Cengage Advantage Books: Fundamentals of Business Law 9th Edition by Roger LeRoy Miller

Exercise 21

Bezirdjian v. O'Reilly
Court of Appeal of California, First District, 183 Cal.App.4th 316, 107 Cal.Rptr.3d 384 (2010).
www.courts.ca.gov/1dca.htm
FACTS Lawrence Bezirdjian was a shareholder of Chevron Corporation. In 2007, he filed a shareholder's derivative action against David O'Reilly and other members of Chevron's board of directors. The complaint included claims of breach of fiduciary duties, gross mismanagement, and waste of corporate assets in connection with illicit payments Chevron had allegedly made to Saddam Hussein in exchange for Iraqi oil from 2000 to 2003. In the complaint, Bezirdjian acknowledged that most of his factual allegations were derived from an article published by the New York Times. He also claimed that he was excused from making a prefiling demand on the board to institute this action because such a demand would be futile. Specifically, he stated that "the [board] cannot exercise independent objective judgment in deciding whether to bring this action or whether to vigorously prosecute this action because each of its members participated personally in the wrongdoing or are dependent upon other Defendants who did." The trial court stayed the action until Bezirdjian made a prefiling demand to give the board members an opportunity to decide whether to sue on behalf of the corporation. So the board formed a special committee of directors to consider and respond to this demand. The committee reported that it did not think it was in the best interests of Chevron or its stockholders to pursue the claims in the demand. The board decided not to sue. Subsequently, Bezirdjian submitted an amended shareholder's derivative complaint stating, among other things, that he had "made sufficient effort to get Chevron to bring this action and need do no more." The trial court granted Chevron's motion for judgment on the pleadings and dismissed the action. Bezirdjian appealed.
ISSUE Did Bezirdjian present enough evidence to rebut the presumption that the board of directors' decision not to litigate was made in good faith and thus protected by the business judgment rule?
DECISION No. The California appellate court affirmed the trial court's judgment. Bezirdjian failed to rebut the presumption that the board of directors' decision was made in good faith, and thus he could not go forward with the derivative action.
REASON Chevron was incorporated in Delaware, and therefore, Delaware corporate law applied to this lawsuit. According to that state's law, "The decision to bring a lawsuit or to refrain from litigating a claim on behalf of a corporation is a decision concerning the management of thecorporation. Consequently, such decisions are part of the responsibilities of the board of directors." The court went on to apply the business judgment rule to the Chevron board's actions. "Because a conscious decision by a board of directors to refrain from acting may be a valid exercise of business judgment, where demand on a board has been made and refused, courts apply the business judgment rule in reviewing the board's refusal to act pursuant to a stockholder's demand to file a lawsuit." In this case, even though the allegations brought by Bezirdjian with respect to Chevron's alleged payments to Saddam Hussein suggested corporate wrongdoing, Bezirdjian had offered no specific facts that created a reasonable doubt as to the good faith of the board's investigation. He had thus failed to rebut the presumption created by the business judgment rule. In other words, "It was within the Board's power to refuse to undertake this lawsuit if it deemed the litigation would be contrary to the corporation's best interest."
FOR CRITICAL ANALYSIS-Ethical Consideration Given that a shareholder's derivative suit is brought against the directors and not a party outside the corporation, is it fair to require that the shareholder first demand that the directors undertake the suit? Why or why not?