Clifford Tindall v. First Solar Inc.

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

CLIFFORD TINDALL; BRITT No. 17-15185

NEDERHOOD; ENG KWANG TAN;

ERIC FEIGIN, D.C. No.

Plaintiffs-Appellants, 2:12-cv-00769-

DGC

v.

FIRST SOLAR INCORPORATED; OPINION

MICHAEL J. AHEARN; ROBERT J.

GILLETTE; MARK R. WIDMAR; JENS

MEYERHOFF; JAMES ZHU; BRUCE

SOHN; DAVID EAGLESHAM; CRAIG

KENNEDY; JAMES F. NOLAN;

WILLIAM J. POST; J. THOMAS

PRESBY; PAUL H. STEBBINS;

MICHAEL SWEENEY; JOSE H.

VILLAREAL,

Defendants-Appellees.

Appeal from the United States District Court

for the District of Arizona

David G. Campbell, District Judge, Presiding

Argued and Submitted January 12, 2018

San Francisco, California

Filed June 13, 2018

2 TINDALL V. FIRST SOLAR INC.

Before: J. Clifford Wallace, Johnnie B. Rawlinson,

and Paul J. Watford, Circuit Judges.

Opinion by Judge Wallace

SUMMARY *

Demand Futility

The panel affirmed the district court’s dismissal of a

shareholder derivative action under Fed. R. Civ. P. 23.1 for

failure to show demand futility.

Shareholders of First Solar, Inc., alleged that officers and

directors of the company breached their fiduciary duties by

failing to disclose in financial statements and press releases

the existence of manufacturing and design defects in First

Solar’s solar panels. The shareholders made no demand to

the board before bringing the derivative action.

Reviewing for an abuse of discretion, and applying

Delaware law, the panel held that the shareholders failed to

show demand futility. The panel held that the Aronson test

for demand futility did not apply because it is limited to

board business decisions. Under the Rales test, demand was

not excused.

*

This summary constitutes no part of the opinion of the court. It

has been prepared by court staff for the convenience of the reader.

TINDALL V. FIRST SOLAR INC. 3

The panel also held that the district court did not abuse

its discretion in denying plaintiff’s motion to extend the

deadline for filing their fourth amended complaint.

COUNSEL

George C. Aguilar (argued) and Brian J. Robbins, Robbins

Arroyo LLP, San Diego, California; Yury A. Kolesnikov,

Albert Y. Chang, and Francis A. Bottini Jr., Bottini & Bottini

Inc., La Jolla, California; for Plaintiffs-Appellants.

Anna Erickson White (argued), Robert L. Corez Webb, and

Jordan Eth, Morrison & Foerster LLP, San Francisco,

California; Sophia M. Brill and Brian R. Matsui, Morrison

& Foerster LLP, Washington, D.C.; for Defendants-

Appellees.

OPINION

WALLACE, Circuit Judge:

Plaintiffs appeal from the dismissal of their shareholder

derivative action under Federal Rule of Civil Procedure 23.1

for failure to show demand futility. We have jurisdiction

under 28 U.S.C. § 1291, and affirm.

I.

First Solar, Inc. is one of the world’s largest producers of

photovoltaic solar panel modules. Plaintiffs, shareholders of

First Solar, appeal from the dismissal of their fiduciary duty

claims against eight directors and five officers of the

company. Plaintiffs allege that Defendants breached their

4 TINDALL V. FIRST SOLAR INC.

fiduciary duties by failing to disclose in financial statements

and press releases the existence of manufacturing and design

defects in First Solar’s solar panels. This alleged

wrongdoing was also an issue in a separate but related

securities fraud case, Mineworkers’ Pension Scheme v. First

Solar Inc., 881 F.3d 750, 752 (9th Cir. 2018). Plaintiffs did

not make a litigation demand on First Solar’s board of

directors before filing this action.

II.

The parties dispute the applicable standard of review.

While the parties agree that our court applies abuse of

discretion review to Rule 23.1 dismissals, Plaintiffs argue

that such review is inconsistent with the de novo review that

we apply to Rule 12(b)(6) dismissals. This argument has

persuaded other courts. See Espinoza ex rel. JPMorgan

Chase & Co. v. Dimon, 797 F.3d 229, 234–35 (2d Cir. 2015)

(collecting cases). We, however, do not consider its merits

because binding authority compels us, as a three-judge

panel, to apply abuse of discretion review. Potter v. Hughes,

546 F.3d 1051, 1056 (9th Cir. 2008).

III.

A derivative action is an action brought by a shareholder

on behalf of a corporation. See Rosenbloom v. Pyott,

765 F.3d 1137, 1147 (9th Cir. 2014). Before bringing the

action, the shareholder must “demand action from the

corporation’s directors or plead with particularity the

reasons why such demand would have been futile.” La. Mun.

Police Emps.’ Ret. Sys. v. Wynn, 829 F.3d 1048, 1057 (9th

Cir. 2016), quoting Rosenbloom, 765 F.3d at 1148. Where,

as here, the shareholders made no demand to the board

before bringing the derivative action, they must show

demand futility. Wynn, 829 F.3d at 1057. The law of the state

TINDALL V. FIRST SOLAR INC. 5

of incorporation governs whether demand is futile. Arduini

v. Hart, 774 F.3d 622, 628 (9th Cir. 2014). First Solar is a

Delaware corporation and Delaware law, therefore, applies

to this action.

Delaware has two tests for demand futility—the Aronson

test and the Rales test. Wood v. Baum, 953 A.2d 136, 140

(Del. 2008). The parties agree that Plaintiffs’ claims can

survive, if at all, only under the Aronson test. The Aronson

test “requires that the plaintiff allege particularized facts

creating a reason to doubt that ‘(1) the directors are

disinterested and independent or that (2) the challenged

transaction was otherwise the product of a valid exercise of

business judgment.’” Id., quoting Aronson v. Lewis,

473 A.2d 805, 814 (Del. 1984). Aronson’s second

alternative is the lynchpin of Plaintiffs’ appeal. Plaintiffs

argue that if the Aronson test applies, a showing of gross

negligence by the board would excuse demand under the

second alternative. Plaintiffs concede the same is not true for

the Rales test. Accordingly, we must first decide whether the

Aronson or Rales test applies to this action.

Which test applies depends, in part, on the nature of the

alleged wrongdoing. See Wood, 953 A.2d at 140. Plaintiffs

argue the Aronson test applies to claims involving any

affirmative action by the board. They style the alleged

wrongdoing here as an “approval” of financial statements or

press releases concealing the product defects. Plaintiffs point

to authorities showing, they argue, that a director makes a

“statement” for purposes of the securities laws where, as

here, they sign financial statements filed with the Securities

and Exchange Commission. Defendants counter that

whether the alleged wrongdoing was an affirmative action

does not matter. The Aronson test, they say, applies not to all

affirmative actions, but only to board business decisions.

6 TINDALL V. FIRST SOLAR INC.

We agree with Defendants. Delaware law appears clear

that the Aronson test does not apply to all actions, but to

board business decisions. In Rales v. Blasband, the Delaware

Supreme Court held that the “essential predicate for the

Aronson test is the fact that a decision of the board of

directors is being challenged in the derivative suit.”

634 A.2d 927, 933 (Del. 1993) (emphasis in original). The

court further explained that the Aronson test does not apply

“where the subject of the derivative suit is not a business

decision of the board.” Id. at 934. More recently, in Wood

v. Baum, the Delaware Supreme Court stated that “[t]he

Aronson test applies to claims involving a contested

transaction i.e., where it is alleged that the directors made a

conscious business decision in breach of their fiduciary

duties.” 953 A.2d at 140 (emphasis added); see also In re

Citigroup Inc. S’holder Derivative Litig., 964 A.2d 106, 120

(Del. Ch. 2009) (holding the Rales test applies “to show

demand futility where the subject of the derivative suit is not

a business decision of the board”); Guttman v. Huang,

823 A.2d 492, 499–500 (Del. Ch. 2003) (holding the Rales

test applied because the allegations “do not attack a specific

business judgment of the board”).

Limiting the Aronson test to board business decisions

makes sense because only those decisions implicate the

business judgment rule invoked by Aronson’s second

alternative. The business judgment rule is “a presumption

that in making a business decision the directors of a

corporation acted on an informed basis, in good faith and in

the honest belief that the action taken was in the best interests

of the company.” Gantler v. Stephens, 965 A.2d 695, 705–

06 (Del. 2009) (citation omitted) (emphasis added). “[T]he

core rationale of the business judgment rule . . . is that judges

are poorly positioned to evaluate the wisdom of business

decisions . . . .” Corwin v. KKR Fin. Holdings LLC,

TINDALL V. FIRST SOLAR INC. 7

125 A.3d 304, 313 (Del. 2015) (emphasis added). Without a

business decision, it is “impossible to perform the essential

inquiry contemplated by Aronson—whether the directors

have acted in conformity with the business judgment rule in

approving the challenged transaction.” Rales, 634 A.2d at

933.

Even Plaintiffs seem to recognize that Aronson’s

application is limited to business decisions by arguing in

their reply brief that the approval of financial statements and

press releases is, in fact, a business decision. Plaintiffs argue

that we should read “business decision” broadly because

Delaware courts have associated business judgment not only

with transaction decisions, but also with litigation decisions,

delegations to experts, compensation decisions, and stock

buyback decisions. But these types of decisions differ from

those here because they involve judgments by the board as

to whether to enter into a course of conduct, generally one

that creates new rights or obligations on behalf of the

company. By contrast, financial statements and press

releases provide a snapshot of past conduct; they reflect

business judgments already made. Approving financial

statements and press releases generally does not involve

weighing the risks and rewards of future conduct, which is

the type of decision-making process the business judgment

rule is designed to protect.

We view this case as more analogous to the board

oversight claims to which Delaware courts regularly apply

the Rales test. See, e.g., City of Birmingham Ret. & Relief

Sys. v. Good, 177 A.3d 47, 55 (Del. 2017). Tellingly,

Plaintiffs have cited no Delaware authority applying the

Aronson test to a failure-to-disclose case, such as this one.

Defendants have cited authorities that, while not dispositive,

suggest the Rales test would apply. For example, in Guttman

8 TINDALL V. FIRST SOLAR INC.

v. Huang, plaintiffs brought both failure to disclose claims

and oversight claims. 823 A.2d at 494–97. While the

Delaware Chancery Court in Guttman did not compare the

tests because the parties had agreed Rales applied, the court

explained the reason for the parties’ agreement was that “the

plaintiffs do not challenge any particular business decision

made by the [corporation’s] board as a whole.” Id. at 499.

Likewise, Seminaris v. Landa involved claims that the

“board failed to prevent [the CEO] from misrepresenting the

corporation’s financial condition” and that “board members

signed misleading statements on behalf of the corporation.”

662 A.2d 1350, 1354 (Del. Ch. 1995). The Delaware

Chancery Court held that Rales applied because “plaintiff

[did] not challenge a decision of [the corporation’s] board of

directors” or “any specific board action that approved or

ratified these alleged wrongdoings.” Id.

In sum, we conclude that the approval of financial

statements and press releases here was not a board business

decision implicating the Aronson test. The Rales test applies

to this action. We need go no further in our analysis because

Plaintiffs concede here that the Rales test does not excuse

demand. We also need not decide whether gross negligence

could excuse demand under Aronson’s second alternative,

since Aronson does not apply. Therefore, the district court

did not abuse its discretion by dismissing Plaintiffs’

derivative action for failure to show demand futility.

IV.

Plaintiffs also appeal from the denial of their motion to

extend the deadline for filing their fourth amended

complaint. Plaintiffs argue the district court abused its

discretion by failing to cite Federal Rule of Civil Procedure

6(b)(1)(A), the rule governing requests for extensions of

time made before the deadline expires. That rule provides

TINDALL V. FIRST SOLAR INC. 9

that a district court may extend a deadline “for good cause.”

Fed. R. Civ. P. 6(b)(1)(A).

We reject Plaintiffs’ argument. Rule 6 provides that the

court may grant the motion for good cause, not that it must

do so. Fed. R. Civ. P. 6(b)(1)(A). While district courts

normally grant these requests in the absence of bad faith or

prejudice to the adverse party, see Ahanchian v. Xenon

Pictures, Inc., 624 F.3d 1253, 1259 (9th Cir. 2010), the

district court properly concluded that Plaintiffs had not

shown good cause. “That the district court did not recite the

text of [the rule] or employ a specific phrase . . . is not

determinative.” United States v. Ogles, 440 F.3d 1095, 1104

(9th Cir. 2006) (en banc). What matters is that the district

court actually considered the proper standard. See id. Here,

the court viewed the deadline extension, which would have

prolonged the time to amend until after the resolution of

Plaintiffs’ motion to intervene in a related action, as an

attempt to circumvent the district court’s prior rulings

denying Plaintiffs discovery. The district court’s

determination that “the Court cannot justify delaying this

case further while Plaintiffs pursue an appeal of their effort

to obtain improper discovery” is another way of saying

Plaintiffs have not shown good cause. Our case of United

States v. Signed Personal Check No. 730, 615 F.3d 1085,

1091–92 (9th Cir. 2010) is not to the contrary. There, the

district court erred not because it failed to recite the legal

standard, but because this failure led it to apply the wrong

standard. Id. Here, the district court applied the right

standard, simply without reciting it.

AFFIRMED.