Ingrao v. Stoppelman
- Edward Chen
- 3:20-cv-02753
- U.S. District Court · Northern District of California
- 10
In Ingrao v. Stoppelman, Judge Chen denied defendants’ motion to dismiss Nicholas Ingrao’s derivative lawsuit, allowing it to proceed.
Nicholas R. Ingrao, Yelp, Inc., and defendants Jeremy Stoppelman, Charles Baker, and Joseph R. Nachman. The complaint was not dismissed, and the order did not resolve the underlying claims on their merits.
What happened
In Ingrao v. Stoppelman, Nicholas Ingrao sued on Yelp’s behalf, claiming that Jeremy Stoppelman and other defendants breached duties owed to Yelp. He filed the lawsuit after Yelp’s board delayed acting on his demand for the company to pursue claims.
The defendants argued that Ingrao had not provided enough specific facts to show that the board’s decision to delay was wrongful. Ingrao argued that the delay effectively failed to protect Yelp’s claims, which could be lost because of the statute of limitations.
Judge Edward Chen denied the motion to dismiss without prejudice to a possible future motion to pause the case. The court found that the board’s indefinite delay effectively rejected Ingrao’s demand and was not protected by the business-judgment rule, but the court did not decide the underlying claims’ merits.
The detailed version
- Ingrao v. Stoppelman · No. 3:20-cv-02753
- Edward Chen
- Nov. 30, 2020
Background
Nicholas R. Ingrao brought a shareholder derivative action on behalf of Yelp, Inc. against Jeremy Stoppelman, Charles Baker, and Joseph R. Nachman. A derivative action is a lawsuit asserting claims belonging to a corporation. Ingrao alleged that the defendants breached fiduciary duties to Yelp, were unjustly enriched, aided and abetted fiduciary breaches, and owed contribution under Sections 10(b) and 21D of the federal securities law.
Before filing suit, Ingrao demanded that Yelp’s board pursue claims against the defendants and take action in a related securities case. After Ingrao established his stock ownership, the board deferred substantive consideration of the demand until the related securities action ended. The complaint alleged that the board took no remedial action and that Yelp’s continued funding of the defendants’ defense harmed the company.
Motion to dismiss
The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal when a complaint does not state a legally sufficient claim. They argued that Ingrao had not pleaded with the particularity required by Federal Rule of Civil Procedure 23.1 that the board’s deferral was wrongful. The defendants did not challenge the underlying merits of Ingrao’s four claims in this motion.
The board’s deferral
The court applied Delaware law because the parties agreed that Yelp is a Delaware corporation. Under that law, a corporation may not remain neutral after receiving a shareholder demand; the board must investigate and either support or reject the demand. The court concluded that the board’s indefinite deferral, combined with the approaching statute-of-limitations deadline, amounted to a constructive rejection because waiting could prevent Ingrao from pursuing the derivative claims.
Business-judgment rule
A board’s rejection of a shareholder demand ordinarily receives a presumption under the business-judgment rule. That rule generally protects a board decision when the board acted in an informed manner, with due care, in good faith, and for a rational business purpose.
The court held that the complaint alleged enough particularized facts to overcome that presumption at the motion-to-dismiss stage. The board’s response was less than half a page and stated only that it would defer consideration because the demand involved the same allegations as the pending securities action. The court found no evidence that the board adequately investigated the demand, considered the merits of pursuing the claims, or reasonably addressed the risk that the statute of limitations would eliminate Yelp’s claims. The court also noted that the case could be paused while the securities action proceeded, making indefinite delay unnecessary to avoid duplication or other burdens.
Disposition
The court denied defendants’ motion to dismiss without prejudice to any future motion to stay the case. The order did not decide whether Ingrao would ultimately prevail on the underlying fiduciary-duty, unjust-enrichment, aiding-and-abetting, or contribution claims.
Read the full 10-page opinion on CourtListener, the free public archive maintained by the Free Law Project.