This post earlier this week highlighted the Eighth Circuit’s recent opinion affirming dismissal of several Wal-Mart FCPA related derivative actions.
Continuing with the theme, in this recent opinion the Ninth Circuit affirmed dismissal of a shareholder derivative lawsuit alleging that Wynn Resorts board of director defendants breached their fiduciary duties and committed corporate waste by, among other things, approving a $135 million donation to the University of Macau because, the shareholders allege, the donation caused the company to incur legal expenses and be exposed to potential liability.
This 2012 post highlighted how the University of Macau donation resulted in Foreign Corrupt Practices Act scrutiny for Wynn Resorts. The scrutiny ended without any FCPA enforcement action.
The bulk of the 9th Circuit’s decision touches upon state law issues specific to shareholder derivative actions and the pleading requirements for so-called demand futility. If you are not familiar with derivative actions, if might be useful to review this prior post which highlights the relevant procedural and pleading aspects of derivative actions.
In pertinent part, the 9th Circuit stated:
“[T]he shareholders argue that demand was futile because the directors face a substantial likelihood of personal liability for approving the Macau donation, which, they allege, “caused Wynn Resorts to pursue profit at the expense of complying with the law.” The parties agree that director liability under such circumstances would require “intentional misconduct, fraud or a knowing violation of law” on the part of the directors. Nev. Rev. Stat. § 78.138(7)(b). The complaint acknowledges that Steve Wynn had obtained a legal opinion blessing the donation, but alleges that the directors did not request to see the opinion before the vote.
In addition, the shareholders allege more generally that “Macau has been plagued by political corruption and organized crime,” and “the Wynn Resorts board was well aware of [this] corrupt environment”; that the directors had received FCPA training; and that the directors knew that some of the people who would benefit from the Macau donation were the same people who were in a position to influence Wynn’s access to gaming licenses in Macau.
We agree with the district court that the above allegations are not sufficient to show that the directors face a substantial likelihood of personal liability for any wrongdoing. Most importantly, even assuming that the Macau donation did in fact violate the FCPA, the allegations do not create a reasonable inference that any of the individual directors intended or knew that it would do so, as Nevada law would require. Indeed, the complaint’s principal allegation is that the defendants “voted in favor of the donation to the Foundation without any evidence that this donation was compliant with the law and the Company’s policies.” Even if the complaint can be read to allege with particularity that the directors were negligent with respect to the Macau donation’s legality, such would not be sufficient to establish a substantial likelihood of director liability, because Nevada law requires knowledge or intent before director liability attaches. And the fact that the complaint acknowledges that the Nevada state investigation terminated without any enforcement proceedings severely undermines the shareholders’ speculation that the directors face a substantial likelihood of liability. We therefore reject the shareholders’ theory that demand is excused based on allegations that the directors face a substantial likelihood of liability for approving the Macau donation.”