Opinion
2:22-cv-01570-CAS-JCx
01-22-2024
In re Faraday Future Intelligent Electric Inc. Derivative Litigation
Attorneys Present for plaintiffs: Pamela Palmer Saadia Hashmi Timothy Brown Robert Moest Attorneys Present for Defendants: Kristin Murphy Alan Kessel Erica Dressler Jay Dubow Mary Weeks William Sears Kathryn Hutchins
Attorneys Present for plaintiffs:
Pamela Palmer
Saadia Hashmi
Timothy Brown
Robert Moest
Attorneys Present for Defendants:
Kristin Murphy
Alan Kessel
Erica Dressler
Jay Dubow
Mary Weeks
William Sears
Kathryn Hutchins
PRESENT: THE HONORABLE CHRISTINA A. SNYDER
CIVIL MINUTES - GENERAL
Proceedings: ZOOM HEARING RE:
PSAC DEFENDANTS' MOTION TO DISMISS (Dkt. 41, filed on September 15, 2023)
DEFENDANT FARADAY FUTURE INTELLIGENT ELECTRIC INC.'S MOTION TO DISMISS (Dkt. 43, filed on September 15, 2023)
DEFENDANTS AYDT, BREITFELD, DENG, KROLICKI, GLASMAN, GOH, JIA, LIU, MCBRIDE, YE, AND WANG'S MOTION TO DISMISS (Dkt. 45, filed on September 15, 2023) DEFENDANTS VOGEL AND SWENSON'S MOTION TO DISMISS (Dkt. 46, filed on September 15, 2023)
I. INTRODUCTION
On March 8, 2022, plaintiff Ashkan Farazmand filed a shareholder's derivative action on behalf of Nominal Defendant Faraday Future Intelligent Electric Inc. f/k/a Property Solutions Acquisition Corp. (“Faraday Future” or the “Company”) against defendants Eduardo Abush, David Amsterdam, Aaron Feldman. Ayi Savar, and Jordan Vogel (collectively, the “PSAC Defendants”), and Carsten Breitfeld, Zvi Glasman, Walter J. McBride, Matthias Aydt, Chaoying Deng, Edwin Goh, Yueting Jia, Brian Krolicki, Lee Liu, Susan Swenson, Scott Vogel, Jiawei Wang, and Qing Ye (collectively with the PSAC Defendants, the “Individual Defendants”). Dkt. 1.
On June 2, 2023, plaintiffs Akshan Farazmand and Wangjun Zhou filed the operative consolidated shareholder derivative action complaint. Dkt. 29 (“AC”).
The operative complaint alleges eight claims for relief. It brings a claim against the PSAC defendants for (1) violating Section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a)(I) and Rule 14a-9 thereunder, 17 C.F.R. § 240.14a-9 (the “Exchange Act”). It brings five state law claims against the Individual Defendants for (2) breaches of fiduciary duties as directors and/or officers of Faraday Future, (3) unjust enrichment, (4) abuse of control, (5) gross mismanagement, and (6) waste of corporate assets. It brings a separate claim against Defendants Breitfeld, Feldman, Glasman, Jia, McBride, and J. Vogel for (7) contribution under Section 10(b)-5, 15 U.S.C. § 78j(b) and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b5(a)-(c), and Section 21D of the Exchange Act, 15 U.S.C. § 78u-4(f). Finally, it brings a claim against Defendants Aydt, Breitfeld, Deng, Glasman, Jia, Krolicki, Wang, and Ye (collectively, the “Legacy FF Defendants”) for (8) aiding and abetting the PSAC Defendants' breaches of fiduciary duty. See generally AC.
On September 15, 2023, the PSAC defendants filed a motion to dismiss. Dkt. 41. Faraday Future filed a separate motion to dismiss. Dkt. 43. Defendants Aydt. Breitfeld, Deng, Krolicki, Glasman, Goh, Jia, Liu, McBride, Ye, and Wang filed a third motion to dismiss. Dkt. 45. Defendants Vogel and Swenson filed their own motion to dismiss as well. Dkt. 46.
On November 30, 2023, plaintiffs filed a consolidated opposition in response to all four motions to dismiss. Dkt. 79 (“Opp.”).
On December 21, 2023, the PSAC defendants and Faraday Future filed their respective replies. Dkt. 83, 80. Defendants Vogel and Swenson also filed a reply. Dkt. 82. On December 29, 2023, defendants Aydt, Breitfeld, Deng, Krolicki, Glasman, Goh, Jia, Liu, McBride, Ye, and Wang filed their reply. Dkt. 85.
On January 22, 2023, the Court held a hearing. Having carefully considered the parties' arguments and submissions, the Court finds and concludes as follows.
II. BACKGROUND
Plaintiffs allege the following facts in their amended complaint.
In 2014, defendant Jia founded FF Intelligent Mobility Global Holdings Ltd. (“Legacy FF” or “Legacy Faraday”) as a California-based automobile start-up company, incorporated under the laws of the Cayman Islands, with the purported purpose of designing and engineering smart electric connected vehicles. AC ¶ 2; dkt. 41-6 at exh. 4. During the relevant period, the company's primary product focus was the “FF 91” crossover vehicle. Id. ¶ 15.
In February 2020, Property Solutions Acquisition Corp. (“PSAC”) was founded as a special purpose acquisition company (“SPAC”). Id. ¶ 3. PSAC was sponsored and controlled by Property Solutions Acquisition Sponsor, LLC (the “Sponsor”), an entity formed by defendants J. Vogel and Feldman. Id. On July 24, 2020, PSAC closed its initial public offering (“IPO”) and became a publicly traded company. Id. ¶ 4.
In October 2020, Legacy FF commenced discussions with PSAC regarding a possible business combination. Id. ¶ 5.
On January 28, 2021, PSAC and Legacy FF issued a joint press release announcing that they had entered into an agreement (the “Merger Agreement”) to “effect a business combination pursuant to which a subsidiary of PSAC would merge with and into Legacy FF, with Legacy FF surviving as a wholly owned subsidiary of PSAC” (the “Merger”). Id. ¶6.
On June 24, 2021, PSAC filed a proxy statement/consent solicitation statement/prospectus with the SEC (the “Proxy Statement”), in which PSAC's board of directors solicited PSAC shareholders' approval of the Merger and in which Legacy FF's board solicited Legacy FF shareholders for approval of the Merger. Id. ¶ 7. Shareholders of both companies approved the Merger. Id. ¶ 7. The Proxy Statement announced that “a wholly-owned subsidiary of PSAC . . . will be merged with and into [Legacy FF] with [Legacy] FF surviving the merger. As a result of the foregoing transactions, [Legacy] FF will become a wholly-owned subsidiary of PSAC.” Dkt. 41-6 exh. 4. The combined company would be renamed Faraday Future Intelligent Electric Inc. (“Faraday Future”).
The Proxy also sought shareholder approval of the Faraday Future's 2021 Stock Incentive Plan (the “2021 Plan”). Id. ¶ 16. As described in the Proxy, the 2021 Plan would be “administered by the compensation committee of the [Faraday Future] board of directors, or a subcommittee thereof, or such other committee designated by the [Faraday Future] board of directors” (the “Plan Committee”). Id. ¶ 224. The Plan Committee would have “the authority to select eligible persons to receive awards and determine all of the terms and conditions of each award.” Id. The Plan Committee “may delegate some or all of its power and authority under the 2021 Plan to the [Faraday Future] board of directors, a subcommittee of the [Faraday Future] board of directors, a member of the [Faraday Future] board of directors, the Chief Executive Officer or other executive officer of [Faraday Future] as the Plan Committee deems appropriate.” Id. The Plan further provided that “officers, other employees, [and] nonemployee directors ... as selected by the Plan Committee” would be eligible to receive long-term equity incentive awards. Id. ¶¶ 16, 225. The aggregate value of cash compensation and grant date fair value of common stock shares for non-employee directors would be capped at $750,000. Id. ¶225.
On July 21, 2021, the Merger was consummated. Id. ¶ 170. Pursuant to the Merger agreement, outstanding shares of Legacy FF and outstanding Legacy FF convertible debt were exchanged for shares of PSAC common stock. Id. ¶ 171.
Simultaneously with the closing of the Merger, PSAC and FF Top Holding LLC (“FF Top”) entered into an agreement regarding the initial composition of Faraday Future's board. Id. ¶ 8. At the time, FF Top was Faraday Future's largest shareholder. Id. ¶ 9. FF Top is indirectly controlled by FF Global Partners LLC (“FF Global”). At the time of the Merger, FF Global's board membership “consisted of Defendants Jia, Wang, Deng, Aydt, and Breitfeld, who were each, immediately prior to the Merger, also serving as Legacy FF's Chief Product and User Ecosystem Officer, Vice President of Global Capital Markets, Vice President of Administration, Senior Vice President of Business Development and Product Definition, and Chief Executive Officer (“CEO”).” Id. ¶ 11. Prior to the Merger, Legacy FF and FF Global had established an equity partnership program which “awards financial benefits to certain [Legacy Faraday] directors, management personnel, and other employees.” Id. ¶ 13. Plaintiffs allege that FF Global is controlled by defendant Jia. Id. ¶ 19.
On October 7, 2021, J Capital Research published a report (the “J Capital Report”) alleging that Faraday Future was unlikely to ever sell a car and that Faraday Future's claimed 14,000 deposits for car reservations were fabricated because 78% of the reservations were made by a single, undisclosed affiliate of Faraday Future. Id. ¶ 22. The J Capital Report further alleged that, while Faraday Future had represented that it would start production in September 2021, former engineering executives did not believe the car was ready for production. Id.
On November 15, 2021, Faraday Future announced that its board of directors had formed a special committee of independent directors (the “Special Committee”), under the direction of defendant Swenson to investigate the claims in the J Capital Report. Id. ¶24.
On February 1, 2022, Faraday Future announced that the Special Committee had completed its investigation. Id. ¶ 26. The Special Committee found that the statements that Legacy Faraday had received more than 14,000 reservations for the FF 91 was “potentially misleading because only several hundred of those reservations were paid, while the others (totaling 14,000) were unpaid indications of interest.” Id. The Special Committee investigation additionally identified certain weaknesses in corporate controls and recommended remedial actions to enhance oversight. Id.
As a result of the Special Committee's investigation, the Board implemented remedial actions. Id. ¶ 247. Specifically, defendant Swenson was appointed to the newly created position of Executive Chairperson of the Company. Id. Defendants Breitfeld and Jia would report directly to Swenson. Id. S. Vogel was appointed Lead Independent Director and became Chair of the Audit Committee and the Nominating and Corporate Governance Committee. Id. Krolicki stepped down as Chairman of the Board. Id.
On March 8, 2022, plaintiff Farazmand filed a shareholder derivative complaint on behalf of Faraday Future. At the time, the board was composed of nine directors, including three officer-employees of Faraday (Breitfeld, Aydt, and Ye), and six non-employees of Faraday Future (Goh, Krolicki, Liu, Swenson, J. Vogel, and S. Vogel). Farazmand did not make a pre-suit demand.
Two other lawsuits relating to this matter have been filed: (1) Zhou v. Faraday Future Intelligent Electric. Inc., et al.. No. 2:21-cv-09914 (C.D. Cal.) (the “Federal Securities Action”) and (2) In re Faraday Future Intelligent Electric Inc. Stockholder Litigation. C. A. No. 2022-0845-LWW (Del. Ch.) (the “Delaware Direct Action”).
III. LEGAL STANDARD
A motion pursuant to Federal Rule of Civil Procedure 12(b)(6) tests the legal sufficiency of the claims asserted in a complaint. Under this Rule, a district court properly dismisses a claim if “there is a ‘lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory.' ” Conservation Force v. Salazar, 646 F.3d 1240, 1242 (9th Cir. 2011) (quoting Balisteri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1988)). “While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff s obligation to provide the ‘grounds' of his ‘entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Bell Atlantic Corp, v. Twombly, 550 U.S. 544, 555 (2007). “[F]actual allegations must be enough to raise a right to relief above the speculative level.” Id.
In considering a motion pursuant to Rule 12(b)(6), a court must accept as true all material allegations in the complaint, as well as all reasonable inferences to be drawn from them. Pareto v. FDIC. 139 F.3d 696, 699 (9th Cir. 1998). The complaint must be read in the light most favorable to the nonmoving party. Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001). However, “a court considering a motion to dismiss can choose to begin by identifying pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth. While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations.” Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009); see Moss v. United States Secret Service. 572 F.3d 962, 969 (9th Cir. 2009) (“[F]or a complaint to survive a motion to dismiss, the non-conclusory ‘factual content,' and reasonable inferences from that content, must be plausibly suggestive of a claim entitling the plaintiff to relief”). Ultimately, “[determining whether a complaint states a plausible claim for relief will... be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Iqbal, 556 U.S. at 679.
Unless a court converts a Rule 12(b)(6) motion into a motion for summary judgment, a court cannot consider material outside of the complaint (e.g., facts presented in briefs, affidavits, or discovery materials). In re American Cont'l Corp./Lincoln Sav. & Loan Sec. Litig., 102 F.3d 1524, 1537 (9th Cir. 1996), rev'd on other grounds sub nom Lexecon, Inc, v. Milberg Weiss Bershad Hynes & Lerach, 523 U.S. 26 (1998). A court may, however, consider exhibits submitted with or alleged in the complaint and matters that may be judicially noticed pursuant to Federal Rule of Evidence 201. In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 986 (9th Cir. 1999); see Lee v. City of Los Angeles, 250 F.3d 668, 689 (9th Cir. 2001).
As a general rule, leave to amend a complaint which has been dismissed should be freely granted. Fed.R.Civ.P. 15(a). However, leave to amend may be denied when “the court determines that the allegation of other facts consistent with the challenged pleading could not possibly cure the deficiency.” Schreiber Distnb. Co. v. Serv-Well Furniture Co., 806 F.2d 1393, 1401 (9th Cir. 1986).
IV. DISCUSSION
A. State Law Claims and Contribution Claims
In its consolidated opposition, plaintiffs “consent to [defendants' requests for the Court to sever” their “state law claims.” Opp. at 4. They also “acknowledge that their contribution claims under Section 10(b) and 2 ID of the Exchange Act [against defendants Breitfeld, Feldman, Glassman, Jia, McBride, and J. Vogel] may no longer be viable.” Id. at 1-2. They appear to concede that their only remaining claim is for “alleged violations of Section 14(a) of the Exchange Act,” which they bring only against the PSAC defendants. Id. at 2; AC ¶¶ 359-368.
Defendants argued that “PSAC's Amended and Restated Certificate of Incorporation contains an enforceable forum-selection clause that designates the Delaware Court of Chancery as the ‘sole and exclusive forum for . . . any action asserting a claim of breach of fiduciary duty owed by any director, officer or other employee of the Corporation.'” Dkt. 41 at 10. As such, they request that the court “sever any claims subject to th[is] forum-selection clause and then dismiss them on forum non conveniens grounds.” Id. Given the plaintiffs' consent, the parties appear to agree that the severed state law claims should be dismissed from this action and litigated in Delaware pursuant to the forum-selection clause.
Accordingly, the Court GRANTS defendants Aydt, Breitfeld, Deng, Krolicki, Glasman, Goh, Jia, Liu, McBride, Ye, and Wang's motion to dismiss and GRANTS defendants Vogel and Swenson's motion to dismiss. The Court also GRANTS in part the PSAC defendants' motion to dismiss as to the state law claims.
B. Claim Against PSAC Defendants for Violation of Section 14(a) of the Exchange Act
1. Standing
The PSAC defendants argue that plaintiffs lack standing to bring claims against them for alleged violations of Section 14(a) of the Exchange Act. They argue that “[p]laintiffs must own stock in a company to bring a derivative claim on behalf of that company.” Dkt. 41 at 7. Here, “neither of the named plaintiffs pleads that he ever owned PSAC stock prior to the Merger.” Id. Therefore, plaintiffs allegedly “do not have standing to bring a derivative claim for any pre-merger conduct-including any claims based on purported disclosure violations.” Id. Moreover, even if plaintiffs held PSAC stock at one time, they still would not have standing to sue PSAC because “PSAC no longer exists” after the merger. Id. at 2.
The PSAC defendants also argue that “any derivative liability would have been extinguished at the time the [m]erger was complete” because former shareholders of a merged corporation can no longer satisfy the continuous ownership requirement of FRCP 23.1. Dkt. 41 at 8 (citing Lewis v. Anderson, 477 A.2d 1040, 1047 (Del. 1984); Ark-Teacher Ret. Sys. v. Countrywide Fin. Corp., 75 A.3d 888, 894 (Del. 2013)).
Additionally, while defendant Vogel did serve as a board member of post-merger Faraday Future up until his resignation in October 2022, the PSAC defendants argue that plaintiffs' claims against him must be dismissed because “Faraday [Future] and [] Vogel entered into an agreement. . . releasing] him from any claims during his time on the Faraday [Future] board of directors.” Id.
The PSAC defendants attach a copy of the release as an exhibit. See dkt 41 at exh. 2. They request that the Court take judicial notice of the release and, in the alternative, argue that a press release referring to the release is cited directly in the complaint. Dkt. 83 at 6.
In opposition, plaintiffs argue that they “have effectively established their standing to pursue derivative claims on behalf of Faraday [Future].” Opp. at 21. They claim their complaint sufficiently alleges that each of the plaintiffs were “current” shareholders of Faraday [Future] and “held Faraday [Future] common stock at all relevant times.” Id. at 21-22 (citing AC ¶¶ 48-49). Additionally, they attach a declaration alleging that “[p]laintiff Zhou first purchased [PSAC] stock ... on January 11, 2021, before the defined relevant period in the Derivative Action began and has continuously owned thousands of PSAC shares since February 22, 2021.” Dkt. 76-1 ¶ 5. Plaintiffs' complaint identifies Faraday Future as “Faraday Future Intelligent Electric Inc. f/k/a Property Solutions Acquisition Corp.”, suggesting that they believe the entities are one-and-the-same. Id. at 22. In plaintiffs' eyes, PSAC “still exists” and has merely “changed its name” and “adopted a new business model” after using newly issued shares to acquire Legacy FF as a “wholly owned subsidiary.” Id. at 22-23.
Similarly, plaintiffs argue that their claims are not barred by FRCP 23.1 's continuous share ownership requirement simply because “PSAC changed its name to Faraday [Future] in connection with the Merger.” Opp. at 22. They distinguish the cases cited by the PSAC defendants as primarily addressing “traditional mergers” rather than “de-SPAC merger transactions” like the one in this case. Id. (internal quotations omitted). They argue that courts have “recognized the importance of derivative actions in SPAC cases” by noting that “target companies pursuing a potential merger could still be held accountable for material misstatements through ... shareholder derivative suits.” Id. at 23 (citing In re CarLotz, Inc. Sec. Litig,, 2023 WL 2744064 (S.D.N.Y. Mar. 31, 2023)). Moreover, plaintiffs contend that even traditional merger cases have set forth exceptions permitting non-shareholders to maintain derivative suits. Id. (citing Blue v. Fireman. 2022 WL 593899, at *6 (Del. Ch. Feb. 28, 2022)).
Additionally, plaintiff argues that plaintiff Farazmand has standing under the “continuous wrong” doctrine, which notes that “the time at which stock must have been purchased” for standing purposes depends on “whether the wrong complained of is ... a continuing one or is one which has been consummated. Opp. at 24 (quoting Shreiber v. Bryan. 396 A.2d 512 (Del. Ch. 1978)). In their supplemental declaration, plaintiffs claim that Farazmand “has owned [PSAC] shares continuously since September 27, 2021” “while the alleged wrong was continuing and ongoing.” Dkt. 76-1 ¶ 6; Opp. at 24.
Finally, plaintiffs argues that the Court should not consider whether “release language in another case” extends to claims in this action at this stage. Opp. at 24. They contend that the release agreement between Vogel and Faraday Future did not identify the “specific claims and issues raised in [this] action,” and that they have not conceded the release would cover the claims against Vogel. Id.
In reply, the PSAC defendants argue that “courts routinely dismiss complaints for lack of standing where . . . plaintiffs only allege that they owned stock in a company ‘at all relevant times.'” Dkt. 83 at 3 (citing Hawaii Laborers Pension Fund ex rel. THQ, Inc, v. Farrell, 2007 WL 5255035, at *8 (CD. Cal. Aug. 23, 2007)). They also note that plaintiffs “cannot amend their [c]omplaint through their [opposition.” Id. at 4.
The PSAC defendants additionally contend that plaintiffs “mischaracterize[] the nature of a de-SPAC transaction” as a “mere reorganization.” Dkt. 83 at 4. They explain that a “pre-merger SPAC is a shell corporation with no business plan or operations at all, formed solely for the purpose of acquiring an operating company and taking it public. There are no operations to reorganize.” Id. (internal citations omitted). Here “PSAC merged with Legacy Faraday to create the combined entity - Faraday [Future], and PSAC's shareholders became Faraday [Future] shareholders.” Id. The PSAC defendants characterize the suggestion in In re Carlotz Inc. Sec. Litig. that target companies in de-SPAC mergers may be subject to “shareholder derivative suits” as mere dicta that “says nothing about whether [p]laintiffs . .. comply with the continuous ownership requirement.” Id. at 5.
Regarding the continuous wrong doctrine, the PSAC defendants argue that “the alleged wrongdoing by the PSAC [d]efendants occurred only prior to [m]erger, before the new public Faraday [Future] stock was issued.” Dkt. 83 at 5. They claim that plaintiffs “d[o] not meaningfully address” defendants' argument that “standing extinguishes upon consummation of a merger.” Id.
The Court finds that plaintiff Zhou has standing to bring derivative claims against the PSAC defendants. The terms of the Proxy Statement indicate that, as a result of the Merger, Legacy FF became a “wholly-owned subsidiary of PSAC.” See dkt. 41-6 exh. 4. PSAC was subsequently renamed Faraday Future Intelligent Electric Inc. (i.e., “Faraday Future”). Plaintiffs allege that they “continuously held Faraday [Future] common stock at all relevant times.” AC ¶¶ 48-49. They have specified that Zhou “first purchased [PSAC] stock ... on January 11, 2021, before the defined relevant period in the Derivative Action began and has continuously owned thousands of PSAC shares since February 22, 2021.” This is sufficient to provide him with standing to bring derivative claims on behalf of Faraday Future (formerly PSAC) against the PSAC defendants for alleged violations of Section 14(a) of the Exchange Act.
However, the Court finds that plaintiff Farazmand lacks standing to bring derivative claims against the PSAC defendants. Farazmand has allegedly “owned [PSAC] shares continuously since September 27, 2021,” which is after the Merger was consummated. See dkt. 76-1 ¶ 6. While plaintiffs argue that Farazmand nevertheless has standing under the “continuous wrong” doctrine, Delaware law makes it clear that “what must be decided is when the specific acts of alleged wrongdoing occur, and not when their effect is felt.” Schreiber v. Bryan. 396 A.2d 512, 516 (Del. Ch. 1978). Here, plaintiffs claim for Section 14(a) violations is premised on alleged misrepresentations in connection with the Proxy Statement that PSAC issued on June 24, 2021. That is when the specific acts of alleged wrongdoing occurred, regardless of whether Faraday Future continues to suffer the effects of the alleged wrongdoing later on. Farazmand thus lacks standing because he has not sufficiently alleged ownership of PSAC stock at the times relevant to his claims.
Accordingly, the Court GRANTS in part and DENIES in part the PSAC defendants' motion to dismiss. The Court finds that plaintiff Zhou has standing to bring his derivative claims, but plaintiff Farazmand does not.
2. Demand Futility
Plaintiffs in a derivative suit must “state with particularity: (A) any effort by the plaintiff to obtain the desired action from the directors or comparable authority and, if necessary, from the shareholders or members; and (B) the reasons for not obtaining the action or not making the effort.” Fed.R.Civ.P. 23.1(b)(3).
Delaware law applies to the issue of demand futility in this case i.e., the law of Faraday Future's state of incorporation. See Arduini v. Hart, 774 F.3d 622, 628 (9th Cir. 2014) (“A court looks to the law of the state of incorporation to determine when demand would be futile.”). Under Delaware law, courts ask three questions on a director-by-director basis when evaluating allegations of demand futility:
(i) whether the director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand;
(ii) whether the director faces a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand; and
(iii) whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct that would be the subject of the litigation demand or who would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand.
If the answer to any of the questions is “yes” for at least half of the members of the demand board, then demand is excused as futile.United Food & Com. Workers Union & Participating Food Indus. Emps. Tri-State Pension Fund v. Zuckerberg, 262 A.3d 1034, 1059 (Del. 2021).
The parties have identified two potentially relevant boards: the Initial Board (i.e., the nine-member board in place when plaintiffs filed their initial complaint on March 8, 2022) and the Current Board (i.e., the seven-member board in place when the operative consolidated complaint was filed on June 2, 2023). See Opp. at 3. The Initial Board was composed of nine directors, including three officer-employees of Faraday Future (Breitfeld, Aydt, and Ye), and six non-employees of Faraday Future (Goh, Krolicki, Liu, Swenson, J. Vogel, and S. Vogel). Dkt. 43-1 at 7; dkt. 79 at 26.
Defendants argue that plaintiffs' claims should be dismissed for failure to meet Rule 23.1 's pleading requirements regarding demand futility. As a threshold matter, they contend that Faraday Future's “Initial Board is the only relevant demand-board.” Dkt. 43-1 at 11 (capitalization omitted). They assert that, “[i]n the case of an amended complaint, as here, a plaintiff must plead demand futility with respect to the board when the original complaint was filed[,] even if the board changes composition,” if the original complaint was (1) pled as a derivative action, (2) satisfied the legal test for demand excusal, and (3) is based on “essentially the same . . . act or transaction challenged” in the amended complaint. Id. at 11-12 (citing Braddock v. Zimmerman. 906 A.2d 776, 785 (Del. 2006)). Here, defendants argue that the amended complaint's claims “are essentially the same as the original complaint.” Id. at 12; see AC ¶ 333 (alleging “this [amended] complaint contains no new claims, [and] its scope [is] limited to bolstering existing claims [originally set forth in the Original Complaint]”).
Plaintiffs argue, “[o]ut of an abundance of caution, . . . [that] even if demand as to the Initial Board would not have been futile, . . . demand as to the Current Board would [ be[].” Opp. at 40. They contend that “[defendants' demand futility challenge must be denied as long as the Court holds that [p]laintiffs pled that demand would have been futile as to the Initial Board or .. . as to the Current Board.” Id. At the hearing, they argued that “[t]he practical effect of the ‘validly in litigation' standard is that a plaintiff gets two bites at the demand futility apple.” UFCW Loc. 1500 Pension Fund v. Mayer, No. 16-CV-00478-RS, 2016 WL 6122458, at *3 n.2 (N.D. Cal. Oct. 19, 2016), aff'd, 895 F.3d 695 (9th Cir. 2018).
The Court finds that the Initial Board is the relevant demand-board. In Braddock, the Delaware Supreme Court held that, “when an amended derivative complaint is filed, the existence of a new independent board of directors is relevant to a Rule 23.1 demand inquiry only as to derivative claims in the amended complaint that are not already validly in litigation.” 906 A.2d at 786. It defined the term “validly in litigation” to mean “a proceeding that can or has survived a motion to dismiss.” Id. at 779. The UFCW Loc. 1500 Pension Fund court similarly recognized that, “[i]f [] claims were validly in litigation when an old board was in control, then demand futility is evaluated with respect to that old board.” 2016 WL 6122458, at *3 n.2. Here, plaintiffs have conceded that their amended complaint “contains no new claims, [and is] limited to bolstering existing claims.” AC ¶ 333. They further conceded that the claims in their amended complaint are “validly in litigation” and that “demand futility may appropriately be examined with respect to the membership of the Initial Board on March 8, 2022.” Id. Indeed, the Court has already found that plaintiffs' claim for violations of Section 14(a) survives the PS AC defendants' motion to dismiss for lack of standing. See infra Part IV.B. 1.
Regarding demand futility, the Court finds that plaintiffs failed to plead that demand was futile because at least five directors on the Initial Board (S. Vogel, Goh, Liu, Swenson, and Krolicki) did not receive a material benefit from the challenged conduct, did not face a substantial likelihood of personal liability, and were independent. Because the Court has made this determination for five of the nine directors (which is sufficient to support a finding that demand was not excused) it does not make specific findings regarding the remaining four directors (Breitfeld, Aydt, Ye, and J. Vogel). Even if the Current Board was the relevant board, the Court finds that plaintiffs have still failed to plead that demand was futile.
The Court analyzes demand futility for each board in turn.
a. Initial Board
(1) Material Personal Benefit
Defendants argue that plaintiffs “do[] not specify how any Initial Board member . . . received a material personal benefit from the challenged conduct.” Dkt. 43-1 at 13 (internal quotations omitted). They emphasize the absence of allegations that any director either appeared on both sides of a transaction or expected to derive personal financial benefit from a transaction. Id. They focus particularly on four of the non-employee directors (Swenson, S. Vogel, Liu, and Goh) who “had no prior affiliation whatsoever with Legacy [FF] or PSAC and were only appointed to the Board after the Merger.” Id. at 7, 13. They also note that Krolicki “served as an independent non-employee director of Legacy [FF] . . . and is not alleged to have engaged in any of the underlying conduct at issue. Id. at 7-8. None of these five directors (S. Vogel. Goh, Liu, Swenson, and Krolicki) is named as defendants in any action against Faraday Future. Id. at 8.
In opposition, plaintiffs argue that the Initial Board members received material personal benefits as a result of the “false and misleading elements of the Merger Proxy” and the corresponding 2021 Stock Incentive Plan (the “2021 Plan”). Dkt. 79 at 27-28. Specifically, the Proxy and 2021 Plan provided that directors would be eligible to receive $150,000 in restricted stock units (“RSUs”) and additional premiums of RSUs based on committee membership. Id. at 28. Plaintiffs contend that, under Delaware law, “stock option grants represent a material benefit to each individual director permitted to receive them, and no showing is required to demonstrate the materiality of the benefits.” Id. (citing London v. Tyrrell, 2008 WL 2505435, at *5 (Del. Ch. 2008)).
Plaintiffs argue that, while Krolicki ultimately resigned from the Initial Board in October 2022, he resigned with “a hefty payout of $462,980 . . . and received 103,619 stock options tied to the Merger in July 2021.” Dkt. 79 at 30. Additionally, while Swenson “overs[aw] the Special Committee investigation that resulted in the Initial Board appointing S. Vogel as the new chair,” she too allegedly materially benefitted from the underlying misconduct. Her alleged involvement in the Special Committee investigation led to her appointment as Executive Chairperson, “which entitled her to a monthly base salary of $100,000 and millions of dollars' worth of stock options.” Id. at 32. She received $2,731,488 in total compensation in 2022 and 700,935 stock options under the 2021 Plan. Id. Next, plaintiffs argue that S. Vogel ultimately replaced Swenson as Chair of the Audit Committee and Krolicki as Chair of the Nominating and Corporate Governance Committee after the Special Committee investigation, before resigning in October 2022 with a payout of $528,235. Id. at 33. Finally, plaintiffs allege that, while Goh and Liu's “salary packages in 2021 were not noteworthy beyond their potential to receive lucrative awards under the 2021 Plan, they, too, resigned ... in December 2022, with handsome fees and significant stock awards.” Id. Overall, plaintiffs conclude that these Initial Board members would have received none of these benefits if shareholders “had not been induced into approving the Merger, the 2021 Plan, and related terms and proposals on false pretenses.” Id.
Plaintiffs make specific arguments explaining how Breitfeld, Aydt, Ye, and J. Vogel allegedly received material personal benefits from the Merger. Dkt. 79 at 29-32. However, defendants appear to focus primarily on the conduct of S. Vogel, Goh, Liu, Swenson, and Krolicki. Dkt. 43-1 at 7, 8, 13.
In reply, defendants argue that it is well-established that “[director compensation alone cannot create a reasonable basis to doubt a director's impartiality.” Dkt. 80 at 4 (quoting In re Kraft Heinz Co. Deny. Litig, No. 2019-0587, 2021 WL 6012632, at *11 (Del. Ch. Dec. 15, 2021)). Moreover, the 2021 Plan allegedly “cannot constitute a material benefit as it only made the directors eligible to receive stock-based compensation” and “did not award stock to any directors.” Id. at 5 (emphasis in original). Plaintiffs also allegedly “do not challenge the veracity of any statements in the Proxy related to the 2021 Plan.” Id. Defendants contend that plaintiffs fail to allege that the Initial Board directors “stood to receive director compensation in excess of what directors at comparable companies would receive, which is the required showing.” Id. at 5-6 (citing In re Corinthian Colls.. Inc. S'holder Deriv. Litig., No. 10-1597, 2012 WL 8502955, at *11 (CD. Cal. Jan. 30, 2012)). They assert that “[s]imply pointing out. . . year-over-year [increases in compensation] holds no weight.” Id. at 6. They note that references to board member “severance packages and compensation for directors after March 2022 when [p]laintiffs filed this action” have “nothing to do with the 2021 Plan” and should be disregarded. Id. Further, defendants emphasize that there is “no authority for the proposition that compensation for service on a post-merger board disqualifies that board from considering a pre-suit demand challenging a merger proxy.” Id. at 7. Moreover, even if post-Merger compensation was relevant, plaintiffs allegedly failed to show that “the compensation to each Initial Board member . .. was material to that director.” Id. (emphasis in original). Specifically, plaintiffs do not plead any facts showing that the Initial Board members' “economic circumstances” made it such that “future stock awards or RSUs were so valuable that they would be too interested to consider a demand related to the Proxy.” Id. at 8. Five of the Initial Board members were outside directors “not employed by [Faraday Future], and [] not depend[ent] on [Faraday Future's] post-Merger existence for their livelihoods.” Id. Defendants also dispute plaintiffs' claim that “no showing is required to demonstrate the materiality of [stock option grants as] benefits.” Id. at 9. Instead, they assert that “the mere fact that a director received equity compensation does not per se make the director conflicted”; rather, plaintiffs' cases suggest that directors are interested when they stand on both sides of the challenged transaction. Id., at 9-10. Here, plaintiffs allegedly challenge only the “issuance of an allegedly misleading Proxy” and “do not challenge any self-awarded stock options by the Initial Board.” Id. at 10. Defendants argue that any claim that directors “stood on both sides of the Merger's . . . execution” is not supported by any well-pled facts, particularly since “four of the non-employee Initial Board directors -Swenson, S. Vogel, Liu, and Goh - had no affiliation with Legacy Faraday or PSAC prior to the Merger, and a fifth director, Krolicki, served as a non-employee outside director of Legacy Faraday.” Id.
The Court finds that plaintiffs have not shown that S. Vogel, Goh, Liu, Swenson, and Krolicki received a material benefit from the challenged conduct. Under Delaware law, “[d]irector compensation alone cannot create a reasonable basis to doubt a director's impartiality.” In re Kraft Heinz Co. Deriv. Litig, 2021 WL 6012632, at *11. Plaintiffs cite London for the apparent proposition that stock option grants are per se material benefits i.e., “there is no need demonstrate the materiality of [stock option] benefits.” Opp. at 27-28 (citing London, 2008 WL 2505435, at *5). However, in London, the court did not establish a per se rule for stock option grants. Rather, it found that the relevant directors had received a material personal benefit because they “stood on both sides of the transaction that plaintiffs are challenging: the defendants both granted and received the stock options.” London, 2008 WL 2505435 at *11. Here, there is no allegation that the 2021 Plan explicitly enumerated stock option grants for any of the relevant directors. Contra Ausikaitis on behalf of Masimo Corp, v. Kiani, 962 F.Supp.2d 661, 676 (D. Del. 2013) (finding that demand was futile when each of the relevant directors “granted to himself. . . stock options”) (emphasis added). Rather, the 2021 Plan imbued the Plan Committee with “the authority to select eligible persons [including directors] to receive awards and determine all of the terms and conditions of each award.” AC ¶ 224. In other words, the 2021 Plan provided directors with “access to awards” without a guarantee or a specific amount in mind. Opp. at 30. The Plan additionally capped total compensation for non-employee directors at $750,000. AC ¶ 225. To the extent this cap is construed as the upper bound of any potential stock grant, plaintiffs have failed to plead that an award of $750,000 would be material in light of any of the directors' individual economic circumstances or that such an award would be disproportionate to their position. See Freedman v. Adams, No. CIV.A. 4199-VCN, 2012 WL 1345638, at *6 (Del. Ch. Mar. 30, 2012) (finding that “materiality is assessed based upon the individual director's economic circumstances”); Litt v. Wycoff, 2003 WL 1794724, at *10 (Del. Ch. Mar. 28, 2003) (dismissing on demand futility grounds in the absence of “particularized allegations” that director's compensation was disproportionate).
Accordingly, the Court finds that plaintiffs failed to show that S. Vogel, Goh, Liu, Swenson, and Krolicki received a material benefit from the challenged conduct that would render demand on the Initial Board futile.
(2) Substantial Likelihood of Personal Liability
Defendants argue that plaintiffs failed to adequately plead a substantial likelihood of personal liability as to any director. Specifically, they contend that plaintiffs failed to “specifically allege non-exculpated liability for breach of the fiduciary duty of loyalty to [Faraday Future]” i.e., “pleading that [each] director acted with scienter.” Dkt. 43-1 at 14. They note that Faraday Future's Certificate of Incorporation exculpates all corporate directors from monetary liability for breaches of the duty of care, meaning the only potentially non-exculpated liability is for breaches of the duty of loyalty. Id. Next, they assert that plaintiff s have failed to adequately plead Caremark liability for “failure of oversight” because they failed to show bad faith, overlook the policies and controls set forth in Faraday Future's Audit Committee Charter, fail to allege “red flags” that would have alerted the Initial Board to alleged misstatements or omissions, and fail to plead particularized allegations about each board member's alleged role and conduct. Id. 1516; see In re Caremark Int'l Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996).
In opposition, plaintiffs argue that Breitfeld and J. Vogel face a substantial likelihood of liability for issuing false and misleading statements in the Merger Proxy in violation of federal securities laws. Dkt. 79 at 37. They argue that Breitfeld is a named defendant in the Securities Class Action, and J. Vogel is a named defendant in each of the Class Actions “which bring forth claims related to the Merger Proxy and Merger that overlap with certain claims in this [] [a]ction.” Id. Plaintiffs contend that the Court has “already found that these [defendants made and were responsible for making challenged statements . . . outlined in th[is] [a]ction” by “largely den[ying] defendants' motion to dismiss . . . filed in [the Securities Class Action].” Id. at 37-38.
In reply, defendants argue that plaintiffs “concede that the other seven members ha[ve] no [] ‘substantial likelihood of liability' with respect to the Proxy at issue.” Dkt. 80 at 11. They contend that “claims based on negligence, [] like [p]laintiffs' section 14(a) claim . . ., are by definition exculpated” by the exculpatory provision in Faraday Future's COI. Id. at 11-12. They also object to plaintiff s invocation of this Court's ruling on the motion to dismiss in the Securities Class Action, as that decision “was not until October 20, 2022 - seven months after this action was filed in March 2022.” Id. at 13. Asa result, this decision “could not have impacted “any Initial Board member's state of mind as to any ‘substantial likelihood of liability' in considering a demand.” Id. Moreover, the Court's decision did not establish that the Merger Proxy was materially false; it merely found that plaintiffs' allegations “were sufficient to state a Section 14(a) claim.” Id.
The Court finds that, regardless of whether Breitfeld and J. Vogel face a substantial likelihood of liability, plaintiffs have failed to present sufficient evidence as to the other directors (including S. Vogel, Goh, Liu, Swenson, and Krolicki). Where a corporation's articles of incorporation exculpates directors from personal monetary liability, in order for a plaintiff to plead with particularity demand futility in a shareholder derivative action under Delaware law, “a plaintiff must plead bad faith by alleging with particularity that a director knowingly violated a fiduciary duty or failed to act in violation of a known duty to act, demonstrating a conscious disregard for her duties.” Towers v. Iger, 912 F.3d 523, 529 (9th Cir. 2018) (applying Delaware law) (emphasis in original). Here, plaintiffs have failed to adequately plead bad faith on the part of a majority of the directors in their amended complaint. Accordingly, plaintiffs have not adequately pled that a majority of the Initial Board faced a substantial likelihood of liability.
(3) Independence
Defendants argue that plaintiffs fail to plead facts demonstrating that a majority of the Board lacked independence from an interested person (such as Jia) or such that they would have been unable to exercise independent business judgment on a demand. They first note that directors “are presumed independent and disinterested under Delaware law.” Dkt. 43-1 at 16 (citing Miramar Firefighters Pension Fund v. AboveNet, Inc., No. 7376, 2013 WL 4033905, at *3 (Del. Ch. July 31, 2013)). They argue that the mere fact that a director receives fees for their services “adds little to nothing to demand-futility analysis without more.” Id. at 18 (citing Khanna v. McMinn, No. 20545, 2006 WL 1388744, at *16 (Del. Ch. May 9, 2006)). They further contend that plaintiffs fail to allege that such fees or directors were “material[] as to each director.” Id. Defendants also assert that “the mere fact that.. . Breitfeld, Aydt, and Ye[] were [Faraday Future] officers” is insufficient to establish that any of them lacks independence. Id. (citing Forestal v. Caldwell, 739 Fed.Appx. 895, 898 (9th Cir. 2018)). Nor are Breitfeld and Ye's positions on the Finance and Investment Committees admissions that the two directors are non-independent. Id. Defendants also argue that that the fact that “J. Vogel and S. Vogel are brothers . . . has no bearing on their ability to execute their fiduciary duties independently.” Id. at 19 (citing Venhill Ltd. P'ship ex rel. Stallkamp v. Hillman. No. 1866, 2008 WL 2270488, at *23 (Del. Ch. June 3, 2008)).
In opposition, plaintiffs argue that Aydt, Breitfeld, Swenson, and Ye, as “directors and executives at [Faraday Future],” were beholden to defendant Jia and thus lacked independence. Dkt. 79 at 34-35. FF Global allegedly “exerts influence over [Faraday Future's] management through [its] issuance of equity interests as additional compensation to [Faraday Future's] management.” AC ¶ 350. Plaintiffs contend that FF Global “was and is controlled by Defendant Jia, FF Global's ‘managing partner.'” Dkt. 79 at 35. Thus, plaintiffs claim that Aydt. Breitfeld, Swenson, and Ye are beholden to Jia “due to FF Global's ability to grant additional compensation to [Faraday Future's] management.” Id.
In reply, defendants note that “four of nine directors is short of the necessary Initial Board majority” to plead demand futility. Dkt. 80 at 13. They also argue that the shortfall is “actually greater since Swenson was never an officer or employee of [Faraday Future] or FF Global.” Id. Rather, “Swenson joined the [Faraday Future] Board after the Merger, having no prior affiliation with either PSAC or Legacy Faraday.” Id. at 14 (emphasis in original). Defendants further contend that plaintiff “fails to identify any particularized facts demonstrating that Aydt, Breitfeld, and Ye - much less Swenson -lacked independence from Jia . . . or any other Individual Defendant.” Id. They assert that the receipt of compensation for their service as officer-members “fails, in itself, to show a lack of independence.” Id. (citing In re Sagent Tech.. Inc.. Deny. Litig.. 278 F.Supp.2d 1079, 1089 (ND. Cal. 2003)).
The Court finds that plaintiffs fail to adequately plead that a majority of the Initial Board lacked independence. Plaintiffs argue that Swenson was beholden to defendant Jia. However, Swenson had no prior affiliation with either PSAC or Legacy Faraday and only joined Faraday Future's board after the Merger. In the aftermath of the J Capital Report, the board appointed Swenson to lead the Special Committee Investigation. After the conclusion of the investigation, she was appointed to the newly created position of Executive Chairperson. The mere fact that Swenson receives compensation for her services is insufficient to show lack of independence. Accordingly, the Court finds that plaintiffs have not adequately alleged that Swenson (or S. Vogel, Goh, Liu, and Krolicki) lacks independence.
b. Current Board
Even if the Current Board were the relevant board, the Court finds that plaintiffs have still failed to plead that demand was futile. At the time of the filing of the amended complaint, the Board consisted of seven individuals: “non-parties Xuefeng Chen, Chui Tin Mok, Adam He, Chad Chen, Jie Sheng, Ke Sun, and Li Han.” AC ¶ 313. Xuefeng Chen and Chui Tin Mok were executives at the time the amended complaint was filed, while the other five were outside directors. Id. ¶¶ 313, 322-28. All assumed their director roles in 2022 i.e., after the challenged Proxy. Dkt. 80 at 16.
Plaintiff argues that each of the directors on the Current Board: “(1) received material benefits in the form of awards made under the 2021 Plan, Earnout Shares, and/or FF Global units through the Partnership Program: and/or (2) were controlled by and beholden to FF Global, managed by Defendants Jia, Wang, and Deng.” Opp. at 40; see AC ¶¶ 314-330. Because plaintiffs do not appear to argue that any of the Current Board members face a substantial likelihood of personal liability, the Court addresses only the material personal benefit and independence prongs of the demand futility analysis.
(1) Material Personal Benefit
Plaintiffs argue that “six of the seven current directors received material benefits from the merger, merger proxy, and/or partnership program.” Opp. at 40 (capitalization omitted). They allege that Chui Tin Mok received 11,314 Earnout Shares with the close of the Merger and that all of the directors (except for Li Han) “received material benefits from the 2021 Plan” in the form of stock options and RSUs. Id. at 40-41.
Defendants argue that “[t]he only compensation allegations in the [amended complaint] are recitals of benefit awards to the two inside directors, X. Chen and Mok.” Dkt. 80 at 16 (citing AC ¶¶ 322-23). The contend that the complaint “does not allege compensation or stock awards to the five outside directors” and that plaintiffs' opposition “improperly seek[s] to have this Court take judicial notice of public filings reporting awards to He, Sun, and C. Chen.” Id. Defendants argue again that “[b]oard compensation is insufficient to plead a disqualifying interest,” and that plaintiffs “allege nothing to show that alleged compensation was material as to each individual director.” Id. at 17.
The Court finds that, regardless of whether Chui Tin Mok's receipt of earnout shares constitutes a material benefit, plaintiffs have not shown that a majority of the Current Board received a material benefit from the challenged conduct. As previously discussed, stock option grants received under the terms of the 2021 Plan do not constitute a material benefit because the Plan delegated administration of grants to the Plan Committee and imposed a $750,000 cap on total compensation to non-employee directors. See infra Part IV.B.2.a. (1). Plaintiffs have similarly failed to plead that such compensation would be material in light of any of the directors' individual economic circumstances or that such an award would be disproportionate to their position.
(2) Independence
Plaintiffs argue that “Xuefeng Chen, Chui Tin Mok, Jie Sheng, and Li Han . . . lack independence from FF Global and Jia.” Opp. at 41. They contend that these directors “grant[ed] [Jia] control over crucial company departments and officers” and failed to “t[ake] steps to protect Faraday [Future] from damages caused by [d]efendant Jia's mismanagement, violations of securities laws, or the resulting legal actions against Faraday.” Id. at 42. Moreover, plaintiffs allege that Chui Tin Mok is “a member of FF Global's executive committee,” Xuefeng Chen is considered “an FF Global partner,” Jie Sheng “serves as FF Global's Head of Operations & Finance Director,” and Li Han “served as legal counsel to Legacy FF, FF Global, and [d]efendant Jia.” Id. at 42-43.
Defendants argue that plaintiffs improperly rely on group pleading, rather than a director-by-director analysis. Dkt. 80 at 18. They note that “a director's independence is not compromised simply by virtue of being nominated to a board by an interested stockholder.” Id. (quoting In re KKR Fin. Holdings LLC S'holder Litig.. 101 A.3d 980, 996 (Del. Ch. 2014)). Finally, they contend that “the Current Board individuals who joined after the challenged transaction at issue ‘are considered disinterested as a matter of law.'” Id. (quoting In re First Solar Deriv. Litig., No. 12-cv-00769, 2016 WL 3548758, at *5 (D. Ariz. June 30, 2016)). Here, each of the Current Board members joined in 2022 or later, after any complained-of conduct, Id.
The Court finds that plaintiffs have failed to plead that a majority of the Current Board lacked independence. Plaintiffs' allegations regarding connections between the Current Board directors and FF Global do not provide a basis for doubting the directors' independence, as “[i]t is well-settled Delaware law that a director's independence is not compromised simply by virtue of being nominated to a board by an interested stockholder.” In re KKR Fin. Holdings LLC S'holder Litig.. 101 A.3d at 996. Moreover, some of the alleged connections are tenuous. For example, Xuefeng Chen is allegedly beholden to FF Global and defendant Jia merely because he “may become an FF Global partner upon subscribing and paying for” a certain amount of FF Global/performance-based units. AC ¶ 322 (emphasis added). Plaintiffs claim he “would not want to risk not obtaining a lucrative position at FF Global” by “investigat[ing] the misconduct committed by [the defendants].” Id. However, there is no allegation that Xuefeng Chen has a current affiliation with FF Global. Additionally, aside from the fact that Li Han was nominated to the board by an interested shareholder (FF Top), Li Han's alleged lack of independence is based on her previous work “serv[ing] as legal counsel to . . . FF Global, and [d]efendant Jia while she was a partner at an outside law firm.” AC ¶ 328. There is no reason to doubt Li Han's independence merely because she served as legal counsel to FF Global prior to her appointment to the board, especially since there is no allegation of any continued relationship between the two. As a result, plaintiffs have failed to show that a majority (four of the seven) of the Current Board lacked independence.
Accordingly, the Court GRANTS nominal defendant Faraday Future's motion to dismiss for failure to plead with particularity that demand is excused.
3. Direct vs. Derivative Nature of Claim
The PS AC defendants argue that plaintiffs' derivative claim for violation of Section 14(a) should be dismissed because “[t]wo courts-including this one-have already determined that [such] claims against the PSAC Defendants are direct in nature, not derivative.” Dkt. 41 at 8. Defendants contend that, in the Federal Securities Action, “plaintiffs allege that defendants' representations deprived them of their right to make a fully informed vote” which this Court held rendered “the Section 14(a) claim [] direct.” Id. (citing Federal Securities Action ECF No. 64 at 20). Defendants claim that the Section 14(a) claim in that case “is virtually identical to the one here.” Id. at 9.
In opposition, plaintiffs argue that their Section 14(a) claim is distinct from the claim in the Securities Class Action. Dkt. 79 at 49. In that case, plaintiffs allegedly “brought direct claims under Section 14(a) of the Exchange Act for several statements made leading up to the Merger, that improperly solicited the Merger by coloring the market's view of the deal and encouraging shareholders to approve the Merger.” Id. at 50. Here, plaintiffs acknowledge that while “the Merger Proxy also resulted in shareholders being deprived of their rights,” they seek relief on behalf of Faraday Future because “[t]he Company was damaged as a result of the PSAC Defendants' material misrepresentations and omissions” in the Merger Proxy. Id. at 52. They note that they “allege damages to Faraday [Future] that include Faraday [Future]'s expenditures, fees, and liability associated with the Class Actions and investigations, as well as payments made by Faraday [Future] to the Individual Defendants-including pursuant to the 2020 Plan, and the amount that PSAC overpaid for Legacy FF.” Id. They allegedly “seek nothing for themselves, individually, other than reasonable costs associated with litigating their claims.” Id. at 53.
In reply, the PSAC defendants argue that plaintiffs pursuit of their Section 14(a) claim here “is an attempt to get around [the Federal Securities Action] settlement[] and should be rejected.” Dkt. 83 at 8. They argue that the claims in both actions “assert that the PSAC Defendants made false or misleading statements in the Proxy leading up to the merger that affected shareholders' votes to approve the merger.” Id. They contend that it only makes sense to pursue this claim as a direct action, as “PSAC no longer exists to receive any recovery, and thus any recovery would have to flow directly to stockholders.” Id. at 9.
The Court finds that plaintiffs' claims are properly brought as derivative claims on behalf of Faraday Future, formerly PSAC. See J. I. Case Co. v. Borak, 377 U.S. 426, 431 (1964) (holding that Section 14(a) claims may be brought as “both derivative and direct” claims). Here, plaintiffs assert that Faraday Future was damaged by the misrepresentations and omissions in the Proxy Statement in the form of expenditures/fees/liabilities associated with the various Class Actions it is currently defending, payments to the Individual Defendants pursuant to the payment plan approved in the Proxy, and overpayment for Legacy FF. These alleged damages are suffered by Faraday Future rather than shareholders in their individual capacity. Accordingly, plaintiffs' claims are derivative rather than direct.
V. CONCLUSION
In accordance with the foregoing, the Court GRANTS defendants Aydt, Breitfeld, Deng, Krolicki, Glasman, Goh, Jia, Liu, McBride, Ye, and Wang's motion to dismiss and GRANTS defendants Vogel and Swenson's motion to dismiss the state law and contribution claims. The Court additionally GRANTS in part and DENIES in part the PSAC defendants' motion to dismiss. The Court dismisses the state law and contribution claims asserted against the PSAC defendants and also dismisses plaintiff Farazmand's Section 14(a) claim for lack of standing. The Court GRANTS Faraday Future's motion to dismiss for failure to plead that demand is excused. The Court grants plaintiffs leave to amend consistent with this order by February 22, 2024.
IT IS SO ORDERED.