Court of Appeal:
Sempra Directors Face No Liability Over Massive Gas Leak
Majority Says Shareholders Fail to Show That Pre-Litigation Demands to Board Would Have Been Futile;
Derivative Action Stems From 2015 Aliso Canyon Gas Leak, Spawning $1.1 Billion Settlement
By a MetNews Staff Writer
Directors of Sempra Energy cannot be held liable to shareholders for the estimated $1.1 billion loss occasioned by settlements to victims of the massive Aliso Canyon gas leak near Porter Ranch in 2015 because no demand was served on the corporation’s board prior to suits being filed, Div. Five of the Court of Appeal for this district has held, in a 2-1 opinion.
Sempra is the parent of the Southern California Gas Company (“SoCalGas”), which maintained the underground storage facility in the Santa Susana Mountains from which the gas escaped. The result was the largest natural gas leak in U.S. history and one of the nation’s worst environmental disasters.
More than 8,000 families were forced to flee their homes as the result of the contaminated air. A settlement was reached in 2021.
That was after shareholders filed derivative actions for breach of fiduciary duty, beginning in February 2016. A consolidated shareholder derivative complaint was filed on Aug. 10, 2017.
Then-Los Angeles Superior Court Judge Daniel J. Buckley (now an arbitrator/mediator) on Dec. 30, 2020, sustained the demurrers to an amended complaint without leave to amend. He found that the plaintiffs had not adequately pled that a pre-litigation demand would have been futile.
Affirmance came Friday in an opinion by Justice Dorothy Kim, in which Justice Carl H. Moor joined. Presiding Justice Laurence D. Rubin dissented.
Kim wrote that Buckley correctly determined that futility was not apparent from the pleading and, she said, the “allegations do not otherwise sufficiently allege a substantial likelihood of director liability” which would require a showing of bad faith.
Corporations Code Section
Kim pointed to Corporations Code §800(b)(2) which bars a shareholder action unless “[t]he plaintiff alleges in the complaint with particularity plaintiff’s efforts to secure from the board such action as plaintiff desires, or the reasons for not making such effort, and alleges further that plaintiff has either informed the corporation or the board in writing of the ultimate facts of each cause of action against each defendant or delivered to the corporation or the board a true copy of the complaint which plaintiff proposes to file.”
The plaintiffs argued that there was simply no mechanism in place for putting forth their demands to the board.
To the contrary, Kim said, after shareholder Charles Fazio and another on April 13, 2016 demanded that the Board of Directors pursue claims against certain of its own members and certain officers for alleged breaches of fiduciary duty prior to the gas leak and while the leak was in progress, the board did, on June 24 of that year create a demand review committee. It was charged with looking into the conduct in question and making recommendations as to how to respond.
Fazio proceeded to file an action against the board on March 1, 2017, having received no response to his demand. The board’s failure to act on Fazio’s demand, the appellants argued, demonstrated that nothing would have come of like demands from them, thus establishing futility.
“…[W]hile this appeal was pending, the Board acted on Fazio’s demand and refused it. Thus, plaintiffs’ contention that the Board failed to act on Fazio’s demand is now moot….Moreover, the Board’s eventual refusal of the Fazio demand does not, by itself, demonstrate that any demand would have been futile. At best, the eventual refusal of Fazio’s demand made it more probable that the Board would have also refused plaintiffs’ demand. But it does not demonstrate that it would have been futile for plaintiffs to make such a demand….Accordingly, the cases cited in plaintiffs’ brief that address when a complaint sufficiently alleges that a plaintiff has filed a demand that a board of directors has refused.”
In his dissent, Rubin said it does not stand to reason to suppose that directors, if asked to authorize suit against themselves, would have done so.
He wrote :
“The majority agrees that, at the time the plaintiffs filed the operative complaint, eight of the fifteen board members—a majority—had been on the Board at the time of the gas leak….The issue presented by this appeal, simply, is whether plaintiffs have alleged facts sufficient to raise a reasonable doubt that the Board could have properly exercised its independent and disinterested business judgment in responding to a demand that it authorize a corporate suit against, among others, a majority of its current members….This, in turn, depends on whether the majority of board members, who had been on the board at the time of the leak, face a substantial likelihood of personal liability in the action….”
“In this way, the ‘futility’ requirement turns into an evaluation of the merits of the action. If the action has merit, the individual defendants face a substantial likelihood of personal liability, and the futility requirement is satisfied.”
Rubin said that under precedent also cited by Kim, liability would exist if directors had completely failed to put an oversight system in placed and provided for monitoring.
“In their operative complaint, plaintiffs repeatedly allege that the Board members ‘completely failed to adopt and implement a board-level reporting system with respect to the company’s underground storage wells,’ ” the presiding justice noted, adding that “the complaint goes on to flesh out the details.”
Head in Sand
“In short, plaintiffs’ complaint paints a picture of a Board that had its head in the sand about the danger of SoCalGas’s wells in the ground. Individuals who were aware of the dangers were repeatedly sounding the alarm bell, but there was no means for the Board to hear it. In response to these allegations, the Board combed through the minutes of its own meetings and those of the Committee, only to find references to infrastructure safety that are, at best, ambiguous as to whether they encompassed underground storage wells.”
Rubin went on to say:
“On this record, I would conclude plaintiffs have raised a reasonable doubt that the Board would have addressed a demand independently; therefore, plaintiffs’ failure to make a demand was excused on ground of futility. For the same reasons, I would conclude defendants’ demurrer should have been overruled on the merits.”
The case is Kanter v. Reed, 2023 S.O.S. 1875.
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