By Anne Sherry, J.D.
A district court dismissed a shareholder derivative suit alleging that the board of Dow Chemical breached fiduciary duties in connection with alleged urethane price-fixing. By first making demand on the board, the plaintiff conceded the board’s overall independence. The shareholder therefore had to show the board’s refusal to take on the suit was wrongful, which the Eastern District of Michigan held he failed to do (Levine v. Liveris, October 19, 2016, Ludington, T.).
Dow spent about ten years defending allegations of price-fixing in the urethane market; in 2013, judgment was entered against the company in an amount exceeding $1 billion. Following an unsuccessful appeal, Dow settled the class action for $835 million and settled with plaintiffs who had opted out for an additional $450 million. Other defendants in the action settled long before Dow did and for significantly less, the court’s order states. According to the plaintiff, the Dow directors abdicated their business judgment and gave unfettered authority to trial counsel; rejected settlement proposals; and wrongly covered up the potential liability. The shareholder also alleged that the defendants breached their duties in other ways, such as by covering up the misuse of corporate assets.
The board refused the shareholder’s demands to bring suit. By making those demands, the plaintiff conceded that at least a majority of the board was independent and capable of considering the demands. Therefore, the business judgment rule applied to the board’s refusal. Although the investigation committee convened by the board resembled the board as a whole, neither this nor the fact that the committee unanimously rejected the demands constituted a particularized fact creating a reasonable doubt that the refusal was wrongful. The shareholder also did not create a reasonable doubt that the board used sufficient care in selecting an attorney to investigate the demand.
The court also could not take judicial notice of the allegations made or conclusions reached within the urethane price-fixing litigation. The mere fact that Dow was sued for antitrust law violations and found liable was insufficient to establish that the board acted in bad faith. Additionally, the board explained in its demand rejection letter that suing the officers, directors, and employees allegedly engaged in wrongdoing would be counterproductive even if the suit was viable. Suing would undermine Dow’s then-pending appeal, incur substantial legal fees, and cause reputational harm, the board reasoned. A board may refuse a shareholder demand in good faith even if the lawsuit demanded would likely be successful.
The case is No. 16-cv-11255.