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From Securities Regulation Daily, June 16, 2017

Liability allegations fall short of excusing demand on Qualcomm board

By Amy Leisinger, J.D.

The Delaware Chancery Court has dismissed claims for breach of fiduciary duty, waste, and unjust enrichment against Qualcomm Inc.’s directors for failure to plead demand futility. According to the court, the complaint did not allege particularized facts giving rise to an inference that a majority of the board faces a substantial likelihood of liability based on awareness of red flags indicating misconduct or leading Qualcomm to enter a wasteful transaction (In re Qualcomm Inc. FCPA Stockholder Derivative Litigation, June 16, 2017, Montgomery-Reeves, T.).

Alleged violations. In March 2016, the SEC determined that, between 2002 and 2012, Qualcomm violated the Foreign Corrupt Practices Act’s prohibitions on illicit payments to foreign government officials to obtain business and ordered Qualcomm pay a $7.5 million penalty and make periodic reports to the SEC. The complaint alleged that the Qualcomm board and its audit committee knew of several red flags regarding FCPA compliance in China and Korea. According to the plaintiffs, demand was excused as futile because a majority of the board faced a substantial likelihood of liability for breaching their duties to the company and its shareholders given this knowledge.

Red flags and demand futility. Under Rales v. Blasband, to establish demand futility, a plaintiff must make particularized allegations that create a reasonable doubt as to the independence of a board of directors. A plaintiff may satisfy this test by demonstrating that the complaint’s underlying claims pose a substantial threat of liability to a majority of the board. The complaint alleges a breach of fiduciary duty claim for improper oversight regarding which directors may be held liable if they failed to implement any reporting or controls or consciously failed to monitor operations. To rely on the second basis, the court noted, a complaint must allege that the directors knew or should have known that the company was violating the law and acted in bad faith by failing to prevent or remedy the violations.

The plaintiffs do not argue that the Qualcomm board intentionally caused the violations or plead particularized facts giving rise to an inference that the board consciously disregarded its duties, the court stated. Further, the court found that the plaintiffs do not allege that the board consciously disregarded the red flags cited in the complaint; in fact, the court continued, many of the documents regarding the "red flags" cited to also include planned remedial actions, including reporting enhancements and additional training. These responses show that the board did not act in bad faith or consciously disregard the red flags, according to the court.

The court also found that the Qualcomm directors do not face a substantial risk of liability on the corporate waste claim because the complaint does not allege that the directors authorized any questionable payment or, as to the excessive compensation argument, that directors or officers failed to perform the services for which they were paid. The claim for unjust enrichment also must fail, the court found, as there is no basis for the conclusory statement that the individual defendants profited from the purported improper inflation of Qualcomm financial results.

Because the plaintiffs failed to adequately allege facts giving rise to potential liability, demand was not excused, and the court dismissed the complaint in its entirety.

The case is No. 11152-VCMR.

Attorneys: Blake A. Bennett (Cooch and Taylor, P.A.) for Richard Leslie, City of Pontiac General Employees Retirement System, City of Dearborn Heights General Governmental Employees Retirement System. Peter J. Walsh, Jr. (Potter Anderson & Corroon LLP) for Paul E. Jacobs. David E. Ross (Ross Aronstam & Moritz LLP) for Qualcomm Inc.

Companies: City of Pontiac General Employees Retirement System; City of Dearborn Heights General Governmental Employees Retirement System; Qualcomm Inc.

MainStory: TopStory CorporateGovernance CorpGovNews GCNNews DirectorsOfficers FiduciaryDuties DelawareNews

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