Kevin Forestal v. Starr Surgical Company ( 2018 )

NOT FOR PUBLICATION
FILED
JUN 29 2018
UNITED STATES COURT OF APPEALS
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
KEVIN FORESTAL, derivatively and on No. 17-55145
behalf of STAAR Surgical Company,
D.C. No.
Plaintiff-Appellant 2:16-cv-04492-MWF-GJS
v.
MEMORANDUM *
BARRY G. CALDWELL, et al.
Defendants-Appellees.
Appeal from the United States District Court
for the Central District of California
Michael W. Fitzgerald, District Judge, Presiding
Submitted June 8, 2018**
Pasadena, California
Before: LIPEZ,*** TALLMAN, and OWENS, Circuit Judges.
Before a shareholder can bring a derivative action on behalf of a company, he
must either present the action to the company's board of directors, or show in his
*
This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
**
The panel unanimously concludes this case is suitable for decision
without oral argument. See Fed. R. App. P. 34(a)(2).
***
The Honorable Kermit V. Lipez, United States Circuit Judge for the
First Circuit, sitting by designation.
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complaint that doing so would have been futile because at least half of the board was
incapable of making an impartial decision regarding the litigation. See Fed. R. Civ.
P. 23.1(b)(3); La. Mun. Police Emps.' Ret. Sys. v. Wynn, 829 F.3d 1048, 1057-58
(9th Cir. 2016). Plaintiff Kevin Forestal filed this derivative action against nominal
defendant STAAR Surgical Company, certain of its executives, and its board of
directors (collectively, "STAAR") without first presenting his suit to the board. The
district court dismissed the action after finding that demand would have been futile
as to only three of STAAR's eight directors. On appeal, Forestal argues that the
district court abused its discretion by finding that demand on a fourth director,
STAAR's director-CEO Caren Mason, was not futile. We affirm.
STAAR is a Delaware corporation based in California that markets and
manufactures implantable eye lenses. Forestal's complaint alleges that the company
failed to disclose to its investors a series of FDA violations related to its
manufacturing process. On the date that Forestal filed his complaint, three of
STAAR's eight directors were also directors when the company allegedly failed to
disclose the violations, and potentially faced personal liability in the suit. The
district court determined that demand was futile as to those directors.
Caren Mason was not yet a director or the CEO when the company allegedly
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failed to disclose the violations. 1 Forestal nonetheless offers two reasons why
demand on Mason would have been futile. First, he contends that Mason was
conflicted because the directors -- three of whom may have faced personal liability
in the derivative suit -- controlled her compensation and benefits. Second, he argues
that STAAR's decision to list Mason as not "independent" under the NASDAQ's
definition of that term made her non-independent for demand-futility purposes. See
NASDAQ Marketplace Rule 5605(a)(2).2
The parties agree that Delaware law governs whether Forestal has adequately
alleged that demand on Mason would have been futile. And, the parties agree that
under Delaware law the standard for assessing demand futility applicable to this case
is whether "the particularized factual allegations of [Forestal's] complaint create a
reasonable doubt that, as of the time the complaint is filed, [Mason] could have
properly exercised [her] independent and disinterested business judgment in
responding to a demand." Rales v. Blasband, 634 A.2d 927, 934 (Del. 1993).
Applying this standard, we first conclude that Mason's status as a director-
executive did not create a reasonable doubt as to her independence or
1
The last alleged failure to disclose occurred in May 2014. Mason became a
director in June 2014 and became CEO in March 2015. She is not named in the
complaint's substantive allegations.
2
Available online at http://nasdaq.cchwallstreet.com/nasdaq/main/nasdaq-
equityrules/chp_1_1/chp_1_1_4/chp_1_1_4_3/chp_1_1_4_3_8/default.asp.
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disinterestedness. As the district court correctly observed, the fact that a director-
executive's compensation is set by the board is ordinarily not enough to show
demand futility under Delaware law. There must be something more -- usually, a
controlling relationship between the director-executive and a person implicated in
the derivative suit, or some other conflict with the suit. See, e.g., Sandys v. Pincus,
152 A.3d 124, 128 (Del. 2016); Rales, 634 A.2d at 930, 937; In re Tyson Foods,
Inc., 919 A.2d 563, 584 & n.41 (Del. Ch. 2007). Forestal's complaint, however,
alleges nothing beyond the ordinary relationship between a director-executive and
her fellow board members.
Mason's classification as a non-independent director under the NASDAQ's
rules is also a non-starter. NASDAQ Marketplace Rule 5605(a)(2) defines
"Independent Director," in relevant part, as "a person other than an Executive Officer
or employee of the Company or any other individual having a relationship which, in
the opinion of the Company's board of directors, would interfere with the exercise
of independent judgment in carrying out the responsibilities of a director."
(Emphasis added.) Since Mason was an executive officer, she was per se non-
independent under the NASDAQ rule. Though the NASDAQ's judgment that
executives, like Mason, must be classified as non-independent is relevant to the
demand-futility analysis, it is -- without more -- not dispositive. See Sandys, 152
A.3d at 131 ("[T]he Delaware independence standard is context specific and does
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not perfectly marry with the standards of the stock exchange in all cases.").
Forestal relies on Sandys to support his argument that Mason's classification
as non-independent under the NASDAQ rule makes her non-independent for
demand futility purposes. That case is materially distinguishable for a number of
reasons. Most pertinently, the two conflicted directors in Sandys were listed as non-
independent because they had "a relationship which, in the opinion of the Company's
board of directors, would interfere with the exercise of independent judgment in
carrying out the responsibilities of a director." Id. at 133 (quoting NASDAQ
Marketplace Rule 5605(a)(2)). Hence, the two directors' classification as non-
independent under the NASDAQ rule was the product of the board's business
judgment, rather than a per se application of the NASDAQ rule.
For these reasons, we hold that the district court did not abuse its discretion
by finding that demand on Mason was not futile. 3
AFFIRMED.
3
We deny as moot STAAR's request for judicial notice (Dkt. No. 16).
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