BRANDIN v. DEASON, 941 A.2d 1020 (Del.Ch. 2007)

No. C.A. No. 2123-VCL.Court of Chancery of Delaware.Submitted: July 17, 2007.
Decided: July 20, 2007.

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Norman M. Monhait, Esquire, Rosenthal, Monhait Goddess, P.A., Wilmington, Delaware; Edward F. Haber, Esquire, Michelle H. Blauner, Esquire, Matthew L. Tuccillo, Esquire, Shapiro, Haber Urmy, LLP, Boston, Massachusetts, Attorneys for Plaintiff.

Allen M. Terrell, Esquire, Harry Tashjian, IV, Esquire, Richards, Layton Finger, P.A., Wilmington, Delaware; William B. Dawson, Esquire, Karen L. Hirschman, Esquire, Matthew R. Stammel, Esquire, Vinson Elkins, L.L.P., Dallas, Texas; Aitan Goelman, Esquire, Zuckerman Spaeder, L.L.P., Washington, D.C.; Karen Patton Seymour, Esquire, Sullivan Cromwell, L.L.P., New York, New York; Gary P. Naftalis, Esquire, Kramer, Levin, Naftalis Frankel, L.L.P., New York, New York, Attorneys for Defendants Jeffrey A. Rich, Mark A. King and Warren Edwards.

David C. McBride, Esquire, Bruce L. Silverstein, Esquire, Martin S. Lessner, Esquire, Young Conaway Stargatt Taylor, LLP, Wilmington, Delaware, Attorneys for Defendants Darwin Deason, David Black, Lynn Blodgett, John Brophy, William Deckelman, Henry Hortenstine, Clifford Kendall, John Rexford, and Peter Bracken.

Kenneth J. Nachbar, Esquire, Susan Wood Waesco, Esquire, Morris Nichols Arsht Tunnell, LLP, Wilmington, Delaware; Attorneys for Defendants Joseph O’Neill, Frank Rossi, Dennis McCuistion, and J. Livingston Kosberg.

Edward P. Welch, Esquire, Edward B. Micheletti, Esquire, Nicole DiSalvo, Esquire, Skadden, Arps, Slate, Meagher Flom, LLP, Wilmington, Delaware, Attorneys for Nominal Defendant Affiliated Computer Services, Inc.

OPINION
LAMB, Vice Chancellor.

Over a year after the filing of this derivative action and several months after the sixteen individual defendants answered the amended complaint, three of them now ask the court to stay this case, which challenges purported stock option backdating practices allegedly perpetrated by various directors and officers of a Delaware corporation, pending resolution of a later-filed parallel proceeding in a Texas federal court. Largely because substantial unsettled issues of Delaware law are involved in this litigation, and since the defendants’ claims that they would be inconvenienced by proceeding in this forum are both dilatory and pretextual, the court will deny their request to stay this case.

I.
A. The Parties

The plaintiff, Jan Brandin, is a Massachusetts resident who alleges that he has owned stock in the nominal defendant, Affiliated Computer Services, Inc., since July 19, 2001. Affiliated is a Delaware corporation with a principal place of business in Dallas, Texas. The company provides information technology and business process outsourcing services.

Defendant Jeffrey A. Rich is a former chief executive officer and director of Affiliated, having resigned from those positions in September 2005. Defendant Mark A. King is a former president, chief executive officer, and director of the company. King stepped down from his posts in November

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2006. Joining him that month was defendant Warren Edwards, who, until that time, served as Affiliated’s chief financial officer.[1] Thirteen other persons, all of whom either served or continue to serve as Affiliated’s officers and directors, are individual defendants in this case, but do not join in the present motion.[2]

B. The Facts

Brandin filed this derivative action on May 2, 2006, and subsequently amended his complaint on August 15, 2006. He alleges that between 1994 and 2002; the individual defendants breached their fiduciary duties to Affiliated by engaging in a scheme to backdate stock options in violation of the company’s stock option plans. In the weeks following Brandin’s initial filing, other derivative plaintiffs brought lawsuits in courts around the country alleging similar claims based on virtually identical facts. Of particular importance here is a consolidated derivative action originally filed on June 22, 2006 in the U.S. District Court for the Northern District of Texas (the “Texas Action”).[3] In addition to the same state law causes of action Brandin sets forth here, the complaint in the Texas Action includes a number of additional derivative claims based on purported violations of the Securities Exchange Act of 1934 and the rules promulgated thereunder.[4] The Texas Action has remained virtually dormant since its commencement over a year ago, although the defendants there filed motions to dismiss in early June 2007, arguing, inter alia, that the Texas plaintiffs failed to adequately allege demand futility.[5] No defendant has filed an answer in the Texas Action, and discovery is at a standstill due to the automatic stay provisions of the Private Securities Litigation Reform Act.[6]

By comparison, the Delaware action has proceeded at a relatively steady pace. All of the individual defendants have answered the amended complaint, and, although they raise vaguely phrased affirmative defenses premised on Court of Chancery Rule 23.1, none of the defendants moved for dismissal on demand-related grounds. Brandin has served several sets of interrogatories and document requests on the defendants, and has obtained over a million pages of document discovery from Affiliated. On April 5, 2007, Brandin moved for partial summary judgment against Deason, Rich,

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and King on the grounds that those defendants received backdated stock option grants and, accordingly, the company is entitled to rescind the grants and receive any monetary benefits wrongfully obtained therefrom.[7] On May 11, 2007, Rich, King, and Edwards moved to stay this action in favor of the Texas Action.

II.
In support of their motion, the defendants argue that allowing this case to proceed would result in duplicative and wasteful litigation. Brandin’s complaint, the defendants contend, is merely a subset of the claims asserted in the Texas Action because a number of federal securities laws issues, over which this court has no jurisdiction, are alleged there. The defendants also posit that Brandin has no standing to contest the validity of stock options granted on eleven of the twelve dates in question since he did not own Affiliated stock at those times. Thus, the defendants say, this lawsuit, unlike the Texas Action, will not resolve the substantive merits of state law claims implicating a majority of the alleged misconduct perpetrated by Affiliated’s management. Finally, the defendants, as Texas residents, argue they will be saddled with great hardship by having to litigate this case in Delaware, and are presented with “a real threat” that certain key witnesses would be unable to present live testimony at trial.

Brandin views the present motion as a belated and frivolous attempt by a handful of defendants to further delay substantive judicial scrutiny of their past conduct. In opposition to the motion, he argues that Delaware, as Affiliated’s state of incorporation, has an overriding interest in hearing this case because it involves a type of fiduciary malfeasance — stock options backdating — which has the potential to raise unsettled, yet important, issues of Delaware corporate law. Moreover, Brandin says this case was filed before the Texas Action, and, in stark contrast to that lawsuit, has progressed substantially. The defendants’ litany of hardships, according to Brandin, is pretextual: had they truly faced insurmountable difficulty by proceeding in Delaware, such issues would have surfaced many months ago, before answers to the complaint were filed and before Brandin ever moved for partial summary judgment. In essence, Brandin asks the court not to countenance the kind of litigation gamesmanship that, he believes, is all too clear if one looks beneath the surface of this motion.

III.
Pursuant to the teachings of McWane Cast Iron Pipe Corp. v. McDowell-Wellman Engineering Co., principles of comity allow a Delaware court great discretion to stay a case “when there is a prior action pending elsewhere, in a court capable of doing prompt and complete justice, involving the same parties and the same issues.”[8] The McWane doctrine, however, has limited application to the present motion because this case was filed well before the Texas Action and because, as this court has consistently recognized, the doctrine’s application “presents great difficulty in shareholder derivative actions.”[9]

Indeed, when deciding a motion to stay in the context of a representative lawsuit, the “paramount interest” the court must protect is ensuring that a corporation’s stockholders receive “fair and consistent

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enforcement of their rights under the law governing the corporation. . . .”[10] Thus, when faced with the question of whether to defer to another derivative suit, a court should “examin[e] more closely the relevant factors bearing on where the case should best proceed, using something akin to forum non conveniens analysis.”[11]

The forum non conveniens inquiry the court must apply in this case rests on six factors: “(1) the applicability of Delaware law in the action; (2) the relative ease of access to proof; (3) the availability of compulsory process for witnesses; (4) the pendency or non-pendency of any similar actions in other jurisdictions; (5) the possibility of a need to view the premises; and (6) all other practical considerations which serve to make trial easy, expeditious and inexpensive.”[12] On the present facts, the defendants fail to carry their burden of persuasion to show that a stay is appropriate.[13]

First, Delaware law controls the entirety of Brandin’s lawsuit, as well as the state law claims asserted in the Texas Action. Despite the defendants’ arguments to the contrary, the law governing all of the intricacies potentially associated with stock options backdating claims is far from well-settled,[14]
and Delaware courts have a sizable interest in resolving such novel issues to promote uniformity and clarity in the law that governs a great number of corporations.[15]

The present posture of this case and the Texas Action potentially raises novel issues of Delaware law. As an example, the procedural posture of this case may require the court to consider whether the defendants’ decision to answer the amended complaint in this action and, to begin discovery amounted to a waiver of their right to argue that demand on the board of directors was not excused.[16] Delaware precedent relevant to this issue

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seems to suggest that, by engaging in the discovery process, the defendants may have relinquished this right.[17] A second issue of unsettled Delaware law raised by the moving defendants’ arguments concerns the proper application of principles of standing where the very nature of the wrongdoing alleged was affirmatively concealed by the corporation’s misleading public disclosures over a long period of time. Where, as is alleged here, the plaintiff purchased shares before some of the allegedly backdated options grants and long before any suggestion of backdating emerged relating to earlier grants, does Delaware law prohibit the litigation of all related claims in an action brought by such a plaintiff? Given the large number of option backdating cases pending around the country, and the likelihood that many, if not most, of them raise similar issues, it is important for the Delaware courts to decide this, and all related issues, authoritatively.[18] The presence of complicated issues of unsettled Delaware law, then, strongly favors denial of the motion.

The second and third factors — relative ease of access to proof and availability of compulsory process for witnesses — deserve relatively little weight in the court’s analysis on these facts. Although the defendants have identified three groups of witnesses whom they say are not subject to the court’s subpoena power,[19] this argument lacks persuasive merit: the court can allow the deposition testimony of these individuals, should they refuse to appear at

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trial in Delaware, to be admitted into evidence,[20] and stands ready to grant commissions to take those depositions should it prove necessary.[21] As to the ease of access to proof, the law firms representing the defendants are well staffed and are fully capable of culling through potentially relevant documents regardless of the exact geographic location where this occurs. More importantly, however, one would expect practical issues such as these, if truly constituting as heavy a burden on them as the defendants now contend, to have been raised months ago when this litigation began, rather than after the defendants answered Brandin’s complaint and voluntarily engaged in discovery.[22]

In their briefing and at oral argument, the defendants seemed to recognize that the fourth and sixth forum non conveniens factors, dealing with the pendency of similar actions and other practical reasons why a stay might be merited, provide the strongest bases for their motion. All else being equal, Delaware courts prefer to avoid adjudicating a mere subset of the claims being actively litigated in another jurisdiction.[23] Under close scrutiny, however, their arguments that the Texas Action should proceed in lieu of this one because it rests on a more comprehensive complaint ring hollow.

While Brandin admits that he did not acquire his Affiliated stock until July 19, 2001, this does not necessarily mean he lacks standing to contest option grants that occurred before that date. It is premature to judge what effect the continuous ownership requirement may have on Brandin’s derivative standing, but that issue will very likely be determined in connection with the pending motions for partial summary judgment. More notably, however, there is no particular reason to assume that the named Texas plaintiffs have owned Affiliated stock any longer than Brandin. Instead, the defendants use carefully hedged statements in an attempt to convince the court that, due to the vague allegations of the plaintiffs’ stock ownership in the Texas complaint, the Texas Action is likely to resolve a larger subset of the state law fiduciary claims than this case ever would.[24] Of course, if the

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Texas plaintiffs were as specific in their pleadings with respect to stock ownership as Brandin, the plaintiffs potential lack of standing here might weigh in favor of a stay, depending on what those more specific pleadings revealed. But, on this record, the court is far from satisfied that the Texas Action provides any greater opportunity than this case does for a court to provide unitary resolution of the state law fiduciary claims levied against the defendants.

Nor does the court believe that it is necessarily sound practice for the Court of Chancery to stay a prior-filed derivative action in blind deference to a later-filed derivative action in a federal court in which the federal securities laws claims (over which the federal court has exclusive jurisdiction) are predicated on the same fiduciary misconduct that animates the state law claims. Although federal courts are quite capable of deciding cases involving Delaware corporate law,[25] the stockholders of companies incorporated in this state would suffer a disservice if Delaware courts suddenly became a forum of last resort, available for only that small percentage of representative suits which do not, at least in theory, overlap with issues of the federal securities laws. Notably, i Santa Fe Industries, Inc. v. Green, the U.S. Supreme Court frowned upon a private litigant’s attempt to broaden the sweep of section 10(b) of the Exchange Act and Rule 10b-5 thereunder to remedy fiduciary-based wrongs, as doing so would tend to bring within the federal regulatory framework “a wide variety of corporate conduct traditionally left to state regulation.”[26] As Justice White observed, federal courts should proceed carefully when faced with litigation which largely encroaches upon state law fiduciary principles, since the unavoidable tendency would be for those courts “to depart from state fiduciary standards at least to the extent necessary to ensure uniformity within the federal system.”[27]

IV.
For the foregoing reasons, the defendants’ motion to stay this proceeding in favor the later-filed Texas Action is DENIED. IT IS SO ORDERED.

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