a breach of the duty of loyalty, a shareholder must allege facts sufficient to show that a majority of the directors who approved of the conduct or transaction were materially interested in the transaction. A director is materially interested in a transaction if the director's interest is of a sufficiently material importance, in the context of the director's economic circumstances, as to have made it improbable that the director could perform the fiduciary duties owed to shareholders without being influenced by overriding personal interests. [13] Corporations Sale of Business Duty of Directors Breach of Duty of Loyalty Pleading Requirement Delaware Law. To plead actionable disloyalty by directors of a corporation in a case involving a merger with a genuine third-party acquiring company, under Delaware law the plaintiff must show that the materially self-interested board members either (1) constituted a majority of the board, (2) controlled and dominated the board as a whole, or (3) failed to disclose their interests in the transaction to the board and a reasonable board member would have regarded the existence of their material interests as a significant fact in the evaluation of the proposed transaction. Absent such a showing, the mere presence of a conflicted director or an act of disloyalty by a director does not deprive the board of the presumption of loyalty afforded by the business judgment rule under Delaware law. [14] Corporations Sale of Business Duty of Directors Failure To Disclose Failure To Maximize Value Duties Breached Delaware Law. Under Delaware law, while a corporate board's breaches of the duties to disclose and to maximize value in a merger or acquisition arise from all three primary fiduciary duties of due care, loyalty, and good faith, such breaches do not necessarily constitute breaches of all three fiduciary duties. Neither the duty of loyalty nor the duty of good faith is implicated by a complaint's allegations of failure to disclose or failure to maximize value if there are no allegations of superior offers, or that a nondisclosure agreement prevented a bidder from presenting a superior offer, or of any conduct so far beyond the bounds of reasonable judgment that it had to be attributable to bad faith. [15] Corporations Sale of Business Duty of Directors Severance Package for Officers Favorable Stock Vesting Package for Directors Duties Implicated Delaware Law. Under Delaware law, a proposal for a merger or sale of a corporation that provides for severance packages for high ranking officers and for the acceleration of stock option vesting for corporate directors does not necessarily create a conflict that would prevent the corporation's directors from seeking the highest value for shareholders by the merger or sale of the corporation. Absent some evidence that the severance or stock option package caused the directors to prefer the bid over other potential bids or that the directors otherwise breached their duty of loyalty, no claim is stated for the breach of the duty of loyalty or the duty of good faith. The situation that typically implicates disloyalty is when the directors of the company to be sold also have interests in the acquiring company or when the directors seek to entrench themselves in their positions of control. [16] Dismissal and Nonsuit Failure To State Claim Matters Considered Outside of Pleadings Judicial Notice. Although in ruling on a CR 12(b)(6) motion to dismiss an action for failure to state a claim on which relief can be granted a trial court generally may consider only those allegations contained in the complaint and may not go beyond the face of the pleadings, the trial court may take judicial notice of public documents if their authenticity cannot reasonably be disputed. ER 201(b) authorizes the court to take judicial notice of a fact that is not subject to reasonable dispute in that it is capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned. [17] Dismissal and Nonsuit Failure To State Claim Matters Considered Unattached Documents Noted in Pleading. Documents whose contents are alleged in a complaint but which are not physically attached to the pleading may be considered by a trial court in ruling on a CR 12(b)(6) motion to dismiss an action for failure to state a claim on which relief can be granted. [18] Evidence Judicial Notice Matters of Public Record. A court may take judicial notice of a matter of public record. [19] Evidence Judicial Notice Certificate of Incorporation Contents. A court may take judicial notice of the contents of a corporation's certificate of incorporation on file with the secretary of state's office in the state of incorporation. [20] Corporations Directors Personal Liability Shareholder Suit Dismissal of Action Failure To State Claim Delaware Corporation Exculpatory Clause in Certificate of Incorporation Judicial Notice. An action against the directors of a Delaware corporation may be dismissed by the trial court for failure to state a claim on which relief can be granted under CR 12(b)(6) based on judicial notice of an exculpatory clause under Del. Code. Ann. title 8, § 102(b)(7) in the corporation's certificate of incorporation on file with the Delaware secretary of state's office if the plaintiff does not contest the existence or authenticity of the section 102(b)(7) provision. [21] Dismissal and Nonsuit Failure To State Claim Review Factual Allegations Not Alleged in Trial Court. In reviewing a trial court's dismissal of an action under CR 12(b)(6) for failure to raise a claim on which relief can be granted, an appellate court may decline to consider arguments not first raised before the trial court. [22] Evidence Judicial Notice Corporate Filings With SEC. A court may take judicial notice of a corporation's Form 8-K filings with the United State Securities and Exchange Commission. [23] Dismissal and Nonsuit Failure To State Claim Matters Considered Outside of Pleadings Harmless Error Test. A trial court's improper consideration of matters outside of the pleadings in dismissing an action for failure to state a claim on which relief can be granted under CR 12(b)(6) is harmless error if the pleadings properly considered by the court fail to establish an actionable claim. [24] Pleading Amendment Review Standard of Review. A trial court's denial of a motion to amend a pleading under CR 15 is reviewed for an abuse of discretion. [25] Pleading Amendment Discretion of Court Futility of Amendment. A trial court does not abuse its discretion by denying a motion to amend a pleading under CR 15 if the proposed amendment is futile. [26] Pleading Amendment Motion Failure To Attach Amended Pleading Lack of Explanation of Benefit. The failure of a party moving to amend its pleading under CR 15 to attach a proposed amended pleading to the motion or to explain how an amendment would correct defects in the party's original pleading is not necessarily fatal to the motion. The trial court may nonetheless rule on the merits of the motion. [27] Pleading Amendment Discretion of Court Lack of Explanation Apparent Reason for Denial Effect. A trial court's failure to give an explanation for denying a CR 15 motion to amend a pleading does not constitute an abuse of discretion if the record demonstrates an apparent reason for the denial, such as futility of the amendment. Nature of Action: A shareholder in a corporation incorporated under Delaware law sought relief on a claim that the corporation's directors breached their fiduciary duties of care, loyalty, and good faith in conducting a merger with another corporation. Superior Court: After denying the plaintiff's motion to amend his complaint, the Superior Court for King County, No. 06-2-32528-1, Jeffrey M. Ramsdell, J., dismissed the action on April 3, 2007. Court of Appeals: Holding that, under Delaware law, the trial court was permitted to dismiss the claim for breach of the duty of care based on an exculpatory provision in the corporation's charter, that the plaintiff failed to allege sufficient facts to support the claims for breach of the duties of loyalty and good faith, and that the trial court did not abuse its discretion by denying the plaintiff's motion to amend his complaint, the court affirms the orders dismissing the action and denying leave to amend. Clifford A. Cantor- (of Law Offices of Clifford A. Cantor, PC) (Karen T. Rogers- and Michiyo M. Furukawa- of Milberg Weiss, LLP, of counsel), for appellant. Daniel J. Dunne, Jr.-, Charles J. Ha-, Leonard J. Feldman-, and Christopher Lanese- (of Heller Ehrman, LLP), for respondents. Ά1 AGID, J. Shareholders of Loudeye Corp., a Delaware corporation, appeal the trial court's order dismissing their complaint against Loudeye directors alleging breach of their fiduciary duties in conducting a merger with Nokia Corp. The shareholders assert the trial court improperly considered an exculpatory provision in Loudeye's charter that bars any claims for damages against its directors for breach of the duty of due care and that the complaint sufficiently alleges that the directors breached their fiduciary duties of care, loyalty, and good faith. But Delaware law permits a trial court to dismiss on a CR 12(b)(6) motion claims for breach of the duty of care based on exculpatory provisions in a corporate charter, and the complaint fails to allege sufficient facts to support a claim for breach of the duty of loyalty or good faith. We therefore affirm. FACTS Ά2 Loudeye is a company that provided media content, mostly digital music, for use in cell phones and consumer electronics. In June 2004, Loudeye acquired OD2, a European based provider of digital media store services. In July 2004, Loudeye began collaborating with Nokia about music services offered by OD2. By November 2005, Loudeye and Nokia had entered into a nondisclosure agreement in " 'contemplation of [Loudeye] sharing confidential information with Nokia outside the scope of Loudeye and Nokia's [then] existing commercial relationship.' " Ά3 Loudeye's directors also hired an investment banking firm, Allen and Company, LLC (Allen & Co.), to help them identify strategic partners willing to acquire or merge with Loudeye. According to Loudeye's proxy statement, Allen & Co. was retained because "despite management's cost containment efforts, the revenue generated by Loudeye's two digital store platforms was insufficient to maintain both [the American and European digital music] platforms on a long term basis." The proxy statement notes that in February 2006, two of Loudeye's major United States customers terminated their relationship with Loudeye. Ά4 Working with Allen & Co., Loudeye then contacted at least 72 potential suitors to solicit interest in a merger or acquisition and held discussions with 26 of these suitors, 3 of whom ultimately made offers. In May 2006, Loudeye representatives went to London to make due diligence presentations to Nokia about Loudeye's European business. At the same time, Loudeye representatives conducted due diligence meetings in London and Bristol, United Kingdom, about a potential merger with another company. Ά5 On June 22, 2006, Nokia made an offer to acquire Loudeye in a cash merger at $4.50 per share, subject to certain conditions, including an exclusivity agreement. On the date of the offer, the closing price of Loudeye's stock was $1.66 per share. On June 26, 2006, Loudeye counter offered for $5.00 per share, but Nokia refused the counter offer. Two other companies then submitted offers for prices significantly lower than Nokia's offer. On August 7, 2006, management presented to Loudeye's board of directors a definitive merger agreement with Nokia and the board unanimously voted to approve and recommend it to the stockholders. Ά6 On October 6, before the vote was put to the shareholders, Eli Rodriguez filed this class action lawsuit on behalf of Loudeye shareholders, suing five members of Loudeye's board of directors. The complaint alleged that the directors breached their fiduciary duties by failing to auction, failing to adequately disclose information about other potential offers, and failing to obtain the best price. The complaint also alleged that the board had conflicts of interest, citing a termination agreement entitling Chief Executive Officer (CEO) Michael Brochu to $325,000 if he was terminated without cause on or following the date of the merger. The complaint further alleged that "other control people at Loudeye receive[d] lucrative employment or retention packages" and "other perks, such as accelerated vesting of Loudeye stock options." The complaint then sought relief as follows: preliminary and permanent injunctive and declaratory relief preventing the Defendants from inequitably and unlawfully depriving Plaintiff and the Class of their right to realize the full market value for their stock, by unlawfully entrenching themselves in their positions of control, and to compel the Defendants to carry out their fiduciary duties to maximize shareholder value. Ά7 On October 11, 2006, the stockholders voted on the merger and 90 percent of them voted in favor of the merger. The transaction closed on October 16, 2006. The shareholder class did not make any motions or take any action to enjoin the shareholder vote or the merger closing. On February 21, 2007, defendant directors moved to dismiss the complaint for failure to state a claim and the trial court granted the motion. I. CR 12(b)(6) Dismissal A. Effect of Section 102(b)(7) Exculpatory Provision Ά9 The shareholders first contend the trial court improperly considered an exculpatory provision in Loudeye's certificate of incorporation that bars any claims against its directors for breach of the duty of care. They contend that under Washington procedure, such a provision cannot support a CR 12(b)(6) motion to dismiss. We disagree. Ά11 The three primary fiduciary duties of directors of Delaware corporations are due care, loyalty, and good faith. Ά13 The shareholders argue that the trial court improperly considered the section 102(b)(7) provision because it is an affirmative defense and under Washington procedure cannot support a CR 12(b)(6) motion to dismiss. While they acknowledge that Delaware law allows the provision to bar a claim for breach of the duty of care on a CR 12(b)(6) motion, they assert that this is a matter of Delaware procedure which is not recognized in Washington. They note that while Delaware substantive law applies here, procedure is determined by Washington law. And, without citation to any supporting Washington authority, they assert that section 102(b)(7) director immunity cannot defeat their claims of breach of fiduciary duties on a CR 12(b)(6) motion to dismiss because it must be proved as an affirmative defense. We disagree. Ά15 Here, the conduct challenged in the complaint is the directors' failures to auction, to adequately disclose information about other potential offers, and to obtain the best price, and their conflicts of interest based on their employment or retention packages and accelerated vesting of Loudeye stock options. But to the extent these allegations describe gross negligence in the sale of the corporation, their conduct amounts only to a breach of due care, which is not actionable under section 102(b)(7). B. Allegations of Loyalty and Good Faith Violations Ά16 The shareholders do not point to the allegations that support a claim for breaches of the specific duties of loyalty and good faith, but assert generally that the directors breached all three fiduciary obligations by failing to auction for the best price and disclose adequate details of the negotiations with potential suitor companies, and by benefiting personally from employment or retention packages and accelerated stock vesting. They argue that the duties to disclose and maximize shareholder value implicate all three fiduciary duties of due care, loyalty, and good faith and assert that their allegations that the directors failed to do so establish a breach of all three duties. They further contend that the alleged conflicts of interest establish a breach of the duty of loyalty. We disagree. Ά21 Likewise here, there were no allegations of superior offers or that the nondisclosure agreement in fact prevented a bidder from presenting a superior offer. Nor were there allegations of any conduct "so far beyond the bounds of reasonable judgment" that it had to be attributable to bad faith. Thus, neither the duty of loyalty nor the duty of good faith is implicated by the complaint's allegations of failure to disclose or failure to maximize value. Ά23 The shareholders contend that the complaint establishes that Brochu dominated the board because he failed to bring an unsolicited offer to the board for consideration. But the complaint does not establish that Brochu failed to bring this offer to the board as the shareholders suggest; it simply states that the proxy statement does not disclose whether or not the board considered it. Ά24 Nor does the accelerated vesting of the stock options amount to an adverse or impermissible interest in the merger. Rather, as the directors note, the accelerated vesting establishes that the directors' interests are actually aligned with the shareholders because they are both interested in maximizing the value of their shares. Ά25 Finally, as the directors point out, the situation that typically implicates disloyalty is when the directors in the acquired corporation also have interests in the acquiring corporation or when directors seek to entrench themselves in their positions of control. II. Trial Court's Consideration of Facts outside of the Complaint Ά28 Indeed, Delaware courts have properly considered such provisions in ruling on similar motions to dismiss. In McMillan, the court took judicial notice of a similar exculpatory charter provision in resolving a motion addressed to the pleadings. When the issue is confined to the legal effect of a Section 102(b)(7) charter provision, it is difficult to envision what discovery would be implicated. To be sure, in a due care case where a Section 102(b)(7) charter provision is invoked, a plaintiff could theoretically contest the validity of the charter provision. In such a case, the plaintiff must have a proper basis to claim that the Section 102(b)(7) charter provision presented by the defendants on the Rule 12(b)(6) motion is not authentic, was improperly adopted by the stockholders, or the like. There, the plaintiffs did not contest the existence or authenticity of the section 102(b)(7) charter provision and the court concluded that they "were not deprived of any important procedural right arising from the fact that the trial court considered [defendant company's] 102(b)(7) charter exculpation provision" on a motion to dismiss. Ά32 The invited error cases cited by the directors do not address CR 12(b)(6) motions, and nothing in those cases suggests that the invited error doctrine applies in this context. Rather, they involve challenges to jury instructions by the party who proposed them, which do not apply here. III. Denial of Leave To Amend Ά36 The directors assert that the apparent reason for the denial was futility of amendment, as evidenced by the ruling dismissing the complaint for failure to state a claim. We agree. As we have held, the shareholders failed to allege any facts to support a claim for breach of the duties of loyalty or good faith, and they fail to identify any additional facts that might support such claims. They simply argue that the purported defects in their complaint actually refer to inferences that should be drawn from the facts they have pleaded. Thus, absent any other showing that they could successfully plead these claims, an amendment would be futile. Denial of the motion for leave to amend was therefore within the trial court's discretion. Ά37 We affirm the trial court's dismissal of the complaint and denial of leave to amend. DWYER and LEACH, JJ., concur.