In Re VWARE, INC. STOCKHOLDER DERIVATIVE LITIGATION

Background

The Booth Family Trust, Hugues Gervat, and Stacie Williams brought a shareholder derivative action on behalf of VMware, Inc. The complaint named Anthony Bates, Marianne Brown, Michael Brown, Donald Carty, Michael Dell, Egon Durban, Karen Dykstra, Patrick Gelsinger, Paul Sagan, and Zane Rowe as defendants, with VMware as the nominal defendant. Plaintiffs alleged that the defendants made false or misleading statements about VMware’s quarterly backlog between August 2018 and February 2020, caused VMware to repurchase approximately $1.334 billion of its common stock at allegedly inflated prices, and engaged in insider stock sales. The claims included breach of fiduciary duty, insider trading, contribution under Sections 10(b) and 21D of the Securities Exchange Act of 1934, a derivative claim under Section 10(b) and Securities and Exchange Commission Rule 10b-5, and unjust enrichment.

This was the second amended complaint. The court had previously dismissed an earlier complaint with leave to amend. Defendants again moved to dismiss, arguing that Plaintiffs had not made the required pre-suit demand on VMware’s board and had not adequately pleaded that demand would have been futile. They also argued that the complaint failed to state a claim under Federal Rule of Civil Procedure 12(b)(6).

Demand futility

A shareholder derivative action allows a shareholder to pursue claims on a corporation’s behalf. Before bringing such an action, the shareholder generally must ask the corporation’s board to act. Under the Delaware law applied by the court, demand is excused only if the complaint pleads particularized facts creating a reasonable doubt that at least half of the board could fairly and independently evaluate the demand.

The court evaluated the ten-member board in place when the second amended complaint was filed. It found that Plaintiffs had not shown demand was futile as to Kenneth Denman, Marianne Brown, Michael Brown, Karen Dykstra, Paul Sagan, Anthony Bates, or Donald Carty. The court concluded that the allegations did not adequately show that these directors faced a substantial likelihood of liability, had received a material personal benefit, or lacked independence from an interested director.

The court did find that Plaintiffs sufficiently alleged that Michael Dell and Egon Durban had a personal financial interest in maintaining VMware’s allegedly inflated stock price because of their interests in Dell Technologies and the planned spinoff. The court also found that Plaintiffs sufficiently pleaded that Raghu Raghuram lacked independence from Dell and Durban because litigation against them could jeopardize Raghuram’s continued employment and approximately $25 million in equity awards. However, these findings involved only three of the ten directors and therefore did not satisfy the requirement that at least half of the board be interested or not independent.

The court found that Plaintiffs had not shown Raghuram lacked independence from Patrick Gelsinger or Zane Rowe. It also found that allegations describing Bates’s and Durban’s professional, charitable, and social connections did not adequately show that Bates lacked independence. Similarly, the allegations concerning Carty’s long work history with Dell, compensation, and statements describing Dell as a close friend did not adequately rebut the presumption that Carty was independent.

Failure to state a claim

Because the court concluded that Plaintiffs had failed to plead demand futility, it did not reach Defendants’ separate argument that the complaint failed to state a claim under Rule 12(b)(6).

Disposition

The court held that amendment would be futile because Plaintiffs had not cured the deficiencies identified in the earlier order. It granted Defendants’ motion to dismiss the Consolidated Second Amended Shareholder Derivative Complaint without leave to amend. The action was dismissed with prejudice, judgment was to enter separately, and the Clerk was directed to close the file.