May 7, 2010 | Posted By
California Court Of Appeal Affirms Dismissal Of Shareholder Derivative Action
Where Company Refused Demand
In Bezirdjian v. O’Reilly, Case No. A124859, 183 Cal. App. 4th 316, 2010 WL 1212437 (Cal. App. Mar. 30,
2010), the California Court of Appeal for the First Appellate District affirmed the dismissal of a shareholder
derivative action against current and former board members of Chevron Corporation. The Court held that
the plaintiff failed to allege facts with sufficient particularity to rebut the presumption that the company’s
refusal to pursue the case in response to the shareholder demand was protected by the business judgment
rule. This decision joins the growing body of California cases that follow or apply Delaware law in protecting
the integrity of corporate decision-making.
In Bezirdjian, plaintiff alleged breach of fiduciary duties, gross mismanagement, constructive fraud and
waste of corporate assets in connection with illicit payments Chevron allegedly made to Saddam Hussein in
exchange for Iraqi oil from 2000 to 2003. Under Delaware law (Chevron is a Delaware corporation), a
shareholder seeking to institute an action against board members on behalf of a corporation must exhaust
intracorporate remedies by making a pre-suit demand on the directors or, alternatively, plead with
particularity why demand is excused. Here, the parties stipulated to treating the initial complaint as a
demand on the board of directors to pursue an action against current and former board members. The
parties further stipulated that the shareholder plaintiff could file an amended complaint after this
“demand” had been considered.
In response to the “demand,” Chevron’s board authorized a special committee of three independent
directors, appointed to the board after the alleged wrongdoing, to “investigate, analyze, deliberate upon,
and respond to the demand” and make a binding decision on the board without further review. On J une 11,
2008, the committee issued a determination that, after interviewing 34 individuals and reviewing over
150,000 pages of documents, it was not in the best interests of the corporation or its shareholders to pursue
the claims alleged in the complaint. Thereafter, the plaintiff shareholder amended his complaint to indicate
that his demand had been refused, and challenged the refusal of demand as wrongful and itself a breach of
fiduciary duty.
Chevron responded by filing a motion for judgment on the pleadings to dismiss the action. In its motion,
Chevron was able to show from the face of the pleadings, facts stipulated by the parties and those matters
properly subject to judicial notice (here, its 2008 proxy statement) that the special committee was
