By Anne Sherry, J.D.
A shareholder failed to make the case that Mattel wrongfully refused to attempt to recover $11.5 million in severance and consulting payments from its former chairman and CEO. Mattel’s press release announcing the CEO’s departure characterized it as a resignation, but its proxy statement said he was terminated. Under Delaware law, the Court of Chancery wrote, a forced resignation is a termination, and the shareholder fell short of pleading gross negligence or bad faith in connection with the demand refusal (Andersen v. Mattel, Inc., January 19, 2017, Montgomery-Reeves, T.).
Departure and severance. Bryan Stockton began participating in Mattel’s executive severance plan in 2009. He became CEO in 2012 and chairman in 2013. Mattel’s performance suffered throughout 2014; in January 2015, the company announced that Stockton had resigned. Its next proxy statement said that Stockton had been terminated, qualified for $10 million in severance, and would be paid $125,000 per month under a twelve-month consulting agreement.
Demand refusal. The plaintiff shortly demanded that the board undertake an independent internal investigation into management’s alleged wrongdoing, attempt to claw back any severance already provided, and enter into a standstill agreement with Stockton while this was pending. The board unanimously decided to reject the demand, explaining in its refusal letter that there was no evidence of breach of fiduciary duty. The refusal letter also acknowledged that Stockton had resigned, but that the disclosures about his departure were correct because he did not leave voluntarily. A subsequent letter explained that counsel for the board interviewed 24 people and reviewed over 12,000 documents, but Mattel did not provide those documents or the board’s report as requested by the plaintiff.
Demand triggers business judgment rule. The plaintiff asserted that his demand was wrongfully refused, giving him standing to bring derivative claims for breach of fiduciary duty, unjust enrichment, and waste. The court, however, cited the rule that the making of a demand is a concession that the board is disinterested and independent for purposes of responding. The demand refusal, therefore, is entitled to the business judgment presumption. A plaintiff alleging wrongful refusal must allege particularized facts that raise a reasonable doubt that either the board’s decision was not grossly negligent or that the board acted in good faith.
Pleading inadequate. A grossly negligent investigation, the court wrote, is one where the board did not investigate at all or is so inadequate, in light of the seriousness of the demand, that a court can reasonably infer a breach of the duty of care. The plaintiff did not meet this pleading threshold. Although Mattel did not provide the board report upon the plaintiff’s informal request, making it difficult for the court to fully understand the scope of the investigation, it was the plaintiff’s strategic choice not to seek the report through a Section 220 demand.
The plaintiff also argued that the demand refusal was inexplicable given the merits of the claim: the refusal letter said that the disclosures were “true and correct,” but the disclosures were inconsistent, with one stating Stockton resigned and the other that he was terminated. The court concluded, though, that these arguments inappropriately focused on the merits of the claim and did not cast a reasonable doubt as to whether the refusal was in good faith. A 2016 case dealing with severance payments to Expedia’s CEO after he left the TripAdvisor board observed that Delaware case law holds that a forced resignation is an involuntary termination. There, the board’s determination that the director did not leave voluntarily was not made in bad faith. As in that case, the question was not whether the board’s conclusion was wrong, but whether the board intentionally disregarded Mattel’s best interests in deciding not to pursue the claims.
The case is No. 11816-VCMR.