Opinion
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of Los Angeles County No. BC396461, William F. Highberger, Judge.
Milberg, Jeff S. Westerman, David E. Azar, Nichole M. Duckett; The Weiser Law Firm, Patricia C. Weiser, Debra S. Goodman, Henry J. Young; Harwood Feffer, Robert I. Harwood and Samuel K. Rosen for Plaintiffs and Appellants.
Sheppard, Mullin, Richter & Hampton, John P. Stigi III, Christina L. Costley and Cyrus Khojandpour for Defendants and Respondents.
JOHNSON, J.
Hui Zhao, on behalf of himself and other public stockholders of defendant International Rectifier Corporation (IRC), appeals judgment after the trial court sustained defendants’ demurrer to plaintiffs’ amended complaint in this consolidated class action. Plaintiffs alleged that defendants breached their fiduciary duty to IRC’s stockholders by failing to accept a buyout offer of $23 per share for IRC. The trial court concluded that plaintiffs’ claims were derivative, rather than direct and were barred by judicial estoppel.
We conclude that while plaintiffs’ claims are properly derivative claims, their claims are not barred by judicial estoppel, and plaintiffs should be permitted to amend their complaint to state a derivative claim.
FACTUAL BACKGROUND AND PROCEDURAL HISTORY
1. Plaintiffs’ Consolidated Amended Class Action Complaint.
Plaintiffs’ Consolidated Amended Class Action Complaint alleged:
This consolidated action consists of six related class action complaints against IRC arising out of the buyout offer. The cases were consolidated by court order on October 7, 2008.
Plaintiffs are the owners of common stock in IRC, which is a Delaware corporation that is traded on the New York Stock Exchange. IRC is “known as a leader in the field of power management” and produces analog, digital, and mixed signal integrated circuits and provides its products to leading manufacturers of computers, energy efficient appliances, lighting, automobiles, satellites, aircraft, and defense systems, including Hewlett Packard, Samsung, Sony, LG and Lockheed Martin. As of August 2008, IRC had “hundreds if not thousands” of shareholders.
The board consists of the eight individually named defendants. In addition to being directors, these board members serve on its various committees or in other capacities: Defendant Jack O. Vance is chairman of the IRC board’s audit committee. Rochus E. Vogt is chairman of the board’s compensation committee, as well as a member of the board’s audit and nominating committees. James D. Plummer is chairman of the board’s nominating committee and a member of the audit committee. Thomas Lacey is a member of the board’s audit and nominating committees. Robert S. Attiyeh is a member of the board’s audit committee. Richard J. Dahl was appointed chairman of the board in May 2008; Oley Khaykin is a director and had served as IRC’s president and CEO since March 2008. Mary B. Cranston is a member of the board’s nominating committee. All of the board members, with the exception of Khaykin, are employed at third-party entities.
In April 2007, IRC announced it had uncovered accounting irregularities. As a result, its stock value plummeted. A news report dated April 9, 2007 stated that “A probe at [IRC] has uncovered accounting errors that have rendered at least its last six financial statements unreliable.” IRC revealed that an audit committee found statements for quarters ending September 30, 2005 through December 31, 2006 “should no longer be relied on.” The audit had been undertaken at the request of IRC by independent investigators hired by outside legal counsel. The irregularities existed at an “unnamed foreign subsidiary” of IRC and consisted of premature revenue recognition of product sales. IRC’s stock declined more than 10 percent, to $34.86 from the previous day’s close of $38.80.
In a form 8-K filed with the Securities Exchange Commission (SEC) on May 11, 2007, IRC announced the investigation had discovered the faulty sales figures were the result of unsubstantiated orders at IRC’s Japan subsidiary. On October 2, 2007, IRC announced that the CEO and son of the founder of IRC was resigning at the company’s request. IRC named a new CEO (Khaykin) on March 1, 2008 and restated its financial results.
A “[f]orm 8-K is the ‘current report’ companies must have with SEC to announce major events that shareholders should know about.” (www.sec.gov/answers/8k.htm)
As a result, after February 14, 2008, four new board members (Dahl, Khaykin, Lacey, and Cranston) were appointed to fill vacancies and were not elected by the shareholders. IRC’s board is staggered, and an election for Class One directors should have been held in November 2007 at the annual meeting, but no such meeting took place due to the accounting scandal. The board announced the Class One directors’ election would be held in November 2008, and refused to hold a Class Two election, although such directors’ terms would expire in November 2008.
On August 15, 2008, Vishay International (Vishay) announced to the public that it had made a nonbinding proposal to IRC to acquire all of IRC’s outstanding shares for $21.22 per share in cash (Initial Offer). This offer represented a premium of 13 percent over the trading price of IRC stock. Analysts predicted Vishay would be willing to pay more, some estimating a share price as high as $29. “[IRC] is inexpensive, reflecting its recent fraudulent accounting issues, management turmoil, and low gross and operating margins. The company’s valuation is very attractive in our view, as we expect these overhangs to diminish.”
On August 29, 2008, IRC’s board rejected the offer. IRC’s press release stated it had “‘unanimously determined that the unsolicited, non-binding proposal by Vishay Intertechnology, Inc. to acquire all of the outstanding shares of [IRC] for $21.22 per share in cash is not in the best interests of shareholders. [¶]... [¶] “Vishay’s proposal significantly undervalues the Company and its future prospects when compared to the shareholder value realizable under our recently adopted strategic plan. On August 1, we announced that the Company had successfully completed the restatement process of prior financial periods. The Company also added considerable strength and depth to its senior management team during the past year and is poised to enhance its competitive position in the marketplace. [¶] The Board believes the proposal by Vishay does not value the Company and its future prospects appropriately. In our judgment, [IRC] shareholders will be better served by allowing management to move forward with its strategic plan. We believe that [IRC]’s valuation is still under the cloud of legacy issues.”’” In a letter to Vishay, set forth in the press release, IRC’s board rejected the offer and advised Vishay, “‘“Having accomplished much during the past eighteen months to move through these legacy issues successfully, [IRC] is now beginning to implement its turnaround strategy under the leadership of an outstanding new management team. We believe that this plan has the potential to create significant value for [IRC] shareholders as the company enhances its competitive position in the marketplace.”’”
Plaintiffs alleged that in rejecting Vishay’s offer outright, the board took no steps to reasonably inform themselves about the offer or to engage in any attempts to increase the consideration offered.
On September 10, 2008, Vishay increased its offer to $23 per share and issued a press release that stated, “‘the increased proposal represents a premium of 22 [percent] to [IRC]’s closing stock price on August 14, 2008... and a 30 [percent] premium over [IRC]’s average closing price for the 30 trading days preceding that announcement. The transaction has a value of approximately $1.7 billion in the aggregate.’” Vishay noted that “‘[w]e firmly believe there are significant and compelling benefits to a combination of Vishay and [IRC]. We are committed to bringing our two companies together to create a global leader in the manufacturing of power integrated circuits, discrete semiconductors and passive electronic components.... [W]e believe that a combined Vishay-[IRC] would provide customers a broader and more fully integrated product and technology portfolio that will enable us to better address their needs.’” Vishay noted, “From the outset it has been our strong preference to work together with [IRC] and its [board] to negotiate a mutually beneficial transaction for our respective stockholders, employees, customers, partners and other stakeholders.... Despite our best efforts, [IRC] has flatly refused to discuss a business combination with us and to explore the benefits of such a combination. Their Board has set a very tight timeframe for the Company’s stockholders to have any say over the matters to be considered at a stockholders meeting which is being delayed by almost eleven months. As a result, we have been left with no alternative but to present our increased proposal directly to [IRC]’s stockholders. We are confident that the stockholders, deciding for themselves, will find our increased all-cash proposal to be compelling.’”
On September 10, 2008, Vishay sent a letter to the IRC board in which Vishay advised the board that it was Vishay’s preference to work together with IRC to negotiate an agreement that would be mutually beneficial for both companies’ stockholders. Vishay was “‘disappointed that, despite our best efforts, including indicating that we are willing to discuss all aspects of our proposal, you have flatly refused to discuss any transaction with us and to explore the benefits of the combination of our two companies.’” Vishay, to “‘demonstrate our commitment to consummating’” an acquisition in a timely manner, raised the proposal to $23 per share, which was a 22 percent premium over IRC’s closing stock price on August 14, 2008, and a 30 percent premium over IRC’s average closing stock price over the preceding 30 days. “‘We are confident our increased proposal would provide your stockholders with far greater value than what [IRC] could achieve on its own in the foreseeable future.’” Vishay advised IRC that because IRC had set a “‘very tight timeframe’” for the stockholders to consider the acquisition offer, it left Vishay “‘with no alternative but to take the steps we are announcing today, including presenting our increased proposal directly to your stockholders.’” Vishay continued, “‘[IRC] stockholders deserve to be represented by directors who will not deprive them of the opportunity to receive a significant cash premium for their shares.’” Vishay announced its intention to deliver written notice of three highly qualified, independent individuals that Vishay intended to nominate for election to IRC’s board of directors at the delayed 2007 annual meeting, to be held October 10, 2008.
Vishay further announced its intention to propose amendments to IRC’s bylaws at the upcoming meeting of shareholders, which amendments were “‘designed to ensure that [IRC] stockholders-who have had no say over the composition of their Board of Directors since 2006-will have the opportunity to exercise their voting rights and elect a Board that will represent their interests. We note that half of the current [IRC] directors were never elected by stockholders but were instead appointed by their fellow directors. And those incumbent directors who were previously elected by the stockholders held office during a disastrous, value-destructive period for [IRC] and have not been subject to stockholder approval since then.’” Vishay stated its disapproval with IRC’s intention to delay its 2008 meeting until 2009, and would be seeking shareholder approval to hold the 2008 annual meeting in 2008. Vishay’s proposed slate included Ronald M. Ruzic, formerly executive vice president of BorgWarner, Inc.; William T. Vinson, Director and Chairman of Siemens Government Services, Inc.; and Yoram Wind, Professor at the Wharton School of Business.
On September 10, 2008, IRC responded by issuing a press release stating that Richard Dahl, IRC’s Chairman, had commented, “‘“We will, as we have in the past, carefully review Vishay’s proposal in consultation with our legal and financial advisers.... We wish to clarify that we have not entered into negotiations with Vishay because it had submitted, until today, only one proposal, for $21.22 per share on August 14, that was rejected by our Board. The Board declined subsequent requests for negotiations since there was no change in a proposal that our Board had determined was opportunistic, inadequate and not in the best interests of shareholders.”’”
On September 15, 2008, the investment firm Lehman Brothers filed for bankruptcy and the brokerage firm Merrill Lynch was the subject of a $50 billion buyout by Bank of America. On September 16, 2008, defendants rejected the Vishay offer. IRC issued a press release that stated, “‘The Board of Directors of “[IRC] has reviewed Vishay’s unsolicited, revised proposal with the assistance of its financial and legal advisors... and unanimously determined that Vishay’s $23 per share offer significantly undervalues the future prospects of the Company and is not in the best interests of [IRC] and its stockholders.’” IRC’s President and CEO Khaykin stated, “We remain steadfast in our belief in [IRC]’s potential and the value-creation strategy that we are implementing. This potential is reflected in part in the recent launch of our revolutionary GaN technology platform for Power Conversion. We look forward to communicating with our shareholders in the coming days the exciting value-creative opportunities available for our business.”’” Richard Dahl commented, “‘“We are extremely disappointed that, in addition to offering a price that significantly undervalues the future prospects of the Company, Vishay has chosen to deploy heavy-handed and disruptive tactics in its efforts-commencing a proxy contest to replace three of our highly-experienced and independent directors with its slate of handpicked nominees; seeking to amend our Bylaws; bringing litigation against our directors and the Company; threatening to launch a hostile tender offer, as well as continuing to assert meritless claims against the Company related to the PCS sale-all to pressure the Board and our stockholders to sell the Company at a bargain price.”’”
IRC’s Board responded to Vishay’s offer with a letter dated the same date, advising that the Board was rejecting its $23 per share offer and advising its stockholders to do the same. Further, the IRC board did not believe a $23 per share offer was a reasonable starting point for negotiations, and declined to engage in further discussions. IRC stated, “‘“[t]he price of $23 per share... does not adequately compensate our stockholders for the accelerating momentum of our business, our key technology and product leadership in power management and the significant value we expect to create for our stockholders through the implementation of our strategic plan. [¶] Your obvious attempt to acquire [IRC] before the market fully appreciates the upside from our strategic plan, at a low-point in the business cycle in the semi-conductor industry and in less-than robust M&A and credit markets, in attempt to capture value that rightfully belongs to our shareholders. [¶]... [¶] That said, our Board has taken, and will continue to take, its responsibility to stockholders extremely seriously. We are committed to creating value and view your proposal as not being in the best interests of [IRC] and its shareholders. Accordingly, we have determined that the appropriate course of action is to forcefully resist your attempt to acquire our Company at an inadequate price.”’”
On September 16, 2008, Vishay responded with a press release stating that it was “‘“disappointed”’” that IRC continued to refuse to negotiate with it. However, due to IRC’s refusal to negotiate, Vishay had “‘“no alternative”’” but to present its offer directly to the shareholders of IRC. Plaintiffs alleged that at this time, the individual defendants took no steps to reasonably inform themselves about the Vishay offer or to increase the consideration being offered by Vishay.
On September 29, 2008, Vishay commenced its tender offer for IRC. The offer, at $23.00 per share, was set to expire midnight, EST on October 27, 2008. This offer represented a 30 percent premium over IRC’s average closing price for the 30 days preceding August 15, 2008; since that time, the Philadelphia Semiconductor Sector Index had dropped 15 percent, and the trading prices of IRC’s peer group had dropped 21 percent. Vishay’s founder and executive chairman, Dr. Felix Zandman, announced that the $23 per share offer “‘“provides [IRC] stockholders with superior value to what [IRC] can reasonably achieve on its own in the foreseeable future. As a result of the [IRC] Board’s refusal to negotiate a mutually agreeable business combination, we are presenting our offer directly to [IRC]s stockholders.”’” Vishay commenced mailing a proxy statement with respect to IRC’s delayed 2007 annual meeting, and urged all IRC stockholders to vote for its slate of three director nominees and for Vishay’s proposed amendments to IRC’s bylaws. Included in Vishay’s mailing was a letter addressed directly to IRC’s stockholders in which Vishay extolled the superiority of the $23 per share offer, and told the shareholders that they should not believe IRC’s “‘“aggressive”’” and “‘“optimistic”’” roadmap. Vishay pointed to IRC’s speculative plan that raised serious credibility questions, and IRC’s Form 10-K annual report filed September 15, 2008, in which IRC admitted it faced serious risks and it had ongoing material weaknesses in its financial controls. Vishay advised IRC stockholders: “‘“In refusing to recognize the merits of Vishay’s all-cash premium offer, we believe the [IRC] Board has ignored its responsibilities to maximize the value of your investment. We believe the Board should be held accountable for that and also for its failed stewardship of a company that is spending over $125 million to investigate accounting and tax improprieties that occurred on its watch. In this regard, we note that half the Board was in office during the self described ‘dark chapter’ and the other half was appointed by them without any stockholder approval.... At the long-delayed but hastily called Annual Meeting on October 10th, you will have an opportunity to send a strong message to the incumbent board by electing three highly-qualified, independent directors who are committed to maximizing value for all [IRC] stockholders.”’”
Vishay filed its tender offer documents with the SEC on September 29, 2008. On October 6, 2008, a proxy services company recommended that IRC shareholders vote in favor of Vishay’s slate of directors. Vishay issued a press release in that regard, which stated: “‘“By voting for the three dissident nominees on Oct. 10, however, [IRC] Shareholders will help to keep alive what is in effect a $23 ‘put option.’ The [IRC] board would receive a clear message from shareholders that it should not unreasonably stand in the way of an attractive offer. The incumbent directors would continue to be able to exert significant negotiating leverage as they would continue to constitute a majority of the board, and the board would have the time to deliver on its aggressive projections and/or run a sales process. In the meantime, the three new dissident directors would owe the typical fiduciary duties to shareholders and be subject to personal legal liability for a breach of the duty of loyalty if they were to self-deal to the benefit of Vishay and the detriment of [IRC] shareholders. Thus, it appears the downside risk of supporting the dissident nominees is minimal.”’” (Boldface omitted.) On the other hand, Vishay advised stockholders that if they voted against Vishay’s slate, the wait while the shareholders (in the event of a change in the board other than through Vishay’s slate) evaluated Vishay’s bid could cause Vishay to drop its bid altogether. Further, if Vishay were to drop its bid, “‘“some commentators believe that the [IRC] share price would drop dramatically, an outlook which is also supported by our valuation analysis. Thus, the downside risk of not supporting the dissident nominees could be significant.”’” (Boldface omitted.) Plaintiffs alleged that the IRC board, rather than informing themselves and engaging in a careful and independent analysis, merely stated “there is nothing to talk about” and any efforts by Vishay to purchase IRC would be unproductive.
On October 10, 2008, IRC announced the preliminary results from the shareholder meeting, and indicated its board nominees had defeated Vishay’s slate. IRC’s stock price fell 10.2 percent to close at $13.97. On October 13, 2008, Vishay announced it was withdrawing its offer.
On October 27, 2008, plaintiffs filed their amended class action complaint, which alleged a single claim of breach of fiduciary duty. Plaintiffs alleged that the IRC board’s refusal to negotiate with Vishay, in the “midst of the tsunami-like destruction of the world’s financial markets” had denied IRC’s stockholders the opportunity to exchange each of their currently valued $15 shares for $23 per share.
Plaintiffs’ original complaint had been filed August 15, 2008.
In support of its theory of director entrenchment, plaintiffs alleged that IRC maintained a poison pill provision (a rights agreement permitting shareholders to purchase stock at nominal prices in the event of the acquisition of more than 20 percent of IRC’s shares by a third party, thus making it expensive and difficult for a suitor to acquire the company). Plaintiffs alleged this poison pill provision, due to expire on November 21, 2007 (when the IRC board first learned of Vishay’s potential interest), was extended by the board until November 25, 2008. In addition, on October 12, 2008, the board approved another amendment to this poison pill provision extending its expiration to earlier of (a) April 12, 2009, or (b) the third business day after the filing of a 10-Q quarterly report for the period ending December 31, 2008. The board also amended the poison pill to change the definition of “beneficial ownership” to cover synthetic and derivative securities, and decreased from 20 percent to 10 percent the threshold of beneficial ownership which would cause investors to become “acquiring persons, ” and thereby trigger the provisions of the poison pill. Further, plaintiffs alleged that the board maintained a staggered board, consisting of eight directors divided into three classes of three-year terms each, that left no opportunity to replace a majority of the board at any single annual meeting, and the board had manipulated the composition of the board by delaying its annual meetings. At the time of the Vishay offer, IRC had not held an annual meeting since 2006.
Plaintiffs alleged defendants’ failure to negotiate with Vishay or properly shop the company or conduct an auction failed to maximize shareholder value. Plaintiffs sought class certification; a declaration defendants had breached their fiduciary duties; compensatory damages; and an order directing the individual defendants to consider proposed mergers with other companies, eliminate any barriers to proposed acquisitions, conduct elections, and eliminate conflicts of interest between the individual defendants and their fiduciary obligations.
2. Defendants’ Demurrer.
Defendants demurred to the complaint, alleging that (1) plaintiffs were estopped because they had previously represented in verified pleadings (the related class action claims) that Vishay’s offer was undervalued, while in the current action they alleged the offer was a fair price; (2) plaintiffs could not allege a claim based upon (a) the rejection of the Vishay offer, or (b) entrenchment, because such actions were protected by the business judgment rule; and (3) plaintiffs lacked standing because the action was properly a derivative, rather than direct, action.
In support of their first contention that plaintiffs were estopped, defendants relied on the six other class lawsuits filed on and shortly after August 20, 2008, near the date of Vishay’s first offer, in which stockholder plaintiffs alleged that acceptance of the offer by IRC’s board would constitute a breach of fiduciary duty because the offer was too low. Those complaints generally sought injunctive relief to prohibit the board from accepting the Vishay offer.
Those complaints consist of (1) the United Union of Roofers complaint, filed August 19, 2008 by United Union of Roofers, Waterproofers and Allied Workers Local Union No. 8 as a class action complaint, based on the $21.22 Vishay offer, alleged claims based on the inadequacy of Vishay’s offer and seeking an injunction to stop IRC from accepting the offer; (2) the Gerber complaint, filed on August 20, 2008 by Joel A. Gerber as a class action complaint, based on the $21.22 Vishay offer, alleged claims based on the inadequacy of the offer and sought an injunction to stop IRC from accepting the offer; (3) the Ly complaint, filed August 20, 2008 by Hay Ly as a class action complaint, based on the $21.22 offer, alleged claims based on the inadequacy of Vishay’s offer and seeking an injunction to stop IRC from accepting the offer; (4) the Soyugenc complaint, filed August 22, 2008 by Rahmi Soyugenc, as a class action complaint, based on the $21.22 offer, alleged claims based on the inadequacy of Vishay’s offer and seeking an injunction to stop IRC from accepting the offer; (5) the Guttman complaint, filed August 22, 2008 by Joshua Guttman, $21.22 offer, alleged claims based on the inadequacy of Vishay’s offer and seeking to compel IRC to adopt a procedure to review the Vishay offer; and (6) the City of Sterling Heights complaint, filed August 28, 2008 by the City of Sterling Heights Police & Fire Retirement System as a derivative action, based on the $21.22 offer.
In support of their second contention that the board had not breached its fiduciary duties, defendants argued that plaintiffs had not alleged any facts supporting an inference the board had acted without due care or committed waste in rejecting the Vishay offer. Further, the board had not adopted any wrongful defensive measures in response to the Vishay offer because the structure of its board had been in place for some time before the Vishay offer was made, and thus did not represent any contemporaneous and wrongful response to the Vishay offer. Finally, defendants argue the action grounded on rejection of an acquisition offer was properly a derivative action, and plaintiffs therefore lacked standing.
Plaintiffs opposed the motion, arguing that their claims were direct, rather than derivative because the board’s conduct deprived them, as individual shareholders, of the opportunity of considering a premium offer for their shares, relying on both California and Delaware law, citing Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93 and Tooley v. Donaldson, Lufkin & Jenrette (2004) 845 A.2d 1031, 1035 (Tooley). Plaintiffs contended that the mere fact that all IRC stockholders were affected equally in accordance with their pro rata ownership of IRC did not mean a suit to enforce their rights was necessarily a suit to enforce a corporate right. Further, plaintiffs contended the business judgment rule did not shield actions taken without reasonable inquiry or as a result of a conflict of interest. Plaintiffs asserted that heightened judicial scrutiny should be applied to defensive measures under Unocal Corp. v Mesa Petroleum Co. (Del. 1985) 493 A.2d 946 (Unocal), and the IRC board could not demonstrate that their defensive measures were enacted in good faith, or that such measures were reasonably proportionate to the perceived threat, and were not coercive or preclusive. Finally, they argued judicial estoppel did not apply to the changing allegations of their various class actions because they were in the process of amending their pleadings to account for the change in circumstances surrounding the Vishay offers.
In reply, defendants argued that plaintiffs had cited no case requiring them to obtain the highest possible price from a potential acquirer; the changing factual circumstances surrounding Vishay’s offer did not excuse plaintiffs’ pleading inconsistencies; and plaintiffs failed to state a claim for fiduciary duty because defendants could not be liable for defensive measures enacted long before the Vishay offer.
At the hearing, the plaintiffs argued that under Tooley, supra, 845 A.2d 1031, when another company tried to take over a target company, it was the shareholders who benefitted from the takeover, and were the parties who would get the money if the takeover was handled properly. The shareholders here were denied the opportunity to tender their shares at $23 per share instead of the current price of $14 per share. This lost opportunity was money that would have gone directly into the shareholders’ pockets rather than to the company. Defendants argued that the gravamen of plaintiffs’ claim was based upon a theory of entrenchment, and such a claim was derivative by nature. Plaintiffs responded that entrenchment claims were not exclusively derivative, and depended upon the facts of the particular case. The court stated it found the rule of Tooley to be dictum because it was not necessary to the court’s result.
The trial court sustained the demurrer without leave to amend. The court held that plaintiffs’ claims were derivative because they were based on the IRC board’s failure to withdraw defensive measures, citing Coates v. Netro Corp.(Del. Ch 2002) No. 19154 [2002 Del. Ch Lexis 107], Cottle v. Standard Brands Paint Co. (Del. Ch. 1990) No. 9342 [1990 Del. Ch. Lexis 40], and Lewis v. Spencer (Del. 1990) 577 A.2d 753 [1990 Del. Lexis 154]. The court noted that the related case of City of Sterling was proceeding against IRC as a derivative matter, and therecounsel had “chosen the correct form of pleading.” The court further found that plaintiffs were barred by judicial estoppel because in another IRC-related action, the plaintiffs alleged the offer price was too low, the board would have breached its fiduciary duty by accepting the offer, and such claim was inconsistent with the position taken in the case before the court. The court found the additional allegations in the current case that the board should have taken steps to eliminate defensive measures did not change the result because Delaware law conferred broad business judgment to boards in determining what defensive measures to employ. As a result, the court did not reach the central question of whether plaintiffs had stated a cause of action for breach of fiduciary duty, and sustained the demurrer without leave to amend.
DISCUSSION
Plaintiffs contend the trial court erred in refusing to apply the Delaware test under Tooley, which is not dicta, as the trial court concluded, and which establishes that their action is a direct, rather than derivative, claim. (See Schuster v. Gardner (2005) 127 Cal.App.4th 305, 315–316 [Tooley established test for determining whether claim is direct or derivative under Delaware law].) Plaintiffs also argue that their claims are not barred by judicial estoppel because of the changing factual background against which the various complaints were drafted. They lastly allege the complaint states a claim for breach of fiduciary duty based on defendants’ defensive measures.
We conclude plaintiffs’ claims are derivative under Tooley¸ and affirm the ruling of the trial court sustaining defendants’ demurrer on that basis. We also conclude that plaintiffs’ claims are not barred by judicial estoppel and they have alleged a claim for breach of fiduciary duty. However, the trial court erred in denying leave to plaintiffs to amend their complaint to state a derivative claim.
I. STANDARD OF REVIEW.
On appeal from a judgment of dismissal following an order sustaining a demurrer, “we examine the complaint de novo to determine whether it alleges facts sufficient to state a cause of action under any legal theory, such facts being assumed true for this purpose.” (McCall v. PacifiCare of Cal., Inc. (2001) 25 Cal.4th 412, 415.) We assume the truth of the properly pleaded factual allegations, facts that can be reasonably inferred from those pleaded, and facts of which judicial notice can be taken. (Schifando v. City of Los Angeles (2003) 31 Cal.4th 1074, 1081.) We review the trial court’s denial of leave to amend for an abuse of discretion. (Hernandez v. City of Pomona (1996) 49 Cal.App.4th 1492, 1497.) “When a demurrer is sustained without leave to amend, we determine whether there is a reasonable probability that the defect can be cured by amendment. [Citation.]” (V.C. v. Los Angeles Unified School Dist. (2006) 139 Cal.App.4th 499, 506.)
We apply Delaware law to the claims against IRC’s board. (See Corp. Code, § 2116.) Corporations Code section 2116 is a codification of the “‘“internal affairs doctrine [which] is a conflict of laws principle which recognizes that “only one State should have the authority to regulate a corporation’s internal affairs-matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders-because otherwise a corporation could be faced with conflicting demands.”’” As a result, “‘“[s]tates normally look to the State of a business’ incorporation for the law that provides the relevant corporate governance general standard of care.”’” (Friese v. Superior Court (2005) 134 Cal.App.4th 693, 706; see also State Farm Mutual Automobile Ins. Co. v. Superior Court (2003) 114 Cal.App.4th 434, 442 [“‘a corporation-except in the rarest situations-is organized under, and governed by, the law of a single jurisdiction, traditionally the corporate law of the State of its incorporation’”].) In our application of Delaware law, we are not confined to the citation of published cases but may also rely on unpublished authority. (Lebrilla v. Farmers Group, Inc. (2004) 119 Cal.App.4th 1070, 1077 [“Opinions from other jurisdictions can be cited without regard to their publication status.”].)
II. THE ACTION IS PROPERLY A DERIVATIVE ACTION.
Plaintiffs argue under Tooley, supra, 845 A.2d 1031, this action is properly a direct action because they are the parties who suffered injury, and any recovery would belong to them, not the corporation. First, as Vishay’s direct tender offer to them evidences, it is their separate ownership interest in IRC that was damaged, and any monetary damages will be paid directly to them, not the corporation. Second, IRC’s interference with their voting rights is a direct claim because it had the effect of reducing their voting rights. (See, e.g., In re Gaylord Cont. Corp. Shareholders (Del. Ch. 1999) 747 A.2d 71, 83 (Gaylord).
The test for distinguishing between the propriety of pursuing a derivative action or a direct shareholders’ action focuses on who will benefit from the remedy a court may grant. (Tooley, supra, 845 A.2d at p. 1033.) In Tooley, a group of minority stockholders claimed that members of the board of directors had breached their fiduciary duties by delaying a proposed merger. After conducting a “brief history of our jurisprudence, ” the court rejected the “special injury” test and the “concept that a claim is necessarily derivative if it affects all stockholders equally.” (Id. at p. 1039.) Tooley stated that the proper analysis for determining whether a claim was direct or derivative “must be based solely on an analysis of the following two questions: Who suffered the alleged harm-the corporation or the suing stockholder individually-and who would receive the benefit of the recovery or other remedy?” (Id. at p. 1035.)
In order to show a direct injury under Tooley, a “stockholder must demonstrate that the duty breached was owed to the stockholder and that he or she can prevail without showing an injury to the corporation.” (Tooley, supra, 845 A.2d at p. 1039.) “[U]nder Tooley, the duty of the court is to look at the nature of the wrong alleged, not merely at the form of words used in the complaint.” (In re Syncor Int’l Corp. Shareholders Litigation (Del. Ch. 2004) 857 A.2d 994, 997. “[T]he court must look to all the facts of the complaint and determine for itself whether a direct claim exists.” (Dieterich v. Harrer (Del. Ch. 2004) 857 A.2d 1017, 1027.)
In the case before the Tooley court, the shareholders argued that they have suffered a “special injury” because they had an alleged contractual right to receive the merger consideration of $90 per share without suffering the 22-day delay arising out of the extensions under the merger agreement. Tooley concluded this did not constitute a direct claim because the right had not yet ripened: any contractual shareholder right to payment of the merger consideration did not ripen until the conditions of the agreement were met, namely, SEC regulatory approvals or certain payment obligations. (Tooley, supra, 845 A.2d at pp. 1034–1035.) Further, Tooley found there was no derivative claim because there was no recovery that would go to the corporation, and hence no harm to the corporate entity. (Id. at p. 1039.)
Apparently, because in Tooley, supra, 845 A.2d 1031the court found the plaintiffs had not stated a direct or a derivative claim, the trial court in our case concluded at the hearing on the demurrer that the holding of Tooley was dicta.
Claims of entrenchment may, depending upon the circumstances, be alleged as direct or derivative claims, while claims of waste are always derivative claims. (Avacus Partners v. Brian (Del. Ch. 1990) 16 Del. J. Corp. L. 1425, 1438 (Avacus).) Furthermore, the same set of facts can give rise to both a direct and a derivative claim. (Gentile v. Rossette (Del. 2006) 906 A.2d 91, 100, fn. 19.)
Analytically, a claim for loss in the value of a corporation’s shares is a derivative claim because the injury falls equally on all shareholders. (See, e.g., Gentile v. Rossette, supra, 906 A.2d at p. 99 [“any dilution in value of the corporation’s stock [as a result of breaches of fiduciary duty] is merely the unavoidable result (from an accounting standpoint) of the reduction in the value of the entire corporate entity, of which each share of equity represents an equal fraction. In the eyes of the law, such equal ‘injury’ to the shares... is not viewed as, or equated with, harm to specific shareholders individually”]; Feldman v. Cutaia (Del. 2008) 951 A.2d 727, 733 (Feldman).) As explained in Feldman, “Where all of a corporation’s stockholders are harmed and would recover pro rata in proportion with their ownership of the corporation’s stock solely because they are stockholders, then the claim is derivative in nature. The mere fact that the alleged harm is ultimately suffered by, or the recovery would ultimately inure to the benefit of, the stockholders does not make a claim direct under Tooley. In order to state a direct claim, the plaintiff must have suffered some individualized harm not suffered by all of the stockholders at large.” (Feldman, at p. 733.) Although rationally it may appear that the shareholders alone as owners of the corporation are damaged by director action that harms the stock’s value, under Delaware law any monetary recovery properly belongs to the corporation as well as the stockholders, “if only because there is no rational way in which to define a class differing from all of the shareholders at the time the judgment is entered.” (Dieterich v. Harrar (Del. Ch. 2004) 857 A.2d 1017, 1028, fn. 20.)
On the other hand, if the reduction in value of the shares is accompanied by a breach of fiduciary duty that results in the loss of voting power, then the harm may be direct. As explained in Avacus, supra, 16 Del. J. Corp. L. 1425, “To illustrate, if a board of directors authorizes the issuance of stock for no or grossly inadequate consideration, the corporation is directly injured and shareholders are injured derivatively. The claim that this act constituted waste of corporate assets could be asserted only by the corporation itself or, in proper circumstances, by a shareholder derivatively. If, instead, a board issues stock for adequate consideration but with the wrongful intent of entrenching itself, there is no injury to the corporation. The corporation has been fully compensated for its stock. But if one accepts that the stock was issued primarily for entrenchment purposes (to an associate, let’s suppose, who had confidentially promised to keep the board in office), it may constitute a wrong to the shareholders. What has arguably been affected is not a corporate property or right, but the right of shareholders to elect the board without unfair manipulation. In all events, whether it is a strong claim or a weak claim, such a claim as may exist is individual, not corporate. The fact that all shareholders have been affected equally does not make this claim of improper interference with the right to vote a corporate claim.” (Id. at p. 1438.) An entrenchment claim is individual where the shareholder alleges that the entrenching activity directly impairs a right he or she possesses as a shareholder, such as the right to vote shares. As a result, a claim that the board improperly acted to entrench itself by issuing stock that affects a shareholder’s voting power may state either an individual or a direct claim. “Assuming the stock is issued for adequate consideration, the claim will be only individual. If the stock is issued for inadequate consideration, the corporation itself will be directly injured as well and both individual and derivative wrongs might be alleged.” (Id. at p. 1439; see also Robotti & Co., LLC v. Liddell (Del. Ch. 2010, Jan. 14, 2010, C.A. No. 3128-VCN) [2010 Del. Ch. Lexis 4] [direct claim from dilution results when the dilution causes a shift in voting rights in favor of majority shareholder at expense of minority shareholders].)
Similarly, in Gaylord, supra, 747 A.2d 71, a pre-Tooley case, stockholders challenged defensive takeover tactics adopted by the board of directors. These actions included premerger changes to voting rights, a poison pill provision, and strategically timed shareholder meetings that had the result of making it unlikely anyone could take control of the company. (Id. at pp. 72–73.) Although it contains dicta criticizing the direct/derivative distinction made in Unocal claims, Gaylord reiterated that “[w]here the entrenching actions of a corporate board have the purpose and effect of reducing the voting power of stockholders, the affected stockholders may bring an individual action.” (Gaylord, at pp. 79–83.) Thus, Gaylord concluded the board’s tactics diminished the voting power of the shareholders and therefore shareholders could state a direct claim. “When a corporate board undertakes related actions that diminish the ability of non-management stockholders to elect a new slate of directors, entertain sales proposals, and to amend the corporation’s charter and bylaws, the resulting injury to the non-management stockholders is independent of and distinct from any injury to the corporation. Indeed, whatever injury results is to the stockholders within the corporate structure that have lost relative power, not to the corporation as an entity. After all, the corporation as an entity has not lost the power to do anything, it is power to cause the corporation to do certain things that has shifted. Nor are all stockholders injured equally in such circumstances, since whatever injury has been suffered has been borne disproportionately, if not exclusively, by the non-management stockholders whose power has been diminished.” (Id. at p. 84.)
Unocal, supra, 493 A.2d 946.
In NymexS’holders Litig. v. New York Mercantile Exch., Inc. (Del. Ch. 2009, Sept. 30, 2009, C.A. No. 3621-VCN, C.A. No. 3835-VCN) [2009 Del. Ch. Lexis 176] (NYMEX), shareholders of an acquired company brought a class action against its directors alleging that their conduct caused a reduction in the value of a buyout offer to decline from $142 per share to the ultimately consummated transaction price of $100 per share. The merger was to be partially paid for with the acquiring company’s stock, which fluctuated in price while the deal was being negotiated. As a result, any loss in value of the acquiring company’s stock had the effect of reducing consideration for the merger. The directors failed to obtain a “collar” on the stock portion of the merger because it would have adversely affected their own stock options, and the merger agreement curtailed the rights of a certain class of shareholders primarily with respect to future revenue-sharing provisions. (Id. at pp. 5–9) In addition to alleging that the board approved the transaction without attempting to solicit higher offers from competitors, the stockholders alleged, among other things, that the directors agreed to sell at an inadequate price to obtain large severance payments. (Id. at pp. 14–17.)
The NYMEX court noted that “[e]ntrenchment claims are usually viewed as purely derivative in nature, ” and found the plaintiffs’ entrenchment claims were derivative because “breach of fiduciary duty that works to preclude or undermine the likelihood of an alternative, value-maximizing transaction is treated as a derivative claim because the company suffers the harm, having been ‘precluded from entering into a transaction that would have maximized the return on its assets.’ Additionally, the injury ‘falls upon all shareholders equally and falls only upon the individual shareholder in relation to his proportionate share of stock as a result of the direct injury being done to the corporation.’ With respect to the second prong of Tooley[, supra, 845 A.2d 1031], any monetary recovery would properly belong to the company, ‘if only because there is no rational way in which to define a class differing from all of the shareholders at the time the judgment is entered.’” (NYMEX, at pp. 35–36, fns. omitted.) In the case before it, NYMEX found the plaintiffs’ claims to be derivative because plaintiffs had failed to establish a causal link between the price the acquiring corporation paid and the directors’ alleged misconduct. There was no allegation a director favored an unfairly low bid from the acquiring company as compared to a competitor because the director received a pecuniary benefit, and thus the director did not receive anything the company’s shareholders as a whole did not receive. (Id. at pp. 42–43.)
In Feldman, supra, 951 A.2d 727, the plaintiff shareholder alleged he received inadequate consideration in connection with a merger because of stock options previously issued to three of the corporation’s directors. He contended he would have received more for his shares if the stock options had not existed. (Id. at pp. 729–730.) Pursuant to the rule that a merger destroys a stockholder’s standing to assert a derivative claim, the trial court dismissed the claim. (Id. at p. 730.) Feldman noted that equity dilution claims are generally derivative. “A claim for wrongful equity dilution is premised on the theory that the corporation, by issuing additional stock for inadequate consideration, made the complaining stockholder’s investment less valuable.” (Id. at p. 732.) However, “[w]here all of a corporation’s stockholders are harmed and would recover pro rata in proportion with their ownership of the corporation’s stock solely because they are stockholders, then the claim is derivative in nature. The mere fact that the alleged harm is ultimately suffered by, or the recovery would ultimately inure to the benefit of, the stockholders does not make a claim direct under Tooley. In order to state a direct claim, the plaintiff must have suffered some individualized harm not suffered by all of the stockholders at large.” (Id. at p. 733.) Feldman found that the board’s failure to consider the impact and validity of the stock options on the merger stated a derivative claim because it was based upon the dilution in value of the plaintiff’s stock. (Id. at p. 733.)
In J.P. Morgan Chase & Co. Shareholder Litigation (Del. 2005) 906 A.2d 808, the plaintiffs, shareholders of an acquiring corporation sued, alleging the corporation paid too much for the target corporation. (Id. at p. 812.) The plaintiffs sought damages in the amount of the merger exchange ratio premium, approximately $7 billion, and alleged the board of the acquiring corporation by approving the unfavorable merger exchange ratio and the unnecessary premium, harmed them directly by diluting their interests in the acquiring corporation. They theorized that if the board had approved a no-premium merger exchange ratio, the plaintiffs would have a greater stake in the resulting company. Instead, the stockholders of the pre-merger acquiring company now had less of a stake in the post-merger acquiring company. (Id. at p. 814.) The court held that by describing the harm as a dilution of their stockholder interests, the plaintiffs attempted to characterize their claim as a direct claim. However, “at the heart of their complaint, ” the plaintiffs claim that the acquirer overpaid for the target. The court reasoned that if the acquirer had paid cash, the claims would clearly be derivative because any such cash overpayment would not have harmed the stockholders directly. (Id. at p. 818.) Although “dilution claims emphasizing the diminishment of voting power have been categorized as direct claims, [they] are individual in nature [only] where a significant stockholder’s interest is increased at the sole expense of the minority.” As a result, the claims were derivative. (Ibid.)
Here, the plaintiffs’ claim is derivative under Tooley, supra, 845 A.2d 1031. First, although the loss in share value was not caused by dilution but the alleged failure to accept an above-market offer, the result is the same as the dilution cases because all shareholders lost value in an equal amount. Whether the plaintiffs’ damages are characterized as a lost opportunity from the failure to pursue an opportunity to sell IRC at the higher than market price (which would equate with damage to the corporation as well as the shareholders), or a loss in value of the stock price (which would equate with harm solely to each shareholder’s individual interest) does not change the result. Although each shareholder is a part owner of IRC and their shares constitute divisible property interests in it, as the above cases demonstrate, under Delaware law any monetary recovery for the loss in stock price due to alleged fiduciary breaches by IRC’s directors belongs to the corporation as well as the stockholders because the interests of the corporation cannot be separated from those of the entire body of shareholders. Thus, to the extent the breach of fiduciary duty claims is based upon IRC’s failure to conduct due diligence or obtain the highest possible stock price by properly shopping the company, it is a derivative claim. A board’s actions that work to preclude or undermine the likelihood of an alternative, value-maximizing transaction is treated as a derivative claim because the company suffers the harm, having been “precluded from entering into a transaction that would have maximized the return on its assets.” (Agostino v. Hicks (Del. Ch. 2004) 845 A.2d 1110, 1123.) In that case, the injury falls upon the individual shareholder in relation to his or her proportionate share of the stock as a result of the injury being done to the corporation. (See Gentile v. Rossette, supra, 906 A.2d at p. 99.)
Second, the plaintiffs’ entrenchment allegations do not convert the stockholders’ derivative claims into direct claims. Here, in contrast to Gaylord, supra, 747 A.2d 71, the loss in shareholder value did not result from the directors’ entrenchment, but from the defendants’ alleged failure to properly consider the offer or shop the company to competitors. Thus, nothing links the directors’ conduct in entrenching themselves with the loss in stock value. Without a causal connection between the board’s entrenching conduct and the loss in stock price, the claim for breach of fiduciary duty is derivative because the board did not receive anything the company’s shareholders as a whole did not receive. (See NYMEX, supra, at p. 43.) Further, this is not a case where the directors’ actions reduced the voting power of other, minority shareholders while enhancing the voting power of the majority, as in Gaylord, supra, 747 A.2d 71. Rather, the directors enacted a poison pill provision which made it more difficult for third parties to acquire shares and obtain a position of power on IRC’s board. Without more, this did not affect the voting rights of individual shareholders such that plaintiffs’ claims become direct claims. Finally, the IRC board’s failure to disclose information did not deprive shareholders of an informed vote because here, shareholders were fully apprised of the contents of Vishay’s offers. (Cf. Thornton v. Bernard Techs., Inc. (Del. Ch. 2009, Feb. 20, 2009, C.A. No. 962-VCN) [2009 Del. Ch. Lexis 29, 11] [board’s failure to disclose information that had the result of impairing stockholders ability to cast informed vote is a direct claim].)
Under California law a shareholder may not bring a direct action for damages on the theory that the directors and officers engaged in wrongdoing that decreased the value of their stock. Such an action is a derivative action. (Schuster v. Gardner (2005) 127 Cal.App.4th 305, 312.) The rationale is that the wrong is to the corporation, rather than the individual shareholder whose injury is incidental to the injury to the corporation. Permitting individual actions would “authorize multitudinous litigation.” (Sutter v. General Petroleum Corp. (1946) 28 Cal.2d 525, 530; see also Nelson v. Anderson (1999) 72 Cal.App.4th 111, 124 [stockholder may file derivative action for stock losses caused by directors’ and officers’ wrongdoing, but an individual stockholder may not maintain an action in his own right against the directors for destruction of or diminution in the value of the stock].)
III. PLAINTIFFS ARE NOT JUDICIALLY ESTOPPED BY THE PRIOR CLASS ACTION COMPLAINTS.
Plaintiffs contend the trial court improperly applied judicial estoppel because (1) the instant complaint was premised on the $23 offer, while the original complaints relied on the original $21 offer; (2) the instant complaint was filed on October 29, 2008, after substantial changes in the factual circumstances underlying the original complaints, the last of which was filed on August 22, 2008. We agree that judicial estopped does not apply here.
Judicial estoppel is an equitable doctrine aimed at preventing fraud on the courts. “‘The primary purpose of the doctrine is not to protect the litigants, but to protect the integrity of the judiciary. [Citations.] The doctrine does not require reliance or prejudice before a party may invoke it.’” (Billmeyer v. Plaza Bank of Commerce (1995) 42 Cal.App.4th 1086, 1092.) The doctrine applies where a party has taken positions so irreconcilable that “‘one necessarily excludes the other.’” (Prilliman v. United Air Lines, Inc. (1997) 53 Cal.App.4th 935, 960.) The remedy is extraordinary and will only be invoked where a party’s inconsistent positions will result in a miscarriage of justice. (Haley v. Dow Lewis Motors, Inc. (1999) 72 Cal.App.4th 497, 511.)
In practice, judicial estoppel will be applied where “(1) the same party has taken two positions; (2) the positions were taken in judicial or quasi-judicial... proceedings; (3) the party was successful in asserting the first position (i.e., the tribunal adopted the position or accepted it as true); (4) the two positions are totally inconsistent; and (5) the first position was not taken as the result of ignorance, fraud, or mistake.” (Jackson v. County of Los Angeles (1997) 60 Cal.App.4th 171, 183.) Although the majority view requires the party to be estopped to have been successful in asserting the earlier position, under equitable principles, the doctrine may be applied even where the first position was not actually adopted by the tribunal. (Id. at p. 183, fn. 8.)
Here, the doctrine does not apply because the positions plaintiffs have taken are not totally inconsistent. The record establishes that the first five class action complaints were based upon Vishay’s initial offer and alleged it was insufficient in relation to IRC’s actual value. As such, they were not based upon the particular price offered by Vishay ($21.22 per share) but the fact the price offered was low in relation to the company’s potential value in relation to its stock price at the time. The instant complaint, on the other hand, was based upon a higher offer ($23.00 per share) and asserted that price was high in relation to the company’s potential value at the time the offer was made. These allegations represent legal conclusions drawn from a different set of facts and are not inconsistent positions warranting the imposition of judicial estoppel.
IV. CLAIM FOR BREACH OF FIDUCIARY DUTY.
Plaintiffs alleged breach of fiduciary duty premised upon several entrenchment theories, including (1) impairment of voting rights through staggered director elections and delayed annual meetings, and (2) expansion and extension of the poison pill, and also alleged claims based upon IRC’s failure to properly investigate the Vishay offer or shop the company.
Corporate directors and officers owe a fiduciary duty to the corporation. (See Berg & Berg Enterprises, LLC. v. Boyle (2009) 178 Cal.App.4th 1020, 1037.) Generally, shareholders may bring a derivative action to recover for breaches of fiduciary duties of officers and directors causing injury to the corporation. (Jones v. H.F. Ahmanson & Co., supra, 1 Cal.3d 93, 107.)
Courts apply the business judgment rule to determine directors’ liability for breach of their duty of care. Under this rule, courts will not review directors’ business decisions if such decisions are disinterested and independent; the product of good faith actions; and the directors were reasonably diligent in informing themselves of the facts. The Delaware case of McMullin v. Beran (Del. 2000) 765 A.2d 910, 919 (McMullin) explained that “[o]ne of the fundamental principles of the Delaware General Corporation Law statute is that the business affairs of a corporation are managed by or under the direction of its board of directors. The business judgment rule is a corollary common law precept to this statutory provision. The business judgment rule, therefore, combines a judicial acknowledgment of the managerial prerogatives that are vested in the directors of a Delaware corporation by statute with a judicial recognition that the directors are acting as fiduciaries in discharging their statutory responsibilities to the corporation and its shareholders. The business judgment rule ‘is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.’” (Id. at p. 916, fns. omitted.)
The business judgment rule therefore has both a procedural and a substantive element. (McMullin, supra, 765 A.2d at pp. 916–917.) “Procedurally, the initial burden is on the shareholder plaintiff to rebut the presumption of the business judgment rule. To meet that burden, the shareholder plaintiff must effectively provide evidence that the defendant board of directors, in reaching its challenged decision, breached any one of its ‘triad of fiduciary duties, loyalty, good faith or due care.’ Substantively, ‘if the shareholder plaintiff fails to meet that evidentiary burden, the business judgment rule attaches’ and operates to protect the individual director-defendants from personal liability for making the board decision at issue.” (Id. at p. 917, fns. omitted.) Thus, “unless effectively pled factual allegations in the shareholder plaintiff’s... [c]omplaint successfully rebut the procedural presumption of the business judgment rule, the... [d]irectors would be protected by the substantive operation of the business judgment rule.” (McMullin, supra, 765 A.2d at p. 918.) A prima facie showing of good faith and reasonable investigation is established where a majority of the board comprised of outside directors receives the advice of investment bankers and independent counsel. (Polk v. Good (Del. 1986) 507 A.2d 531, 536–537.)
The business judgment rule applies to defensive measures designed to prevent a takeover. Where directors adopt defensive tactics against a takeover, they are presumed to be acting in their best interests. Thus, such directors will not be protected by the business judgment rule unless they can show they had (1) “reasonable grounds for believing that a danger to corporate policy and effectiveness existed, ” and (2) the defensive tactics were “reasonable in relation to the threat posed.” (Unocal, supra, 493 A.2d at pp. 954–955.)
If the directors determine in good faith it is in the best interests of the corporation and shareholders that the corporation remain independent, the business judgment rule protects against claims that they should be liable for declines in stock prices resulting from their opposition to takeover bids. (Panter v. Marshall Field & Co. (7th Cir. 1981) 646 F.2d 271, 295–296.) Poison pills, which vastly increase the cost of a takeover and which generally can be adopted without shareholder approval and terminated when the takeover threat has abated, are protected as a legitimate exercise of business judgment where the directors reasonably believe it would make the corporation less vulnerable to coercive acquisition techniques. (Gearhart Industries, Inc. v. Smith Intern., Inc. (5th Cir. 1984) 741 F.2d 707, 722–724.) However, if the poison pill is used to protect management at shareholder expense, it may not be used indefinitely to delay a takeover. (Grand Metro. Public LTD Co. v. Pillsbury Co. (Del. Ch. 1988) 558 A.2d 1049, 1060.)
Similarly, director actions that infringe on shareholders’ voting rights may not be protected by the business judgment rule. If the action is primarily designed to thwart an exercise of shareholder voting rights, the directors bear the burden of demonstrating compelling justification for their action. (MM Companies., Inc. v. Liquid Audio, Inc. (Del. 2003) 813 A.2d 1118, 1127–1132; Blasius Industries, Inc. v. Atlas Corp. (Del. Ch. 1988) 564 A.2d 651, 661.)
Here, plaintiffs have alleged not only that the board failed to adequately consider the Vishay offer, but also that the staggered board and lack of annual meetings impaired their voting rights, the poison pill and its extension while the Vishay offer was pending did not permit them to install a new board that would take appropriate action in the face of the Vishay offer. Plaintiffs have alleged such actions by the board were not proportionate to the threat of the takeover and therefore constituted defensive measures in violation of their fiduciary duties and hence not protected by the business judgment rule. In that we have found that plaintiffs cannot state a direct claim because the board’s actions did not affect shareholders’ voting rights, they should be permitted to amend their complaint to attempt to state a derivative claimed based on the foregoing alleged wrongs of the IRC board. In reversing to permit such amendment, we offer no opinion on whether such a claim can be stated, or whether it will be successful.
DISPOSITION
The judgment of the superior court is reversed, and the matter is remanded for proceedings in accordance with the views expressed in this opinion. Appellants are to recover costs on appeal.
We concur: MALLANO, P. J., CHANEY, J.