                                                                                    FILED
                                                                        United States Court of Appeals
                                               PUBLISH                          Tenth Circuit

                          UNITED STATES COURT OF APPEALS                       June 20, 2016

                                                                            Elisabeth A. Shumaker
                                 FOR THE TENTH CIRCUIT                          Clerk of Court
                             _________________________________

IN RE: ZAGG INC. SHAREHOLDER
DERIVATIVE ACTION

----------------------------------------------------

ALBERT PIKK; DANIEL L.
ROSENBERG, derivatively and on behalf
of ZAGG Inc.,

       Plaintiffs - Appellants,

v.                                                            No. 15-4001

ROBERT G. PEDERSEN, II; EDWARD
EKSTROM; RANDALL HALES;
BRANDON T. O'BRIEN; CHERYL A.
LARABEE,

       Defendants - Appellees,

and

ZAGG INC.,

       Nominal Defendant - Appellee.
                      _________________________________

                         Appeal from the United States District Court
                                   for the District of Utah
                                (D.C. No. 2:12-CV-01188-DB)
                           _________________________________

Albert Y. Chang, Bottini & Bottini, Inc., La Jolla, California (David W. Scofield, Peters
Scofield, PC, Sandy, Utah, Francis A. Bottini, Jr., Yury A. Kolesnikov, Bottini & Bottini,
Inc., with him on the briefs) for Plaintiffs-Appellants.
Steven M. Schatz, Wilson Sonsini Goodrich & Rosati PC, Palo Alto, California (David J.
Berger, Naira Der Kiureghian, and Anne J. Veldhuis, Wilson Sonsini Goodrich & Rosati
PC, Palo Alto, California, Gideon A. Schor, Wilson Sonsini Goodrich & Rosati PC, New
York, New York, Kevin N. Anderson and Artemis D. Vamianakis, Fabian & Clendenin,
Salt Lake City, Utah, Brent R. Baker, D. Loren Washburn, Jennifer A. James, Aaron D.
Lebenta, and Shannon K. Zollinger, Clyde Snow & Sessions, P.C., with him on the
briefs) for Defendants-Appellees.
                        _________________________________

Before HARTZ, BACHARACH, and PHILLIPS, Circuit Judges.
                  _________________________________

HARTZ, Circuit Judge.
                        _________________________________

       Plaintiffs, shareholders of ZAGG Inc., a publicly held Nevada corporation, filed a

shareholder-derivative action seeking damages, restitution, and other relief for ZAGG.

They alleged that past and present officers and directors of ZAGG violated § 14(a) of the

Securities Exchange Act of 1934, breached their fiduciary duties to ZAGG, wasted

corporate assets, and were unjustly enriched. The district court dismissed the suit on two

alternative grounds: (1) Plaintiffs filed suit before presenting the ZAGG Board of

Directors (the Board) with a demand to bring suit and they failed to adequately allege that

such demand would have been futile, and (2) the complaint failed to state a claim.

Plaintiffs appeal the dismissal on both grounds. Because we deny the challenge to the

first ground, we need not address the second.

       Plaintiffs urge two reasons why demand would have been futile. First, they allege

that three of the six board members (Randall Hales, Cheryl A. Larabee, and Edward D.

Ekstrom (the Director Defendants)) had a disqualifying interest in the prospective suit

because each was threatened with a substantial likelihood of liability. Second, they


                                            2
allege that each of the Director Defendants was compromised by personal and business

relationships among themselves and with Robert Pedersen, former ZAGG Chief

Executive Officer (CEO) and a codefendant. We reject these arguments. The Director

Defendants were not at substantial risk of liability under any of Plaintiffs’ claims because

the complaint does not adequately allege that any of them knew that he or she was acting

wrongfully, as required by a Nevada statute limiting director liability. And at least a

majority of the Board was not compromised by personal or business relationships

because Plaintiffs do not challenge three of the six directors and they have failed to

adequately allege that Director Defendant Larabee had a compromising relationship.

   I.      BACKGROUND

        Pedersen, the founder of ZAGG, served as chairman of the Board and CEO until

he resigned in August 2012. The reason for the resignation, and the underlying source of

the defendants’ alleged liability, is the harm to ZAGG from his forced sales of over two

million ZAGG shares that secured his margin account with a broker. A margin account is

“an extension of credit by a broker that is secured by securities of the customer.” In re

Zagg, Inc. Sec. Litig., 797 F.3d 1194, 1198 (10th Cir. 2015) (internal quotation marks

omitted). To protect the broker, the value of the pledged shares must exceed a threshold

set by the broker. If the stock value drops below the threshold, the broker has the right to

sell shares to cover the customer’s debt. See id. Such sales can cause the supply of

shares to far exceed market demand, leading to a sharp drop in share price and the

company’s market value. Also, the Securities and Exchange Commission (SEC) has

recognized that officers and directors who pledge company stock in margin accounts may

                                             3
be subject to improper influences. See SEC Final Rule, Executive Compensation and

Related Person Disclosure, 71 Fed. Reg. 53,158, 53,197 (Sept. 8, 2006) (“To the extent

that shares beneficially owned by named executive officers, directors and director

nominees are used as collateral, these shares may be subject to material risk or

contingencies that do not apply to other shares beneficially owned by these persons.

These circumstances have the potential to influence management’s performance and

decisions.”). Although these risks from pledging shares have not lead to a prohibition on

pledges by corporate officers and directors, the SEC decided in 2006 that the public

should be informed when they occur. It amended Item 403(b) of SEC Regulation S-K,

17 C.F.R. § 229.403(b), to require that pledges be publicly disclosed in certain company

filings, such as proxy statements and Forms 10-K.1 See In re Zagg, 797 F.3d at 1198.



1
    The regulation requires the following information to be disclosed:

         Security ownership of management. Furnish the following information, as
         of the most recent practicable date, in substantially the tabular form
         indicated, as to each class of equity securities of the registrant or any of its
         parents or subsidiaries, including directors’ qualifying shares, beneficially
         owned by all directors and nominees, naming them, each of the named
         executive officers as defined in Item 402(a)(3) (§ 229.402(a)(3)), and
         directors and executive officers of the registrant as a group, without naming
         them. Show in column (3) the total number of shares beneficially owned
         and in column (4) the percent of the class so owned. Of the number of
         shares shown in column (3), indicate, by footnote or otherwise,
         the amount of shares that are pledged as security and the amount of shares
         with respect to which such persons have the right to acquire beneficial
         ownership as specified in § 240.13d-3(d)(1) of this chapter.

17 C.F.R. § 229.403(b) (emphasis added); see id. § 229.10 (listing filings with the
SEC that must contain the information set forth in § 229.403).

                                                4
       On December 21, 2011 (nine days after Defendant Hales, who was already a

member of the Board, had been named as ZAGG’s president and chief operating officer

(COO)) a margin call on Pedersen’s account forced the sale of 345,200 shares. Pedersen

reported the sale to the SEC. By December 24, ZAGG’s share price had dropped from

$8.65 to $6.73. After that sale more than 1.7 million of Pedersen’s shares still remained

pledged.

       On March 15, 2012, ZAGG filed a Form 10-K for fiscal year 2011, and on April

27 it filed a proxy statement soliciting votes for re-election of five board members.

Neither the 10-K nor the proxy statement disclosed any pledged shares of Pedersen, as

required by § 229.403(b).

       On August 14, 2012, a second margin call on Pedersen’s account forced the sale of

an additional 515,000 shares. This caused Pedersen to resign as Chairman and CEO, as

announced in a press release issued August 17. The press release also announced that

Larabee was the new Board Chair, that ZAGG would conduct a search for a new

permanent CEO, and that Hales would serve as interim CEO. ZAGG stock fell 13% the

next trading day. On an August 28 conference call with analysts, Hales stated that

Pedersen’s departure “was entirely related to the margin call situation that started last

December and unfortunately surfaced again two weeks ago.” Complaint, Aplt. App. at

42 ¶ 86 (internal quotation marks omitted). On that same call Pedersen—who had

satisfied all his margin obligations after a third margin call on August 24—assured

investors that “[b]y completely deleveraging my ZAGG stock, I have removed the

element of uncertainty around future unwanted sales and have taken a step towards

                                              5
building investor confidence in ZAGG.” Dist. Ct. Mem. Decision and Order, Feb. 5,

2014 at 5, (Order), Aplt. App., Vol. 1 at 239. ZAGG also implemented a new policy

prohibiting officers and directors from pledging ZAGG shares in margin accounts. A

month later, ZAGG signed Pedersen to a one-year, $910,000 consulting agreement. On

December 10, 2012, nearly four months after Pedersen resigned, ZAGG appointed Hales

as permanent CEO.

          Plaintiffs filed the shareholder-derivative complaint at issue in this appeal on June

5, 2013. The complaint alleged that the defendants had failed to disclose Pedersen’s

“margin call situation” to the public and had executed a “secret succession plan” to

replace Pedersen with Hales, Aplt. App., Vol. 1 at 22 ¶ 14, thereby violating § 14(a) of

the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a), and breaching their fiduciary

duties as directors and officers. Plaintiffs also asserted claims of unjust enrichment and

corporate waste based on Pedersen’s consulting agreement and the Director Defendants’

continued receipt of director compensation even after their alleged transgressions.2

Plaintiffs did not make a presuit demand on the Board to bring this action, alleging that

demand should be excused as futile.

    II.      STANDARD OF REVIEW

          Plaintiffs argue that our review of the futility issue is de novo. But, citing deHaas

v. Empire Petroleum Co., 435 F.2d 1223, 1228 (10th Cir. 1970), the defendants argue

that we review the district court’s ruling only for abuse of discretion. We need not

2
  The complaint also included a count against former director Shuichiro Ueyama for
insider trading. He was dismissed from the case because he did not receive timely
service.
                                                6
resolve the dispute because we can affirm the district court’s dismissal upon de novo

review.

   III.   DEMAND FUTILITY

       A. Selection of Governing Law

       Plaintiffs’ claims arise under federal statutory law (§ 14(a) of the Exchange Act)

and the common law (of some jurisdiction, not specified in the complaint). It is not

obvious, however, what law should govern the standards for determining whether

Plaintiffs were required to demand that ZAGG’s directors bring suit before Plaintiffs filed

suit themselves. The Federal Rules of Civil Procedure require all shareholder-derivative

complaints filed in federal court to “state with particularity: (A) any effort by the

plaintiff to obtain the desired action from the directors or comparable authority and, if

necessary, from the shareholders or members; and (B) the reasons for not obtaining the

action or not making the effort.” Fed. R. Civ. P. 23.1(b)(3). But the federal procedural

rules cannot establish substantive law. As the Supreme Court wrote in a shareholder-

derivative suit bringing claims under § 20(a) of the Investment Company Act of 1940, 15

U.S.C. § 80a-20(a) (ICA):

          [A]lthough Rule 23.1 clearly contemplates both the demand requirement
          and the possibility that demand may be excused, it does not create a
          demand requirement of any particular dimension. On its face, Rule 23.1
          speaks only to the adequacy of the shareholder representative’s
          pleadings. Indeed, as a rule of procedure issued pursuant to the Rules
          Enabling Act, Rule 23.1 cannot be understood to “abridge, enlarge or
          modify any substantive right.” 28 U.S.C. § 2072(b). . . . [T]he function
          of the demand doctrine in delimiting the respective powers of the
          individual shareholder and of the directors to control corporate litigation
          clearly is a matter of “substance,” not “procedure.”


                                              7
Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 96–97 (1991) (citations omitted).

“Thus,” said the Court, “in order to determine whether the demand requirement may be

excused by futility in a derivative action founded on § 20(a) of the ICA, we must identify

the source and content of the substantive law that defines the demand requirement in such

a suit.” Id. at 97.

       The Court began its analysis by stating that the substantive-law issue is one of

federal law:

           It is clear that the contours of the demand requirement in a derivative
           action founded on the ICA are governed by federal law. Because the
           ICA is a federal statute, any common law rule necessary to effectuate a
           private cause of action under that statute is necessarily federal in
           character.

Id. That was not, however, the end of the story. The Court then determined that federal

common law should adopt the futility law of the state of incorporation of the company on

behalf of which the plaintiffs are bringing suit. It reached that conclusion because (1) as

a matter “that bears on the allocation of governing powers within the corporation, federal

courts should incorporate state law into federal common law unless the particular state

law in question is inconsistent with the policies underlying the federal statute,” and (2)

recognition of a futility exception would “not impede the regulatory objectives of the

ICA.” Id. at 108.

       We are aware of no federal policy underlying Exchange Act § 14(a) that would

distinguish a claim under § 14(a) from, as in Kamen, a claim under § 20 of the ICA with

respect to futility doctrine. Therefore we look to the law of Nevada, ZAGG’s state of



                                              8
incorporation, for the standards that govern the futility exception—at least for Plaintiffs’

§ 14(a) claim.

       But what about Plaintiffs’ common-law claims? Because those claims arise under

state law, we ordinarily look to the substantive law (including choice-of-law rules) of the

forum state. See Boyd Rosene & Assocs., Inc. v. Kan. Mun. Gas Agency, 123 F.3d 1351,

1352–53 (10th Cir. 1997) (“[A] federal court sitting in diversity must apply the

substantive law of the state in which it sits, including the forum state’s choice-of-law

rules.”); Timmerman v. Modern Indus. Inc., 960 F.2d 692, 696 (7th Cir. 1992) (“federal

courts exercising pendent or diversity jurisdiction must apply state law to matters of

substantive law”). Perhaps it would be too problematic to apply two futility standards in

the same case. As stated in a similar context by RCM Sec. Fund, Inc. v. Stanton, 928

F.2d 1318, 1327–28 (2d Cir. 1991), decided before Kamen:

             If a state demand requirement were to apply to state claims and a
          federal demand requirement were to apply to federal claims, a
          plaintiff bringing a derivative suit based on a single transaction
          might well be subject to a demand requirement as to one legal theory
          while excused from making a demand as to another legal theory. . . .
             Needless complexity, needless litigation, and perhaps the loss of
          substantive claims would also result from a rule that state law
          governs the demand requirement involving a state claim but federal
          law governs where a federal claim is in issue.

But we need not decide the matter. The parties agree that Nevada law should apply to the

futility issue (apparently because Utah courts would choose Nevada law as the governing

law); and we see no reason to search for a reason to disagree. See TMJ Implants, Inc. v.

Aetna, Inc., 498 F.3d 1175, 1180–81 (10th Cir. 2007) (“The parties agree that the



                                              9
applicable substantive law is that of Colorado. . . . We therefore assume that this case is

governed by Colorado substantive law.”).

       B. Nevada Futility Law

       Nevada recognizes the right of an individual shareholder to sue on behalf of the

corporation through a shareholder-derivative suit. See Shoen v. SAC Holding Corp., 137

P.3d 1171, 1179 (Nev. 2006). But “because the power to manage the corporation’s

affairs resides in the board of directors,” ordinarily “a shareholder must, before filing suit,

make a demand on the board . . . to obtain the action that the shareholder desires.” Id. If

the board refuses the demand, the shareholder cannot pursue the litigation unless the

refusal was wrongful. See HPEV, Inc. v. Spirit Bear Ltd., No. 2:13-cv-01548-JAD-GWF,

2014 WL 6634838, at *2 (D. Nev. Nov. 21, 2014). See generally Levine v. Smith, 591

A.2d 194, 210–15 (Del. 1991).

       If, however, a board is undeserving of the typical deference given to its business

judgment, Nevada law does not require a presuit demand. “For instance, there is no point

in requiring a party to make a demand for corrective action to officers and directors who

are swayed by outside interests, which contaminates their ability to conduct the

corporation’s affairs.” Shoen, 137 P.3d at 1180. Would-be derivative plaintiffs therefore

need not make a demand on the board if they can show demand futility—that is, show

that a sufficient number “of the directors had a disqualifying interest in the demand

matter or were otherwise unable to act independently [of someone with such an interest].”

Id. at 1183 (brackets and internal quotation marks omitted). Demand to a board with an

even number of members is futile if at least half are compromised. See Beam ex rel.

                                              10
Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1046 n.8 (Del. 2004)

(applying Delaware law; “[i]f three directors of a six person board are not independent

and three directors are independent, there is not a majority of independent directors and

demand would be futile”).

          C. Plaintiffs’ Futility Claim

          Plaintiffs allege demand futility on two grounds. First, they allege that the

Director Defendants (who constituted half the Board) were interested in the prospective

suit because they may have been found personally liable. In arguing futility, Plaintiffs’

opening brief relies on potential liability only on the § 14(a) claim and the fiduciary-duty

claim, not on the unjust-enrichment or corporate-waste claims. We will therefore

consider futility only as to those two claims. See Lindstrom v. United States, 510 F.3d

1191, 1196 (10th Cir. 2007) (“Arguments not raised in an opening brief are waived.”).

Second, Plaintiffs allege that because the Director Defendants were controlled by

personal and business relationships among themselves and with former CEO Pedersen,

who was also potentially liable, they could not have independently considered a demand

to sue.

          We address interest and then control.

          D. Exposure of Defendant Directors to Liability (Interest)

          Nevada follows two landmark decisions of the Supreme Court of Delaware on

demand futility: Aronson v. Lewis, 473 A.2d 805 (Del. 1984), and Rales v. Blasband,

634 A.2d 927 (Del. 1993). See Shoen, 137 P.3d at 1184. In particular, Nevada requires

that “to show interestedness, a shareholder must allege that . . . the board members would

                                               11
be materially affected, either to their benefit or detriment, by a decision of the board, in a

manner not shared by the corporation and the stockholders.” Id. at 1183 (brackets and

internal quotation marks omitted). A director may have such a disqualifying interest if

the matter before the board is whether to sue the director, but only if the risk of liability is

sufficiently great. That is, “interestedness because of potential liability can be shown

only in those rare cases where defendants’ actions were so egregious that a substantial

likelihood of director liability exists.” Id. at 1184 (brackets, ellipses, and internal

quotation marks omitted).

       The likelihood of liability is greatly reduced in Nevada by an “exculpatory” statute

that limits the personal liability of corporate directors. Relevant to Plaintiffs’ claims, it

provides:

            [A] director or officer is not individually liable to the corporation or its
            stockholders or creditors for any damages as a result of any act or
            failure to act in his or her capacity as a director or officer unless it is
            proven that: (a) The director’s or officer’s act or failure to act
            constituted a breach of his or her fiduciary duties as a director or officer;
            and (b) The breach of those duties involved intentional misconduct,
            fraud or a knowing violation of law.

Nev. Rev. Stat. § 78.138(7). Most important here, the Director Defendants are not liable

unless their actions constituted “intentional misconduct, fraud or a knowing violation of

law.” Id.; see In re Amerco Derivative Litig., 252 P.3d 681, 700 (Nev. 2011).

       Plaintiffs argue that the exculpatory statute is an affirmative defense and they need

not plead its negation to claim futility. They rely on Delaware law. In Delaware a statute

authorizes a corporation to include in its articles of incorporation a provision limiting the

personal liability of directors for breach of fiduciary duty unless the breach involved

                                               12
certain specified conduct, including breach of the duty of loyalty and “acts or omissions

not in good faith or which involve intentional misconduct or a knowing violation of law.”

8 Del. C. § 102(b)(7). The Delaware Supreme Court appears to have held that the statute

creates an affirmative defense on which the directors bear the burden of persuasion. See

Emerald Partners v. Berlin, 726 A.2d 1215, 1223–24 (Del. 1999). If Nevada law

similarly holds that the state’s exculpatory statute creates an affirmative defense, then

Fed. R. Civ. P. 8(c), which requires the defendant to plead affirmative defenses, would

support the proposition that the Director Defendants bear the burden of pleading the

application of the statute in defending against the shareholder-derivative claims. One

could then argue that the same pleading burden applies to the futility allegation.

        In our view, however, for Plaintiffs to prevail on the futility issue, their complaint

had to show that the actions of the Director Defendants were not protected by Nevada’s

exculpatory statute. Several considerations lead to that conclusion. As we explain

below, (1) in Nevada the plaintiff bears the burden of persuasion to overcome the

exculpatory statute on a claim against a director; (2) the burdens of persuasion and

pleading on an issue are generally on the same party; (3) the policy reasons for requiring

that a matter be pleaded as an affirmative defense do not apply to a director’s reliance on

the exculpatory statute; and (4) the federal rule governing pleading in shareholder

derivative actions places the burden on the plaintiff to plead the specifics showing

futility.

        To begin with, the burden of persuasion is assigned differently by the Delaware

and Nevada exculpatory statutes. In Delaware the statute says nothing about which party

                                              13
bears the burden of persuasion;3 and, as just noted, the state’s highest court has said that

the director has the burden of proving the facts that provide exculpation. See id. In

contrast, the Nevada statute explicitly states that the director is not liable to the

corporation or its stockholders or creditors “unless it is proven that: (a) The director’s or

officer’s act or failure to act constituted a breach of his or her fiduciary duties as a

director or officer; and (b) The breach of those duties involved intentional misconduct,

fraud or a knowing violation of law.” Nev. Rev. Stat. § 78.138(7) (emphasis added).

This is a clear allocation of the burden of persuasion to the plaintiff. Because allocation

of the burden of persuasion is a matter of substantive law, see Dick v. New York Life Ins.

Co., 359 U.S. 437, 446 (1959) (“Under the Erie rule, presumptions (and their effects) and

burden of proof are ‘substantive’ . . . .” (footnote omitted)), we apply Nevada’s

assignment of the burden in assessing the futility issue here, see Kamen, 500 U.S. at 108.

3
  8 Del. C. § 102(b) states that “the certificate of incorporation may . . . contain any
or all of the following matters:
        ....
        (7) A provision eliminating or limiting the personal liability of a director to
        the corporation or its stockholders for monetary damages for breach of
        fiduciary duty as a director, provided that such provision shall not
        eliminate or limit the liability of a director: (i) For any breach of the
        director’s duty of loyalty to the corporation or its stockholders; (ii) for acts
        or omissions not in good faith or which involve intentional misconduct or a
        knowing violation of law; (iii) under § 174 of this title; or (iv) for any
        transaction from which the director derived an improper personal benefit.
        No such provision shall eliminate or limit the liability of a director for any
        act or omission occurring prior to the date when such provision becomes
        effective. All references in this paragraph to a director shall also be
        deemed to refer to such other person or persons, if any, who, pursuant to a
        provision of the certificate of incorporation in accordance with § 141(a) of
        this title, exercise or perform any of the powers or duties otherwise
        conferred or imposed upon the board of directors by this title.
(emphasis added).
                                               14
Thus, Plaintiffs have the burden of showing a substantial likelihood that the Director

Defendants will be held liable despite Nevada’s exculpatory statute.

       Next, in civil cases the “burden of pleading and burden of proof are usually

parallel [because] they are both manifestations of the same or similar considerations.”

Fleming James, Jr., Burden of Proof, 47 Va. L. Rev. 51, 60 (1961). See Nader v. de

Toledano, 408 A.2d 31, 48 (D.C. App. 1979) (“The general rule is that a party asserting

or pleading an issue has the burden of proof . . . .”); cf. Schaffer ex rel. Schaffer v. Weast,

546 U.S. 49, 56 (2005) (“‘The burdens of pleading and proof with regard to most facts

have been and should be assigned to the plaintiff who generally seeks to change the

present state of affairs and who therefore naturally should be expected to bear the risk of

failure of proof or persuasion.’” (quoting 2 John W. Strong, McCormick on Evidence §

337, at 412 (5th ed. 1999))). Hence, Plaintiffs could be expected to bear the burden of

pleading the absence of exculpation. But see Palmer v. Hoffman, 318 U.S. 109, 116–19

(1943) (in diversity case, Fed. R. Civ. P. 8(c) (which lists contributory negligence as an

affirmative defense) requires defendant to plead contributory negligence as an affirmative

defense even though state law may place on plaintiff the burden of persuasion to negate

contributory negligence).

       Moreover, we agree with the Third Circuit that in determining whether an issue

should be treated as an affirmative defense for purposes of pleading, the critical question

(absent a contrary command by statute or rule, such as the list of affirmative defenses in

Rule 8(c)) is whether requiring the defendant to plead the matter is necessary “to avoid

surprise and undue prejudice by providing the plaintiff with notice and the opportunity to

                                              15
demonstrate why the affirmative defense should not succeed.” In re Sterten, 546 F.3d

278, 285 (3d Cir. 2008) (internal quotation marks omitted). Here, the Nevada

exculpatory statute applies to all claims against directors unless the articles of

incorporation provide for greater liability. See § 78.138(7). The statute provides ample

notice of what the plaintiff will need to prove (and plead) without the necessity of a

director’s pleading the statute as an affirmative defense.

       Further support for requiring Plaintiffs to plead facts establishing the requisites for

liability under § 78.138(7) flows from the futility provisions in Fed. R. Civ. P. 23.1 itself.

Its pleading requirements, which are designed specifically for derivative actions, mandate

that the plaintiff “state with particularity . . . the reasons for . . . not making the effort” to

obtain the board of directors’ consent to the suit. Fed. R. Civ. P. 23.1(b)(3)(B). If the

reason for not making the request is that the directors would face a substantial risk of

liability from the suit, the plaintiffs should set forth fully why the directors face liability.

That would include why the directors are not protected by Nev. Rev. Stat. § 78.138(7).

We note that Delaware, which has a rule of procedure similar to Rule 23.1(b)(3), appears

to require as much when plaintiffs in a shareholder-derivative suit claim futility. See

Wood v. Baum, 953 A.2d 136, 141 (Del. 2008) (“Where directors are contractually or

otherwise exculpated from liability for certain conduct, then a serious threat of liability

may only be found to exist if the plaintiff pleads a non-exculpated claim against the

directors based on particularized facts.” (internal quotation marks omitted)); id. at 139 n.2

(quoting the Delaware rule); Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera,

119 A.3d 44, 62–63 (Del. Ch. 2015); In re Lear Corp. S’holder Litig., 967 A.2d 640,

                                                16
647–48 (Del. Ch. 2008) (“To plead demand futility . . . , because the Lear charter

contains an exculpatory provision . . . , the plaintiffs cannot sustain their complaint even

by pleading facts supporting an inference of gross negligence; they must plead a non-

exculpated claim.”).

       In short, we hold that the allegations of Plaintiffs’ complaint must establish

whether, in light of the Nevada exculpatory statute, the Director Defendants faced a

substantial risk of liability in this derivative action. Thus, we now turn to whether

Plaintiffs alleged with particularity facts showing a substantial likelihood that Defendants

engaged in “intentional misconduct, fraud or a knowing violation of law.” Nev. Rev.

Stat. § 78.138(7)(b). We can rule out fraud because Plaintiffs disclaim any allegations of

fraud. As for the terms knowing violation and intentional misconduct, we believe that

both require knowledge that the conduct was wrongful.

       We recognize that in some contexts courts interpret knowingly in a limited way,

requiring only “factual knowledge as distinguished from knowledge of the law.” Bryan

v. United States, 524 U.S. 184, 192 (1998) (internal quotation marks omitted); see id.

(“[T]he term ‘knowingly’ does not necessarily have any reference to a culpable state of

mind or to knowledge of the law.”). The interpretation of intentional may be similarly

limited, requiring only that the action be deliberate, regardless of whether the actor

appreciated that it was misconduct. See Wright v. Municipality of Anchorage, 590 P.2d

425, 426 (Alaska 1979) (affirming jury instruction stating that “[t]o constitute criminal

intent it is not necessary that there should exist an intent to violate the law. Where a

person intentionally does that which the law declares to be a crime, he is acting with

                                             17
criminal intent, even though he may not know that his act or conduct is unlawful.”);

People v. Hill, 166 Cal. Rptr. 824, 825 (Cal. App. Dep’t Super. Ct. 1980) (defendant

guilty for an intentional act even if he “did not know his actions were unlawful, or even if

he did not intend to violate the law”); cf. United States v. Manatau, 647 F.3d 1048, 1050

(10th Cir. 2011) (“[A] person acts intentionally if he acts purposely or had as a conscious

object to cause a particular result.” (internal quotation marks omitted)).

       But courts have also interpreted knowingly and intentionally more expansively, to

require knowledge of wrongfulness. See, e.g., Liparota v. United States, 471 U.S. 419,

420, 434 (1985) (to be guilty of knowingly acquiring or possessing food stamps in a

manner not authorized by the governing statute or regulations, defendant must know that

the conduct was unauthorized); Mee Indus. v. Dow Chem. Co., 608 F.3d 1202, 1220 (11th

Cir. 2010) (“In order to demonstrate intentional misconduct [to establish liability for

punitive damages], the plaintiff must show the defendant had actual knowledge of the

wrongfulness of the conduct . . . .” (internal quotation marks omitted)); Cohen v. United

States, 378 F.2d 751, 754 n.1, 757 (9th Cir. 1967) (statute stating that “[w]hoever being

engaged in the business of betting or wagering knowingly uses a wire communication

facility for the transmission in interstate or foreign commerce of bets or wagers” is not

violated unless defendant knew of the statutory prohibition); State v. Peters, 253 P. 842,

846 (Idaho 1927) (“The word ‘intentional,’ as used in penal laws, is held to import evil

intent and unlawful purpose.”); S.S. LLC v. Review Bd. of Indiana Dept. of Workforce

Dev., 953 N.E.2d 597, 602 (Ind. Ct. App. 2011) (unemployment claim: “To have

knowingly violated an employer’s rule, the employee must know of the rule and must

                                             18
know that his conduct violated the rule.”); Still v. Comm’r of Employment & Training,

672 N.E.2d 105, 112 (Mass. 1996) (unemployment claim: “‘knowing violation’ requires

an intent to violate the law, and not merely an intent to commit the act that is a

violation.”).

       The latter meaning is the one that makes the most sense here. The purpose of the

exculpatory statute is to limit the liability of corporate directors. Under the narrower

interpretations of intentional and knowing that do not require knowledge of wrongfulness,

a director would not be protected so long as the director knew what his or her actions

were—such as signing a document with knowledge of its contents. But that state of mind

would be present for virtually any conduct that could lead to the director’s liability to the

corporation or its stockholders or creditors. The exculpatory statute would be an empty

gesture. To give the statute a realistic function, it must protect more than just directors (if

any) who did not know what their actions were; it should protect directors who knew

what they did but not that it was wrong. In any event, we need not pursue whether

something less than actual knowledge of the wrongful nature of the conduct may suffice

in some circumstances because Plaintiffs do not press the point. The Director

Defendants’ appellate brief asserted that they are liable only if they knew their conduct to

violate the law, and Plaintiffs did not contest the point in their reply brief.

       We now consider whether Plaintiffs sufficiently pleaded that the Director

Defendants knew their conduct to be wrongful. We find no error in the district court’s

holding that they did not. Plaintiffs alleged that the Director Defendants faced a

substantial likelihood of liability under Exchange Act § 14(a) and the common law

                                              19
governing fiduciaries by failing to disclose Pedersen’s pledges and the alleged succession

plan. We first address the pledges, then the alleged succession plan.

             i.   Failure to Disclose Pedersen’s Margined Stock

       SEC regulations require a company’s proxy statements to “indicate, by footnote or

otherwise, the amount of shares that are pledged as security” by its officers and directors.

17 C.F.R. § 229.403(b); see id. § 229.10(a)(2). And it is a violation of Exchange Act

§ 14(a) to solicit a proxy in violation of SEC regulations, including § 229.403(b). See 15

U.S.C. § 78n(a)(1). ZAGG’s April 27 proxy statement did not report Pedersen’s

margined stock, and Plaintiffs assert that this violation of § 14(a) exposed the Director

Defendants to a substantial likelihood of liability. We can assume without deciding that

Plaintiffs adequately pleaded that the Director Defendants knew of Pedersen’s margin

pledges. What is missing, however, is an adequate basis in the complaint for an inference

that the violation was knowing or intentional—that is, that the Director Defendants knew

that such pledges had to be disclosed.

       Plaintiffs urge that such knowledge is reasonably inferred from the pleaded facts

that all three Director Defendants “reviewed, approved, and signed [ZAGG’s] filings

with the SEC,” Aplt. App., Vol. 1 at 61 ¶ 154, and that Larabee and Ekstrom, as members

of the audit committee, were “responsible for overseeing the integrity of ZAGG’s

financial statements,” id. at 59 ¶ 149. The district court properly refused to infer

knowledge from these allegations. We doubt that board members are expected to know

the minutiae of SEC regulations. We think it significant that the Delaware courts, whose

experience and expertise in such matters is widely recognized, see Delaware Coal. for

                                             20
Open Gov’t, Inc. v. Strine, 733 F.3d 510, 524 (3d Cir. 2013); Swope v. Siegel-Robert,

Inc., 243 F.3d 486, 496 (8th Cir. 2001), do not think they are. Delaware cases do not

infer knowledge of detail (factual or legal) merely from committee membership or

execution of SEC filings, but require specific allegations from which one can infer

knowledge. For example, in Guttman v. Huang, 823 A.2d 492 (Del. Ch. 2003), the

plaintiffs alleged that the board knew of the company’s improper accounting practices.

See id. at 496–97. The court refused to infer such knowledge because the complaint did

not contain “well-pled, particularized allegations of fact detailing the precise roles that

these directors played at the company, the information that would have come to their

attention in those roles, and any indication as to why they would have perceived the

accounting irregularities.” Id. at 503. In Wood, 953 A.2d at 139, plaintiffs alleged that

defendant board members breached their fiduciary duty to value certain assets properly,

in violation of the company’s internal policies, accounting standards, and federal law. To

support the claim that the defendants knew their actions to have been wrongful, the

plaintiffs alleged that the defendants had executed the company’s financial reports and

served on its audit committee. See id. at 142. The court, however, ruled that the

complaint did “not plead with particularity the specific conduct in which each defendant

‘knowingly’ engaged, or that the defendants knew that such conduct was illegal.” Id. It

said that “Delaware law on this point is clear: board approval of a transaction, even one

that later proves to be improper, without more, is an insufficient basis to infer culpable

knowledge or bad faith on the part of individual directors.” Id. It could not infer

knowledge from the plaintiffs’ allegations because “[t]he Board’s execution of [the

                                             21
company’s] financial reports, without more, is insufficient to create an inference that the

directors had actual or constructive notice of any illegality.” Id. In particular, it held that

to infer knowledge from membership on an audit committee would run “contrary to well-

settled Delaware law.” Id. In short, “[a]s numerous Delaware decisions make clear, an

allegation that the underlying cause of a corporate trauma falls within the delegated

authority of a board committee does not support an inference that the directors on that

committee knew of and consciously disregarded the problem.” South v. Baker, 62 A.3d

1, 17 (Del. Ch. 2012).

       Plaintiffs quote the ZAGG audit committee charter, but fail to explain how it

compels a conclusion of knowledge. To be sure, one quoted provision states that “[t]he

Audit Committee shall comply with the relevant rules and regulations of the SEC.”

Complaint, Aplt. App., Vol. 1 at 35 ¶ 51. But it would be too much of a stretch to read

this as requiring the committee members to have detailed knowledge of all SEC

regulations. Corporations have lawyers and accountants for that purpose. Who would

take on that responsibility as a board member? As was true in Wood, 953 A.2d at 142,

“the Complaint alleges . . . violations of federal securities . . . laws but does not plead

with particularity the specific conduct in which each defendant ‘knowingly’ engaged, or

that the defendants knew that such conduct was illegal.” 4




4
  Plaintiffs argued to the district court that the secret succession plan was itself
evidence that the Director Defendants knew of the “illicit nature” of Pedersen’s
pledges. They have dropped this argument on appeal, which is just as well, as the
allegation of a secret succession plan is implausible.
                                              22
        Plaintiffs’ pleadings likewise fail to show that the Director Defendants knew that

nondisclosure of the pledges violated a common-law fiduciary duty. Indeed, that may

have been an impossible task, given the apparent lack of support for the existence of any

such duty. The only case in point that we have found states the contrary. See

Burekovitch v. Hertz, No. 01-cv-1277 (ILG), 2001 WL 984942, at *9 (E.D.N.Y. July 24,

2001) (“While a controlling shareholder’s decision to commit large quantities of his stock

as security in margin trading undoubtedly has the potential to affect the price of that

stock, plaintiff has not and cannot allege an affirmative duty imposed by common law to

keep the public appraised of such a decision.”).

             ii.   Failure to Disclose Succession Plan

        Plaintiffs allege that the Defendant Directors failed to disclose their secret plan to

replace Pedersen by Hales as CEO. But there is nothing wrongful about failing to

disclose the nonexistent, and Plaintiffs did not adequately allege the existence of such a

plan.

        According to Plaintiffs’ opening brief, the Director Defendants decided in

December 2011 to remove Pedersen as CEO and Chairman and make Hales the CEO but

they deliberately concealed this information because ZAGG had repeatedly informed

investors that its success depended on Pedersen’s skill and experience. They allege that

“the hiring of Hales was a direct response to Pedersen’s margin call situation, marking

the initial step of the secret succession plan,” Aplt. Br. at 36, and that the plan was

concealed in a press release of December 12, 2011, and a Form 8-K filed on December

16 which misleadingly stated that Hales would serve only as President and COO and that

                                              23
Pedersen would continue as CEO and Chairman of the Board. In support of their secret-

plan theory, Plaintiffs point to the “temporal proximity” between the first margin call and

Hales’s being named President and COO, Aplt. Br. at 36, and to Hales’s statement in

August 2012 that from the outset he had worked with Pedersen to “identify and establish

corporate objectives” and Pederson had “handed [over] much of the responsibilities for

the day-to-day operations,” id. at 38 (internal quotation marks omitted).

       This theory is far-fetched. The complaint alleges no facts indicating that the

Board knew of Pedersen’s margined stock before the first margin call, and that came nine

days after ZAGG’s announcement that Hales would become president and COO, which

certainly came only after serious discussions with Hales about assuming the positions.

Plaintiffs’ temporal-proximity argument makes no sense if the alleged cause (knowledge

of the margined stock) occurred after the effect (bringing in Hales to take over ZAGG).

We also see nothing remarkable about Hales’s disclosure in August 2012 of the nature of

his work when he took office at ZAGG in December 2011. No one should be surprised if

the president/COO discusses corporate objectives with the CEO and Board chairman or if

the president/COO takes over day-to-day responsibilities.

       And even if the Board knew of the margined stock before hiring Hales, Plaintiffs’

theory would ascribe very peculiar thinking to the Board members. Why would the

Board decide to deal with Pedersen’s margined stock by looking for a successor rather

than working on a plan for an orderly sale of that stock to avoid the bad publicity of a

margin call? And after the publicity from the first margin call had damaged Pedersen’s

favorable image, what would be the public-relations advantage of keeping him on as

                                            24
CEO or the downside of disclosing the succession plan? Why court a further reputational

blast from future margin calls, particularly if the Board was not going to make it a

condition of Pedersen’s remaining as CEO that he eliminate his margin debt? Why wait

until four months after Pedersen’s resignation to appoint Hales as permanent CEO if that

had already been decided a year earlier? Someone might be able to conceive of answers

to these questions, but Plaintiffs’ secret-plan theory is too speculative to support their

futility claim.

       E. Lack of Independence

       Finally, Plaintiffs claim that they did not need to demand action by the Board

before filing suit because there was not a Board majority independent of influence from

interested persons. See Shoen, 137 P.3d at 1183 (“[D]irectors’ discretion must be free

from the influence of other interested persons.”). The independence inquiry asks whether

a board member was “incapable, due to . . . domination and control, of objectively

evaluating a demand.” Brehm v. Eisner, 746 A.2d 244, 257 (Del. 2000). Plaintiffs

contend that three ZAGG directors were not independent of each other or of Pedersen.

Because Plaintiffs do not challenge the independence of the other three of the six board

members, our inquiry is complete if their allegations against any of the three challenged

directors are inadequate. See Beam, 845 A.2d at 1046 n.8 (Del. 2004) (demand is

excused if there is not a majority of independent directors). In this case we need go no

further than Defendant Larabee.

       Plaintiffs’ allegation of Larabee’s lack of independence fails on two grounds.

First, were Larabee controlled by another, such control would compromise her ability to

                                              25
consider a demand only if the person controlling her had an interest in the suit. See

Brehm, 746 A.2d at 258 (because CEO was disinterested, it is irrelevant which directors

were independent of him). But we have already ruled that none of the Director

Defendants were interested in the suit because none faced a substantial likelihood of

liability. That leaves Pedersen as the only potentially interested Defendant. Plaintiffs did

not, however, allege that Pedersen controlled Larabee; as to Larabee, Plaintiffs argue

only lack of independence from Hales.5

       Second, the sole ground alleged for Larabee’s lack of independence from Hales is

that they served on another company’s board together. This is hardly sufficient to

establish the requisite control. Personal or business relationships may compromise

objectivity but only if they are “of a bias-producing nature. Allegations of mere personal

friendship or a mere outside business relationship, standing alone, are insufficient.”

Beam, 845 A.2d at 1050. Although the Delaware Supreme Court has acknowledged “the

structural bias common to corporate boards throughout America, as well as the other

unseen socialization processes cutting against independent discussion and decision

making in the boardroom,” Aronson, 473 A.2d at 815 n. 8, it nonetheless requires

allegations of “specific facts pointing to bias on a particular board” to demonstrate

demand futility. Id. For example, allegations that board members “moved in the same

5
  The Complaint alleged that Larabee lacked independence because she received
substantial compensation in her role as a board director and would not want that
jeopardized. But because Plaintiffs do not pursue this allegation on appeal, we do not
consider it. See Adler v. Wal-Mart, 144 F.3d 664, 679 (10th Cir. 1998). We also do
not consider Plaintiffs’ assertion, raised for the first time in their reply brief and
without any record support, that Hales and Larabee shared a longstanding friendship.
See id.
                                             26
social circles, attended the same weddings, developed business relationships before

joining the board, and described each other as ‘friends’” are insufficient to excuse

demand. Beam, 845 A.2d at 1051. Plaintiffs’ lesser allegation here—merely that

Larabee served on a separate board with Hales—must also fall short. See also Orman v.

Cullman, 794 A.2d 5, 27 (Del. Ch. 2002) (“The naked assertion of a previous business

relationship is not enough to overcome the presumption of a director’s independence.”);

Highland Legacy Ltd. v. Singer, No. Civ.A. 1566-N, 2006 WL 741939, at *5 (Del. Ch.

Mar. 17, 2006) (rejecting allegation of lack of independence that was “based solely on the

alleged facts that [defendant directors served together] on the boards of other

companies”). Plaintiffs have failed to plausibly allege lack of independence.

   IV.      CONCLUSION

         Because Plaintiffs failed to adequately plead that presuit demand on the Board

would have been futile, we AFFIRM the district court’s dismissal of the complaint.




                                             27
