Benjamin Braun – From General Electric to Wynn Resorts to Teva Pharmaceutical, shareholders are making their voices heard by bringing derivative actions to enforce fiduciary duties.[1] Indeed, a corporate entity broadly protects corporate directors, officers, and managers from personal liability to shareholders. Accordingly, shareholders generally defer to the managers of the corporation unless unjustifiable business decisions were made and fiduciary duties were breached. A matter of equity, shareholders may bring a suit on behalf of the corporation concerning its management, and to speak for the corporation when the board’s self-interest prevents it from speaking for the corporation.[2]
In the wake of numerous sexual harassment allegations against former Wynn Resorts Chairman and CEO Steve Wynn, several groups of shareholders have filed lawsuits against Wynn Resorts and its board of directors for failing to investigate its Chief Executive.[3] In a twenty-three page shareholder derivative complaint, shareholders sought compensation for breach of fiduciary duty. The suit alleges that Wynn Resorts turned a blind eye and disregarded a sustained pattern of unacceptable behavior, including “countless acts of sexual harassment, sexual coercion, and other misconduct to take place over a period of decades.”[4] The suit contends that certain officers and directors were aware that the disgraced CEO repeatedly made unwanted sexual advances towards employees and pressured employees to perform sexual acts, yet failed to either investigate or hold him accountable. By failing to act and not confront Wynn’s predatory behavior, the ten-member board breached its fiduciary duty to the company. The board’s incompetence hurt the corporation’s value because Wynn Resorts’ stock plummeted in wake of the damning and horrible revelations of sexual misconduct.[5] The stock was hit hard, declining nearly twenty-percent, because of the public pressure following a published report, which detailed a history of sexual abuse. Together with mounting lawsuits, the possibility of losing gaming licenses and other legal and regulatory sanctions have hurt the corporation’s market capitalization, subsequently warranting a shareholder derivative action accusing the board of mismanagement.
In response, Wynn Resorts formed a special committee to investigate the situation. The board’s special committee is headed by Patricia Mulroy, Wynn’s sole female board member and a former member of the Nevada Gaming Commission.[6] Mulroy stated, “[t]he board is deeply committed to ensure the safety and well-being of all of the Company’s employees.”[7] Special committees are often used as a defense against a derivative lawsuit.[8] The role of special committees is to combat conflict of interest by composing a committee of disinterested and independent parties. The special committee conducts a proper review, in good faith, and if it determines the business judgment did not breach fiduciary duty then the derivative suit is dismissed under the business judgment rule.[9]
In conclusion, shareholder derivative suits send a clear message to boards of directors and officers to be certain that they conform to recognized standards of conduct and that they carefully collect and review relevant material information before making a decision. To this end, the New Jersey Supreme Court in Francis v. United Jersey Bank emphasized “shareholders have a right to expect that directors will exercise reasonable supervision and control over the policies and practices of a corporation.”[10] Thus, directorial management requires a general monitoring of corporate affairs: the “institutional integrity” of a corporation depends upon the proper discharge by directors of those [fiduciary] duties.[11] Moreover, not knowing should not be an excuse either.[12] As Jeffrey Sonnenfeld, a senior associate dean for leadership studies at the Yale School of Management, said, “[i]f they didn’t know this, how come they didn’t?”[13]
[1] John Cropley, More Shareholder Lawsuits Filed Against GE, Daily Gazette, (Feb. 19, 2018), https://dailygazette.com/article/2018/02/19/more-shareholder-lawsuits-filed-against-ge; Chen Ma’anit, Teva Shareholder Files For $519m Derivative Suit, Globes, (Jan. 02, 2017, 11:35 PM), http://www.globes.co.il/en/article-teva-shareholder-files-for-519m-derivative-suit-1001169853; Ferrara, infra note 3.
[2] See Cohen v. Beneficial Industrial Loan Corp., 387 U.S. 541, 541 (1949); see also Eisenberg v. Flying Tiger Line, Inc., 451 F. 2d 267, 267 (2d Cir. 1971).
[3] David Ferrara, Second Shareholder Lawsuit Filed Against Wynn Resorts, Directors, Las Vegas Review Journal (Feb. 15, 2018, 7:58 PM), https://www.reviewjournal.com/business/casinos-gaming/second-shareholder-lawsuit-filed-against-wynn-resorts-directors/.
[4] Id.
[5] WKBH Staff, DiNapoli Filed Lawsuit Against Wynn Resorts Ltd., WKBH Buffalo, (Feb. 26, 2018, 12:21 PM), https://www.wkbw.com/news/national/dinapoli-files-lawsuit-against-wynn-resorts-ltd.
[6] Business, Wynn Resorts Board to Probe Allegations Against CEO, Wall Street Journal, (Jan. 27, 2018, 12:53 AM), https://www.wsj.com/articles/wynn-resorts-board-to-probe-allegations-against-ceo-1517032399.
[7] Christopher Palmeri & Jeff Green, Harassment Claims Add to History of Issues with Wynn Board, Bloomberg, (Jan. 28, 2018, 1:01 PM), https://www.bloomberg.com/news/articles/2018-01-28/sex-harassment-claims-add-to-history-of-issues-with-wynn-board.
[8] See Zapata Corp. v. Maldonado, 430 A. 2d 779, 779 (Del. 1981); see also Tom Hals, Wynn Resorts Board Sued For Failing To Investigate Chief Executive, YAHOO.com, (Feb. 07 2018), https://finance.yahoo.com/news/wynn-resorts-board-sued-failing-211142127.html (“plaintiffs allege the special committee is not independent.”).
[9] Maldonado v. Flynn, 485 F. Supp. 274, 282-86 (S.D. N.Y. 1980).
[10] Francis v. United Jersey Bank, 432 A. 2d 814, 814 (N.J. 1981).
[11] Id.
[12] See Jemele Hill, The NBA Needs to Send a No-Tolerance Message to Mark Cuban, Mavericks, Undefeated, (Feb. 23, 2018), https://theundefeated.com/features/the-nba-needs-to-send-a-no-tolerance-message-to-mark-cuban-mavericks/ (enjoining the NBA to take action because being uninformed is not an excuse: “Cuban told ESPN’s Tim MacMahon that he was “rarely present at the office.” He has denied knowing about Ussery’s alleged transgressions.”).
[13] See generally Smith v. Van Gorkom, 488 A. 2d 858, 858 (Del. Sup. Ct. 1985) (dealing with CEO and board’s uninformed decision-making).
