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Corporate – Shareholders’ Derivative Complaint – Demand on Directors – Futility – Directors’ Liability

Where the plaintiff-shareholders allege that the defendant-directors (1) caused nominal defendant SCANA Corp. to make misleading statements, (2) approved “incentive award” pay for SCANA’s officers despite SCANA’s nuclear project being in jeopardy, and (3) failed to ensure that SCANA’s filings with the Securities and Exchange Commission were accurate, plaintiffs have sufficiently alleged that it would have been futile to demand action from the directors.

The court denies defendants’ motions to dismiss under Rules 23.1(b)(3) and 12(b)(6), FRCP.

Accepting plaintiffs’ theory that the defendant-directors failed to make business decisions on an informed basis, in good faith, and in the best interests of nominal defendant SCANA Corp., plaintiffs must nevertheless establish that it would have been futile for plaintiffs to demand relief from the directors.

Plaintiffs contend the directors were aware of issues surrounding the viability of SCANA’s nuclear project, yet they “caused SCANA to make materially misleading statements” about the project. According to plaintiffs, the directors on SCANA’s Compensation Committee approved “incentive award” compensation for SCANA’s officers, even though the project was in jeopardy. Plaintiffs also argue that the directors on SCANA’s Audit Committee failed to fulfill their risk management duties and failed to ensure SCANA’s filings with the Securities and Exchange Commission were accurate.

According to plaintiffs, the directors “knowingly adopted, endorsed, or condoned a business strategy that caused a clearly failing project to continue, which cannot be considered a legitimate exercise of business judgment.”

The court concludes plaintiffs create a reasonable doubt that a majority of the directors are disinterested and independent or that their decisions relating to the project were products of a valid exercise of business judgment. Accordingly, the court denies defendants’ motions to dismiss pursuant to Rule 23.1(b)(3), FRCP.

Defendant Jimmy Addison moves to dismiss under Rule 12(b)(6). The complaint alleges that Addison signed SCANA’s 2016 Annual Report on Form 10-K that stated: “When [Nuclear Units 2 and 3 under construction at the V.C. Summer Station] are completed, our generating capacity and the percentage of total generating capacity represented by nuclear sources are expected to increase.” The complaint further alleges that Addison signed SCANA’s 2017 Annual Report on Form 10-K, stating: “In addition, construction of significant new transmission infrastructure is necessary to support the New Units and is underway as an integral part of the project.”

Given the findings in reports by Bechtel Corp. that established the lack of construction progress, plaintiffs assert these statements are false and misleading. Plaintiffs observe that making false and misleading statements to the SEC constitutes a breach of fiduciary duty.

As to their unjust enrichment claim, plaintiffs assert that Addison received approximately $2.5 million in total compensation in both 2014 and 2015, which sums lack justification because SCANA’s financial expenditure was doomed.

The court finds that plaintiffs’ claims against Addison are plausible on their face.

Motions denied.

In re SCANA Corp. Derivative Litigation (Lawyers Weekly No. 002-136-18, 13 pp.) (Margaret Seymour, S.J.) 3:17-cv-03166; William Hopkins Jr., James Ficaro, Eric Bland, Ronald Richter Jr., Scott Mongillo, Joseph Seidman Jr. and Uri Seth Ottensoser for plaintiffs; William Alexander Coates, Anne Magee Tompkins, Jonathan Michael Watkins, Benjamin Palmer Carlton, George Craig Johnson, I.S. Leevy Johnson, Steven Pugh, Alexandra Peurach, Lisa Bugni, Michael Smith, James Wyatt III, Robert Adams Blake Jr., John Allen Jordak Jr., Meredith Jones Kingsley and William Mitchelson Jr. for defendants. D.S.C.

 

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