666 N.E.2d 1034 (N.Y. 1996)
Plaintiff Marx, a shareholder of International Business Machines Corporation, commenced this shareholder derivative action against IBM and its board of directors without first making a demand on the board to initiate litigation.1
The amended complaint alleged that during a period of declining profitability at IBM, the director defendants engaged in self-dealing by awarding excessive compensation to the 15 outside directors on the 18-member board.2 The compensation for outside directors had increased from a base of $20,000 plus $500 for each meeting attended to a retainer of $55,000 plus 100 shares of IBM stock over a five-year period.3
Defendants moved to dismiss the complaint for failure to state a cause of action and for failure to serve a demand on IBM’s board.4 The Supreme Court dismissed the complaint, holding that plaintiff failed to establish the futility of a demand.5
The Appellate Division affirmed the dismissal, concluding that the complaint did not contain any details from which the futility of a demand could be inferred and that plaintiffs objections to the level of compensation were not stated with sufficient particularity.6
Whether the Appellate Division abused its discretion by dismissing plaintiff’s complaint for failure to make a demand?7
Business Corporation Law § 626 (c) requires that in any shareholder derivative action the complaint shall set forth with particularity the efforts of the plaintiff to secure the initiation of such action by the board or the reasons for not making such effort.8 Demand is excused as futile when a complaint alleges with particularity that a majority of the board of directors is interested in the challenged transaction.9 Demand is excused as futile when a complaint alleges with particularity that the board of directors did not fully inform themselves about the challenged transaction to the extent reasonably appropriate under the circumstances.10 Demand is excused as futile when a complaint alleges with particularity that the challenged transaction was so egregious on its face that it could not have been the product of sound business judgment of the directors.11
No. The established facts show that plaintiff Marx commenced this shareholder derivative action without first making a demand on IBM’s board.12 The amended complaint alleged that during a period of declining profitability the director defendants engaged in self-dealing by awarding excessive compensation to the 15 outside directors on the 18-member board.13 For the executive compensation claim the established facts indicate that only three directors received the benefit of the scheme.14 Because a majority of the board was not alleged to be interested and the complaint contained no particularized facts showing that the board failed to inform itself or failed to exercise business judgment, demand was not excused for that claim.15
The Appellate Division therefore did not abuse its discretion when it dismissed the executive compensation portion of the complaint for failure to make a demand.16
The Appellate Division did not abuse its discretion by dismissing plaintiff’s complaint for failure to make a demand on the executive compensation claim.17
Whether plaintiff’s complaint fails to state a cause of action?18
To survive a motion to dismiss, a complaint challenging the excessiveness of director compensation must allege compensation rates excessive on their face or other facts which call into question whether the compensation was fair to the corporation when approved, the good faith of the directors setting those rates, or that the decision to set the compensation could not have been a product of valid business judgment.19
Yes. The established facts show that the complaint alleged the compensation awarded to IBM’s outside directors increased from a base of $20,000 plus $500 for each meeting attended to a retainer of $55,000 plus 100 shares of IBM stock over a five-year period.20 The complaint further alleged that this compensation bears little relation to the part-time services rendered by the Non-Employee Directors or to the profitability of IBM.21 These allegations are conclusory and supply no factually based allegations of wrongdoing or waste which would sustain a verdict in plaintiff’s favor.22
Consequently the complaint fails to state a cause of action for corporate waste with respect to the outside directors’ compensation.23
Plaintiff’s complaint fails to state a cause of action for corporate waste regarding the compensation paid to IBM’s outside directors.24