Guzman v. Johnson

483 P.3d 531

Lisa GUZMAN, on behalf of Herself and All Others Similarly Situated, Appellant,

v.Robert L. JOHNSON; Miguel Penella; John Hsu ; Arlene Manos; H. Van Sinclair; Andor M. Laszlo; Scott Royster; Dayton Judd ; John Ziegelman; Amc Network, Inc.; Digital Entertainment Holdings, LLC ; and River Merger Sub, Inc., Respondents.

No. 79818

Supreme Court of Nevada.

FILED MARCH 25, 2021

OPINION

By the Court, SILVER, J.:

A shareholder who sues a corporate director individually for breach of fiduciary duty must, under NRS 78.138(7), rebut the business judgment rule and demonstrate that the alleged breach involved intentional misconduct, fraud, or a knowing violation of the law. In the instant case, appellant Lisa Guzman filed a shareholder complaint against the individual directors of a corporation and its controlling stockholder, alleging breach of fiduciary duty and seeking damages from a merger. The district court dismissed Guzman's complaint for failure to state a claim upon which relief can be granted. Guzman now appeals, contending that she rebutted the business judgment rule by alleging in her complaint that the individual directors were interested parties in the transaction, citing Foster v. Arata, 74 Nev. 143, 325 P.2d 759 (1958).

In resolving this contention, we consider whether NRS 78.138(7) supplants the "inherent fairness" standard adopted in Foster. Under that standard, the mere allegation that a director was an interested party in the transaction rebuts the business judgment rule as a matter of law and shifts the burden to the director to prove the inherent fairness of the transaction. We conclude that NRS 78.138(7) precludes such a standard.

As we recently explained in Chur v. Eighth Judicial District Court , NRS 78.138(7) supplies "the sole avenue to hold directors and officers individually liable for damages arising from official conduct." 136 Nev. 68, 72-73, 458 P.3d 336, 340 (2020) (emphasis added). We now clarify that NRS 78.138 and Chur control, foreclosing the inherent fairness standard that previously allowed a shareholder to automatically rebut the business judgment rule and shift the burden of proof to the director. Further, because Guzman failed to rebut the business judgment rule and allege particularized facts demonstrating the requisite breach of fiduciary duty, we affirm the district court's dismissal of her complaint.

FACTS AND PROCEDURAL HISTORY

In August 2016, RLJ Entertainment, Inc. (RLJE) entered into an investment agreement with respondent Digital Entertainment Holdings, LLC, a subsidiary of respondent AMC Networks, Inc. Under the investment agreement, AMC, through Digital, loaned RLJE $65 million, and RLJE gave AMC the option of owning at least 50.1 percent of RLJE's outstanding common stock, enabling AMC to become RLJE's controlling stockholder. The investment agreement prohibited RLJE from considering any other acquisition proposal (the "No-Shop Provision"). The agreement also gave AMC the right to designate two directors to RLJE's board and, upon the exercise of the warrants in full, AMC had the right to designate a majority of RLJE's board. A majority of the shareholders voted in favor of the investment agreement.

In February 2018, AMC sent RLJE a letter offering to purchase the outstanding shares of common stock for $4.25 per share. In that letter, AMC stated that it would "not sell [its] stake in RLJE or be part of any other process." AMC also urged the board to form an independent special committee to review the proposal, with help from the special committee's own legal and financial advisors. In response to AMC's proposal, RLJE's board formed a special committee consisting of two of its directors, respondent Andor M. Laszlo and respondent Scott Royster (the Special Committee).¹ The Special Committee asked RLJE's board to provide it with authority to consider and solicit offers from third parties. AMC expressed that it would not support any other transaction and that any attempt at soliciting other offers would be futile considering AMC's majority ownership and the No-Shop Provision in the investment agreement. RLJE's board thereafter denied the Special Committee's request.

Over roughly 50 days, the Special Committee negotiated the merger. The Special Committee rejected AMC's first proposal of $4.25 per share as insufficient. AMC increased its offer to $4.92 per share, but the Special Committee rejected that as well, concluding it still materially undervalued RLJE's common stock. The Special Committee told AMC that it would be unlikely to consider a price of less than $6.00 per share. AMC revised its offer to $5.95 per share, but the Special Committee held to a minimum negotiating price of $6.00 per share. AMC agreed to increase its offer to $6.00. The Special Committee countered that it would be prepared to accept a price of $6.25 per share, and AMC agreed.

As of October 3, 2018, AMC beneficially owned approximately 51.9 percent of RLJE's outstanding stock and had notified RLJE it would vote all of its shares in favor of the merger. The merger proxy statement, mailed to stockholders on or about October 5, 2018, disclosed a contribution agreement between AMC and the chair of RLJE's board of directors, respondent Robert L. Johnson, and stated that the Special Committee, and its financial advisor, determined the merger was fair and in the best interests of RLJE and the RLJE stockholders. The merger was approved at an October 31 stockholder meeting. AMC thereby acquired RLJE.

One day before the shareholder vote approved the merger, Guzman filed a class action against RLJE directors Johnson, Miguel Penella, John Hsu, Arlene Manos, H. Van Sinclair, Laszlo, Royster, Dayton Judd, and John Ziegelman (collectively, when possible, the individual directors), AMC, and AMC's subsidiaries Digital and River Merger Sub, Inc.,² alleging that they breached their fiduciary duties to her and the other minority stockholders in connection with the transaction. Guzman argued that because AMC owned a majority of RLJE's stock, AMC owed a fiduciary duty to ensure the sale was fair and RLJE could not realistically contest the sale. Guzman further claimed that AMC secured RLJE chair Johnson's support before making its first share-price offer, asserting that he had already negotiated the terms of his continuing employment with, and equity in, the post-merger company. Guzman acknowledged the two members of the Special Committee, Laszlo and Royster, "had no commercial, financial or business affiliations or relationships with any of AMC, [ ] Johnson or any of their respective affiliates." But Guzman argued the Special Committee had no power to consider or solicit offers from third parties because AMC told the Special Committee it would not consider any such offers and that exploring alternatives to the merger was futile.

The individual directors and AMC moved to dismiss under NRCP 12(b)(5), arguing that Guzman failed to rebut the business judgment rule under NRS 78.138. Guzman countered that she sufficiently pleaded facts to rebut the business judgment rule by arguing the fiduciaries here were interested parties to the transaction, citing Foster v . Arata , 74 Nev. 143, 325 P.2d 759 (1958), and Shoen v. SAC Holding Corp ., 122 Nev. 621, 640 n.61, 137 P.3d 1171, 1184 n.61 (2006), disavowed on other grounds by Chur , 136 Nev. at 72, 458 P.3d at 340. She argued that under Foster and Shoen the burden shifted to the individual directors to show they acted in good faith when negotiating and approving the merger. Guzman additionally argued that NRS 78.138 did not protect AMC as a controlling stockholder.

During a hearing on the motion, the district court asked Guzman what allegations in her complaint supported her claim that the Special Committee was not disinterested in the transaction. Guzman responded that "they were at risk of being ousted and that's not a good footing." Guzman then conceded, however, that she had no specific allegations implicating the Special Committee. The district court concluded that Guzman failed to state adequate facts in her complaint showing the Special Committee was not disinterested. Therefore, the court determined that the business judgment rule applied because RLJE had given the Special Committee full authority to determine whether to merge with AMC. The district court dismissed the action against all of the individual directors as well as AMC, finding that while "AMC is not a board member ... [Guzman is] attacking the transaction." The district court gave leave to amend, but Guzman instead requested entry of judgment and now appeals.

DISCUSSION

Guzman contends that the district court erred by applying NRS 78.138 to the individual directors and AMC, and that pursuant to Foster, she rebutted the business judgment rule as a matter of law and shifted the burden of proof to the individual directors by alleging that they were "interested fiduciaries" in the merger. Guzman argues in the alternative that she presented sufficient allegations against the individual directors and AMC to withstand the motion to dismiss.

A breach of a fiduciary duty gives rise to liability for damages resulting from the breach. See Stalk v. Mushkin, 125 Nev. 21, 28, 199 P.3d 838, 843 (2009). In Chur, we explained that a litigant who sues directors or officers of a corporation individually for breach of fiduciary duty must satisfy both requirements of NRS 78.138(7) (2017), which provides the sole method for holding individual directors liable for corporate decisions.

136 Nev. at 72-73, 458 P.3d at 340-41.³ That statute, enacted in 1991,⁴ requires the claimant to (1) rebut the business judgment rule and (2) demonstrate a breach of fiduciary duty involving intentional misconduct, fraud, or another knowing violation of the law. NRS 78.138(7).

Here, Guzman filed suit against the individual directors and AMC for breach of fiduciary duty regarding the merger. We first address whether Guzman met the requirements of NRS...