           IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

Arthur V. Belendiuk, derivatively on behalf of        )
Verizon Communications Inc. and                       )
Cellco Partnership d/b/a Verizon Wireless,            )
                                                      )
                                                      )
              Plaintiff,                              )
                                                      )
      v.                                              )     Civil Action No. 9026-ML
                                                      )
Richard L. Carrión, David J. Corning, Lenore          )
Daddona, Alin D‟Silva, James J. Gerace,               )
Kathleen Grillo, M. Frances Keeth, John F. Killian,   )
Robert W. Lane, Mike Lanman, Kyle Malady,             )
Lowell C. McAdam, Daniel S. Mead, Anthony J.          )
Melone, Randal S. Milch, Robert M. Miller,            )
Sandra O. Moose, Joseph Neubauer, Donald T.           )
Nicolaisen, Thomas H. O'Brien, Clarence Otis, Jr.,    )
Hugh B. Price, John T. Scott, III,                    )
Ivan G. Seidenberg, Francis J. Shammo,                )
Chris Shunk, Rodney E. Slater, John W. Snow,          )
John R. Stafford, John G. Stratton, Ajay Waghray,     )
and Steven E. Zipperstein,                            )
                                                      )
              Defendants,                             )
                                                      )
      -and-                                           )
                                                      )
Verizon Communications Inc. and Cellco                )
Partnership d/b/a Verizon Wireless,                   )
                                                      )
              Nominal Defendants.                     )


                                 MASTER‟S REPORT
                                  (Motion to Dismiss)

                             Date Submitted: May 7, 2014
                              Final Report: July 22, 2014
Ryan M. Ernst, Esquire and Daniel P. Murray, Esquire of O‟KELLY ERNST & BIELLI,
LLC, Wilmington, Delaware and Kenneth A. Levy, Esquire, Monroe, New York;
Attorneys for Plaintiff.

Blake K. Rohrbacher, Esquire and Susan M. Hannigan, Esquire of RICHARDS,
LAYTON & FINGER, P.A., Wilmington, Delaware; Attorneys for Nominal Defendant
Verizon Communications Inc.



LEGROW, Master




                                      2
       In this double derivative action, a stockholder of Verizon Communications, Inc.

(“Verizon”) contends that the boards of directors of Verizon and its majority owned

subsidiary wrongfully refused his demand that the boards take action to remedy alleged

breaches of fiduciary duty and other wrongful conduct by directors and officers of

Verizon and the subsidiary. The plaintiff contends that the wrongful conduct caused the

subsidiary to pay a substantial fine to the federal government, and also exposed the

subsidiary to other potential sanctions, including a loss of its licenses.

       After Verizon moved to dismiss the plaintiff‟s complaint, the plaintiff filed two

amended complaints.        Notwithstanding those amendments, the complaint and the

plaintiff‟s arguments in opposition to the motion to dismiss demonstrate a fundamental

misunderstanding of the standards governing derivative actions. Unable to demonstrate

that the board‟s investigation was conducted unreasonably or in bad faith, the plaintiff

instead appears to argue that this Court nonetheless should review the substance of that

decision and determine whether the documents the demand committee considered and the

witnesses it interviewed were sufficient or “correct.” Compounding matters, even if the

plaintiff could establish wrongful refusal of the demand by Verizon‟s board, the plaintiff

concedes he has not and cannot allege that demand on the subsidiary‟s board would be

futile, arguing instead that he somehow made a demand on the subsidiary‟s board, even

though the evidence shows otherwise, and even though he is not a stockholder of the

subsidiary. Because the plaintiff cannot plead with the necessary particularity sufficient

facts to allow him to maintain this action, I recommend that the Court grant Verizon‟s

motion to dismiss the second amended complaint.


                                              1
I.          Background

            The following facts are drawn from the second amended complaint (the

     “Complaint”), the documents expressly referred to and relied upon in the Complaint,1 and

     a handful of documents of which the Court may take judicial notice,2 giving the plaintiff

     the benefit of all reasonable inferences.          The plaintiff, Arthur V. Belendiuk, is a

     stockholder of nominal defendant Verizon. At the time Belendiuk filed this action, the

     other nominal defendant, Cellco Partnership d/b/a/ Verizon Wireless (“Verizon

     Wireless”), was a majority owned subsidiary of Verizon.3 The remaining defendants are

     past and present directors and officers of Verizon and past and present Verizon Wireless

     employees and members of Verizon Wireless‟s Board of Representatives (collectively,

     the “Individual Defendants”).4

            The facts forming the basis for Belendiuk‟s claims against the Individual

     Defendants stem from incorrect data charges that Verizon Wireless imposed on some of


     1
       E.g., In re Tyson Foods, Inc. Consol. S’holder Litig., 919 A.2d 563, 585 (Del. Ch. 2007); In re
     Dean Witter P’ship Litig., 1998 WL 442456, at *6 n.46 (Del. Ch. July 17, 1998). These
     documents include Belendiuk‟s demand on the Verizon board and the demand committee‟s
     response to the demand.
     2
       E.g., Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 320 n.27 (Del. 2004) (court may
     take judicial notice of the contents of documents required by law to be filed, and actually filed,
     with federal or state officials, without converting a motion to dismiss into a motion for summary
     judgment); In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 169 (Del. 2002) (court
     may take judicial notice of matters that are not subject to reasonable dispute, without converting
     a motion to dismiss into a motion for summary judgment). These documents include the FCC
     Consent Decree and the Final Order and Judgment in the class action litigation.
     3
       Verizon Wireless is a Delaware general partnership formed in April 2000. At the time the
     action was filed, Verizon owned a 55% interest in the partnership, with Vodafone Group plc
     (“Vodafone”) owning the remaining 45%. While the litigation was pending, Verizon agreed to
     purchase Vodafone‟s interest in Verizon Wireless in a transaction that closed in or around
     February 2014. See Compl. ¶ 14.
     4
       Second Am. Verified Shareholder [sic] Derivative Compl. (hereinafter “Compl.”) ¶¶ 15-45.


                                                    2
its customers between 2007 and 2010. In 2009, several news reports suggested that

Verizon Wireless routinely charged its cellular phone customers for internet data usage

when a customer had not accessed the internet. In September 2009, Verizon introduced a

50kb data “allowance” to prevent data charges for accidental data use, a decision

Belendiuk criticizes as insufficient to remedy the problem.5 On December 4, 2009, the

Federal Communications Commission (“FCC”) sent a letter of inquiry to Verizon

Wireless that posed several questions regarding the data charge issue. On December 18,

2009, Verizon Wireless‟s Senior Vice President – Federal Regulatory Affairs, Kathleen

Grillo, responded to that letter of inquiry. Grillo‟s response stated that the data charges

“apply when a customer launches the Internet browser and then navigates away from the

default Mobile Web homepage to sites other than a Verizon Wireless customer care

site.”6

          The FCC launched an investigation into the data charge issue in January 2010, and

sent a second letter of inquiry to Verizon Wireless in July 2010. On October 28, 2010,

Verizon and the FCC entered into a consent decree wherein Verizon stated that its

internal investigation had determined that “approximately 15 million pay-as-you-go

customers might have been erroneously billed for data usage from November 2007 to

October 2010” (the “Consent Decree”). 7 In the Consent Decree, Verizon agreed to

refund the overcharges, which it estimated to be approximately $52.8 million, to adopt

new procedures to prevent similar issues in the future, and to make a series of compliance

5
  See id. ¶¶ 3, 62-66.
6
  Id. ¶ 59.
7
  Aff. of Susan M. Hannigan, Esq. (hereinafter “Hannigan Aff.”) Ex. A, ¶ 7.


                                              3
reports to the FCC.8 Verizon also made a $25 million “voluntary contribution” to the

U.S. Treasury.9 In return, the FCC agreed that it would not use the facts developed in the

its investigation to institute or refer an action against Verizon Wireless concerning the

matters that were the subject of the investigation, absent new material evidence showing

that Verizon‟s representations in the consent order were not accurate. 10 Belendiuk

contends that, had Verizon Wireless acted “diligently and openly” regarding the data

charge issue, it would not have had to pay this $25 million fine.11 Belendiuk also alleges

that Verizon Wireless substantially misrepresented the extent of the overcharges, which

Belendiuk believes exposes Verizon Wireless to FCC sanctions, including possible

revocation of Verizon Wireless‟s licenses, as well as reputational harm.12

       While the FCC investigation was pending, a series of class action lawsuits also

were filed on behalf of Verizon Wireless customers relating to the data charge issue. In

May 2011, Verizon Wireless entered into an agreement to settle the class action claims,

subject to confirmatory discovery by the plaintiffs and their expert. In connection with

the settlement agreement, Verizon Wireless agreed to increase the amount of the refunds

and credits issued to current and former customers.13 The claims were dismissed with

prejudice in March 2012.14




8
  Id. Ex. A, ¶¶ 7-9.
9
  Id. Ex. A, ¶ 10.
10
   Id. Ex. A, ¶ 7.
11
   Compl. ¶ 4.
12
   Id. ¶ 5.
13
   Hannigan Aff. Ex. D, ¶ 2.2.
14
   Id. Ex. G.


                                            4
       After Verizon Wireless entered into the Consent Decree, Belendiuk made a series

of Freedom of Information Act (“FOIA”) requests to the FCC to obtain the documents

Verizon Wireless had provided to the FCC. When Belendiuk did not obtain all the

information he sought, he filed a petition against the FCC in federal district court in

2012. 15 Verizon Wireless and the FCC disclosed the requested documents in 2013.

Belendiuk also made at least two books and records demands under 8 Del. C. § 220.

       On July 24, 2013, Belendiuk formally demanded (the “Demand”) that the Verizon

board of directors take legal action against

       “each member of the [Verizon] board, the Board of Representatives of
       [Verizon Wireless] and senior officers of [Verizon or Verizon Wireless]
       who have served in any capacities [sic] from November 2007 through
       October 2010 (or who have participated in FCC compliance after October
       2010) and who have engaged in breaches of fiduciary duty, negligence,
       gross negligence, recklessness, constructive fraud and waste of [c]ompany
       assets in connection with their activities as directors and officers … .”16

The Demand alleged that the directors and officers of Verizon and Verizon Wireless

knew or should have known well before June 2009 that customers were complaining

about improper data charges on their wireless bills, and that the directors and officers

failed to prevent Verizon Wireless from falsely denying the existence of a problem in

response to FCC inquiry. The Demand asserted that Verizon and Verizon Wireless

concealed the data charge issue, failed to take adequate remedial action, and made

misrepresentations to the FCC, all of which resulted in Verizon Wireless paying a $25

15
   Compl. ¶ 57.
16
   Hannigan Aff. Ex. I at 1. The Demand collectively defines Verizon and Verizon Wireless as
the “Company” and repeatedly refers to the “Company‟s” response to the FCC and the
“Company‟s” actions to address the data charge. In summarizing the Demand, I have attempted
to distinguish, where possible, between Verizon and Verizon Wireless.


                                               5
million fine to the U.S. Treasury. The Demand also alleged that documents showed that

Verizon Wireless had represented that it was making a full refund to overcharged

customers, but had failed to do so, exposing Verizon Wireless to potential administrative

sanctions issued by the FCC.17

      In response to the Demand, the Verizon board of directors formed a committee of

three independent directors to constitute the Demand Committee, which was charged

with considering the Demand and recommending what action, if any, the Verizon board

should take regarding the claims.18 In a follow-up communication sent to the Verizon

board, Belendiuk expressed concern that the statute of limitations for the claims alleged

in the Demand would expire on October 28, 2013. The Demand Committee retained the

law firm of Cravath, Swaine & Moore LLP as its counsel and worked to complete its

investigation before that deadline.19 In its letter to Belendiuk responding to the Demand,

the Demand Committee summarized its investigation as follows:

      Beginning in September 2013, and at the direction of the Demand
      Committee, Cravath carried out an extensive review of material related to
      the inadvertent data charges issue. The material reviewed included all
      relevant documents produced by Verizon to the FCC, as well as the filings,
      transcripts and other communications between the parties in the class action
      litigation that had been brought against the Company relating to the same
      issues. In addition, we reviewed all publicly available information
      concerning customer complaints, the FCC investigation and the Consent
      Decree. Cravath also conducted in-person and telephone interviews of
      Company employees who had been involved in responding to the customer
      complaints, working to solve the underlying technical and billing issues or
      engaged with the FCC during its investigation. On numerous occasions,

17
   Id. Ex. I at 2-3.
18
   Id. Ex. K. The Court may consider Verizon‟s response to the Demand because it was
incorporated by reference in the Complaint. See supra note 1.
19
   Hannigan Aff. Ex. K at 1-2.


                                           6
        Cravath requested and received additional information and materials from
        employees at the Company and from the Company‟s counsel. Throughout
        this process, the Demand Committee received regular updates from, and
        provided direction to, Cravath, including during telephonic meetings with
        the Demand Committee Chair on September 20, 2013 and October 7, 2013,
        and a telephonic meeting with all members of the Demand Committee
        convened on October 16, 2013. During these meetings Cravath briefed the
        Demand Committee on the progress of its investigation and consulted with
        the Demand Committee regarding the next steps to be taken.20

        According to Verizon‟s response to the Demand, Cravath interviewed 19 Verizon

employees and reviewed more than 32,000 pages of information. At the October 16

Demand Committee meeting, Cravath reviewed with the committee its investigation to

date, the remaining work to be done, and its preliminary findings. Based on that report,

the Demand Committee determined that it was unlikely to recommend to the Board that it

would need to seek tolling agreements relating to the claims alleged in the Demand.21

The Demand Committee met again with Cravath on October 24, 2013, for approximately

two hours, followed by a meeting the following morning with the entire Verizon board.

At the meeting on October 25, the Demand Committee recommended that the board

determine that Verizon had no viable claims as alleged in the Demand and that the

procedures and controls developed in response to the Consent Decree were reasonable

and appropriate. At its meeting, the Verizon board unanimously adopted the Demand

Committee‟s recommendation and rejected the Demand. This result was reported to Mr.

Belendiuk in a letter from Cravath dated October 25, 2013.22 Mr. Belendiuk points out




20
   Id. Ex. K at 2-3.
21
   Id. Ex. K at 3.
22
   Id. Ex. K.


                                           7
that the board meeting lasted approximately 20 minutes and the board issued its

recommendation without the benefit of a written report.

         Two days before the Verizon board met to consider the Demand and the Demand

Committee‟s recommendations, Belendiuk filed this action alleging wrongful refusal of

the Demand. After receiving the October 25 letter, Belendiuk made a books and records

demand to inspect the books and records relating to the Demand Committee‟s

investigation and recommendations and the board‟s refusal of the Demand. The parties

agreed to stay this action while Belendiuk inspected certain books and records, which

included the minutes of the meetings of the Demand Committee and the board relating to

the Demand, the documents provided to, reviewed or relied upon by the committee or the

board, resolutions adopted by the board or the committee, and engagement letters

regarding Cravath‟s retention by the Demand Committee. 23           On January 4, 2014,

Belendiuk filed an amended derivative complaint, which he later amended a second time

in response to Verizon‟s motion to dismiss. That Complaint is the subject of the present

motion.

         Belendiuk alleges that the Verizon‟s board‟s refusal of the Demand was wrongful

for a number of reasons. First, Belendiuk criticizes the retention of Cravath, arguing that

the Demand Committee allowed management to instruct and control the scope of

Cravath‟s investigation. 24 Second, Belendiuk contends that Cravath asked the wrong

questions, reviewed the wrong documents, and interviewed the wrong people, alleging


23
     Compl. ¶ 81.
24
     Id. ¶ 83.


                                            8
that Cravath performed a “perfunctory and superficial investigation” by reviewing only

“self-serving documents” that did not address the material questions raised by the

Demand, including: (1) whether Verizon Wireless made a full refund to its customers,

(2) whether Verizon Wireless made misrepresentations to the FCC, and (3) what actions

or inactions by Verizon or Verizon Wireless caused the FCC to demand a $25 million

“voluntary contribution” to the U.S. Treasury. 25 Finally, Belendiuk asserts that the

Demand Committee and the Verizon board demonstrated a lack of good faith by resting

their recommendations and conclusions on oral reports made by Cravath during various

board and committee meetings, rather than requiring a written report of Cravath‟s

investigation.26

          Verizon argues that the Complaint should be dismissed for several independent

reasons, namely: (1) Belendiuk is not an adequate derivative plaintiff, (2) Belendiuk has

not adequately alleged that the Verizon board wrongfully refused the Demand, (3)

Belendiuk has not pled that demand on the Verizon Wireless board would be futile, and

(4) the Complaint fails to state a claim under Rule 12(b)(6). Because the second and

third arguments independently support dismissal of the Complaint, I have not addressed

the issues of Belendiuk‟s adequacy as a derivative plaintiff or whether the Complaint

states a claim under Rule 12(b)(6).




25
     Id. ¶¶ 85-92.
26
     Id. ¶¶ 93-94.


                                            9
II.          Analysis

             Under Court of Chancery Rule 23.1, a stockholder seeking to pursue a derivative

      claim on behalf of a corporation must allege with particularity either (1) the efforts made

      to obtain the action the plaintiff desires from the directors, and the reasons for the

      plaintiff‟s failure to obtain the action, or (2) the reasons why such efforts would be futile

      and should be excused.27 Where a plaintiff fails to plead with particularity that demand

      would be futile or wrongfully was refused, the complaint will be dismissed. 28 The

      demand requirement flows from the fundamental premise of Delaware corporate law: the

      business and affairs of a corporation are managed by or under the direction of its board of

      directors.29

             The demand requirement “is inextricably bound to issues of business judgment

      and the standards of that doctrine‟s applicability,”30 because a board's business judgment

      not only suffuses standard business decisions but also extends to acceptance or rejection

      of a stockholder demand.31 The demand requirement serves as notice to the board of

      directors, allowing the board to review the facts and make a determination in its business

      judgment whether or not the corporation should take remedial action.32 In most cases,

      therefore, it is the board of directors who is empowered to decide whether to bring a


      27
         Ct. Ch. R. 23.1.
      28
         Haber v. Bell, 465 A.2d 353, 357, 360 (Del. Ch. 1983).
      29
         8 Del. C. § 141(a).
      30
         Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984).
      31
         See Aronson, 473 A.2d at 813; Good v. Getty Oil Co., 514 A.2d 1104, 1106 (Del. Ch. 1986)
      (“The remedy of derivative action on behalf of the corporation is an encroachment upon the
      prerogative of the board of directors to manage the affairs of the corporation.”).
      32
         See Schick, Inc. v. Amalgamated Clothing & Textile Workers Union, 533 A.2d 1235, 1240
      (Del. Ch. 1987).


                                                   10
claim on behalf of the corporation.33 Where, however, a board is not capable of making

an impartial business judgment regarding whether to assert a claim, or wrongfully refuses

to assert such a claim, a stockholder may be permitted to maintain the action on behalf of

the corporation.34

       A. Belendiuk has not alleged with particularly that the Verizon board
          wrongfully refused the Demand

       Here, Belendiuk attempted to satisfy the requirements of Rule 23.1 by making the

Demand on the Verizon board. In so doing, Belendiuk waived any argument that the

board is interested or lacks independence.35 A stockholder who makes a demand on a

board “has spent one – but only one – „arrow‟ in the „quiver.‟” 36 If the demand is

refused, the stockholder still may meet the requirements of Rule 23.1 by showing that the

refusal was “wrongful.” The inquiry, however, is different than that employed by a court

assessing whether demand is excused as futile.

       When a board refuses a demand, the only issues examined by a Court are the good

faith and reasonableness of the board‟s investigation. 37 Upon receipt of a demand, a

board must determine the best method to inform itself of the facts relating to the alleged

wrongdoing and “the considerations, both legal and financial, bearing on a response to

the demand.” 38 Any factual investigation the board decides to undertake must be




33
   Lambrecht v. O’Neal, 3 A.3d 277, 282 (Del. 2010).
34
   Rales v. Blasland, 634 A.2d 927, 932 (Del. 1993).
35
   Rales, 634 A.2d at 935 n.12; Levine v. Smith, 591 A.2d 194, 212 (Del. 1991).
36
   Grimes v. Donald, 673 A.2d 1207, 1218 (Del. 1996).
37
   Levine, 591 A.2d at 212 (citing Spiegel v. Buntrock, 571 A.2d 767, 777 (Del. 1990)).
38
   Rales, 634 A.2d at 935.


                                               11
conducted in good faith.39 The board must then weigh the alternatives available to it,

“including the advisability of implementing internal corrective action and commencing

legal proceedings.”40 If a board refuses a stockholder demand, a stockholder has the right

to pursue the claims at issue in the demand only if the stockholder can allege with

particularity sufficient facts to create a reasonable doubt about the good faith and

reasonableness of the board‟s investigation.41

       Belendiuk offers a series of allegations that he contends create a reasonable doubt

regarding the board‟s investigation. First, Belendiuk alleges the Demand Committee did

not really hire and manage Cravath and instead delegated to Verizon‟s management the

task of overseeing and directing the investigation. Second, Belendiuk seems to argue that

the Demand Committee – and by extension the board – failed adequately to inform itself

of the material facts underlying the claims raised in the Demand. In support of this

allegation, Belendiuk argues that (i) Cravath did not review the correct documents or

interview the correct individuals, (ii) Cravath did not provide written materials, such as a

written report or summaries of witness interviews, to the Demand Committee or the

board, and (iii) the board held a perfunctory meeting to consider the Demand

Committee‟s recommendation, without reviewing any written materials other than draft

resolutions refusing the Demand. These allegations are either conclusory and lack the




39
   Id.
40
   Id.
41
   Levine, 591 A.2d at 212; Spiegel v. Buntrock, 571 A.2d 767, 777 (Del. 1990); Gatz v.
Ponsoldt, 2004 WL 3029868, at *5 (Del. Ch. Nov. 5, 2004).


                                            12
requisite particularity to satisfy Rule 23.1, or fail to rise to the level this Court has held

sufficient to establish wrongful refusal.

         First, Belendiuk‟s argument that the Demand Committee delegated to Verizon

management the task of overseeing and directing Cravath‟s investigation is not a

reasonable inference based on the facts Belendiuk alleges. The only fact Belendiuk

alleges in support of this inference is a letter from Cravath to Verizon‟s corporate

secretary indicating that the Demand Committee had retained Cravath and that, in

connection with that engagement, Verizon and Cravath had agreed that the terms of the

engagement would be as stated in a 2009 letter between Cravath and Verizon. That 2009

letter specified that Cravath‟s engagement for a special committee investigation was not a

general representation of Verizon on other matters and would not create a conflict with

Cravath‟s representation of present or future clients on matters unrelated to the

investigation. 42 That letter does not support a reasonable inference that management

directed the substance of Cravath‟s investigation of the Demand. To the contrary, the

Complaint and the documents it incorporates by reference indicate that Cravath met with

the Demand Committee in person or telephonically on a number of occasions throughout

the investigation and received instructions from the Demand Committee regarding the

investigation.43 Although Belendiuk may doubt these statements, he can point to nothing

to refute them, other than his own unsupported suspicions, and therefore the Court is




42
     Hannigan Aff. Ex. M.
43
     Id. Ex. K at 2-3.


                                             13
entitled to assume the truth of those statements, which are incorporated by reference in

the Complaint.44

      Second, Belendiuk criticizes the substance of the investigation Cravath conducted,

arguing that the Demand Committee failed to inform itself of all material facts before

refusing the Demand, and the Demand Committee‟s recommendation was adopted by the

board without deliberation and without the benefit of any written materials. To show that

the board‟s decision to refuse the Demand was uninformed, Belendiuk must show that the

Demand Committee‟s investigation was grossly negligent, meaning that the Demand

Committee or the board acted with reckless indifference or engaged in conduct outside

the bounds of reason.45 This Court repeatedly has held that a stockholder‟s criticisms

regarding the types of documents reviewed or the persons interviewed in connection with

an investigation do not rise to the level of gross negligence, because those choices are

ones on which reasonable minds may differ.46 Similarly, this Court has held that there is

no requirement that a committee or the board receive a written report before making a

determination to refuse a demand.47 In general, there is no “prescribed procedure” for

how a committee should conduct its investigation, and there are circumstances where a

committee and the board can reach a conclusion based on oral reports. Given Mr.

Belendiuk‟s concerns regarding the statute of limitations, it was reasonable for the


44
   See, e.g., Mt. Moriah Cemetery v. Moritz, 1991 WL 50149, at *3 (Del. Ch. Apr. 4, 1991).
45
   McPadden v. Sidhu, 964 A.2d 1262, 1274 (Del. Ch. 2008); Mt. Moriah Cemetery, 1991 WL
50149, at *4.
46
   See, e.g., Gatz v. Ponsoldt, 2004 WL 3029868, at *5 (Del. Ch. Nov. 5, 2004); Mt. Moriah
Cemetery, 1991 WL 50149, at *4.
47
   Gatz, 2004 WL 3029868, at *5 (citing Levine v. Smith, 591 A.2d 194, 214 (Del. 1991)).


                                           14
Demand Committee to eschew the time associated with preparing a written report, and

rely on the oral advice of their counsel.48 Mr. Belendiuk does not point to any unique

feature of this investigation that mandated use of a written report.

       Mr. Belendiuk‟s criticisms of the Demand Committee‟s reliance on Cravath to

conduct the investigation and provide its advice is at odds with Section 141(e) of the

Delaware General Corporation Law, which provides

       (e) A member of the board of directors, or a member of any committee
       designated by the board of directors, shall, in the performance of such
       member's duties, be fully protected in relying in good faith upon the records
       of the corporation and upon such information, opinions, reports or
       statements presented to the corporation by any of the corporation's officers
       or employees, or committees of the board of directors, or by any other
       person as to matters the member reasonably believes are within such other
       person's professional or expert competence and who has been selected with
       reasonable care by or on behalf of the corporation.

Belendiuk makes no attempt to allege that Cravath was not selected with reasonable care

or that the matters on which Cravath offered advice were outside its professional

competence. 49 Although Belendiuk argues that the Demand Committee should have

hired other experts, including someone with expertise in the accounting issues Belendiuk

believes are implicated in his Demand, Belendiuk does not allege with particularity that


48
   See 66 Del. Laws c. 136 (1987) (stating that, under Section 141, directors may rely in good
faith on the “written or oral” advice or opinions of professionals or experts selected with
reasonable care). Mr. Belendiuk‟s Demand did not mention any concern about the looming
statute of limitations. The Demand was not considered by the Verizon board until its next
regularly scheduled meeting on September 4, 2013, at which time the Demand Committee was
formed. It was not until September 10, 2013 that Mr. Belendiuk mentioned the statute of
limitations issue, leaving Verizon approximately six weeks to investigate and consider the
Demand. See Hannigan Aff. Ex. K at 1-2.
49
   See Brehm v. Eisner, 746 A.2d 244, 262 (Del. 2000) (listing particularized facts a plaintiff
might allege to defeat a Rule 23.1 motion to dismiss in a due care case where an expert has
advised the board in its decision-making process).


                                              15
the Demand Committee‟s decision not to retain any additional experts was “reckless” or

without the bounds of reason.

       The documents incorporated in the Complaint show that the Demand Committee

held several meetings to discuss the Demand, including a final meeting lasting more than

2 hours, and that the Demand Committee‟s recommendation was reported to the full

board, who had the benefit of asking questions of the Demand Committee and its

counsel. 50   The Demand Committee‟s counsel reviewed numerous documents and

interviewed 19 witnesses, and formed its opinion based on that investigation. There is

nothing in the record to indicate that the Demand Committee did not rely on that advice

in good faith, or that the board was not in turn entitled to adopt the recommendation of

the Demand Committee.

       The allegations in the Complaint that Belendiuk contends are sufficient to meet the

requirements of Rule 23.1 are strikingly different from the two published decisions in

which this Court has found that a plaintiff adequately alleged wrongful refusal of a

demand.51 In the first such case, Thorpe v. CERBCO, Inc., a special committee appointed

by the board issued its recommendation to the board, after which the members of the

special committee promptly resigned. The board refused to reveal the substance of the

investigation, but took no other action in response to the demand. This Court held that,

assuming the truth of those allegations, the complaint raised a reasonable doubt



50
   Hannigan Aff. Ex. K at 4-5.
51
   See Seaford Funding Ltd. P’ship v. M&M Assoc. II, L.P., 672 A.2d 66 (Del. Ch. 1995); Thorpe
v. CERBCO, Inc., 611 A.2d 5 (Del. Ch. 1991).


                                             16
concerning the board‟s good faith.52 Similarly, in Seaford Fund Limited Partnership v.

M&M Associates II, L.P., the plaintiffs alleged that a general partner refused demands

that the partnership pursue its claims for payments on a promissory note owed by a

company owned and controlled by the general partner, and the general partner refused to

explain his reasons for failing to pursue the payments. This Court concluded that those

particularized allegations created a reasonable doubt that the general partner validly

exercised his business judgment in refusing the demand.53 Although those cases do not

represent the only circumstances under which a court might conclude that a demand

wrongfully was refused, they illustrate the specificity of the allegations and the

egregiousness of the conduct that this Court has found rises to the level of wrongful

refusal, and stand in marked contrast to the allegations in the Complaint.

          B. Belendiuk has not pled that demand on the Verizon Wireless board of
             representatives would be futile.

          Even if I concluded that the Complaint alleged particularized facts creating a

reasonable doubt that the decision to refuse the demand was the product of the Verizon‟s

board‟s valid business judgment, Belendiuk cannot maintain this derivative action

because he has not alleged – and concedes he cannot allege – that demand on Verizon

Wireless‟s board of representatives would be futile. Although recent decisions of the

Delaware Supreme Court and this Court have clarified that a stockholder seeking to

maintain a double derivative action on behalf of a wholly owned subsidiary need only

show that demand is excused at the parent level, those decisions did not alter the

52
     611 A.2d at 11.
53
     672 A.2d at 72.


                                            17
requirement that – to the extent Delaware law allows a stockholder of a parent company

to pursue a double derivative action on behalf of a non-wholly owned subsidiary54 – the

stockholder must show demand futility at the parent level and the subsidiary level.55

       Accordingly, even if Belendiuk could show that the Verizon board wrongfully

refused the Demand, he would not be able to maintain this double derivative action on

behalf of Verizon Wireless unless he showed that demand on Verizon Wireless‟s board

of representatives would be futile. To show demand futility, a stockholder must allege

particularized facts creating a reasonable doubt that “(1) the directors are disinterested

and independent [or] (2) the challenged transaction was otherwise the product of a valid

exercise of business judgment.” 56 Belendiuk conceded at argument that he could not

meet this standard.57




54
   The Delaware Supreme Court has not addressed squarely the question of whether a parent
company‟s stockholders have the right to maintain a double derivative suit on behalf of a
subsidiary in which the parent owns a controlling interest, but not a 100% interest. See
Lambrecht, 3 A.3d at 283 n.14. The Lambrecht court noted that “a handful of jurisdictions”
appear to recognize the right of a parent company‟s stockholders to maintain a double derivative
action on behalf of a majority-owned subsidiary, but the Lambrecht decision expressly did not
address that issue. See id. For purposes of this report, I will assume that Delaware law permits a
parent company‟s stockholders to maintain a double derivative action on behalf of a majority-
controlled subsidiary.
55
   See Rales v. Blasland, 634 A.2d 927, 934 (Del. 1993) (“[a] plaintiff in a double derivative suit
is still required to satisfy the Aronson test in order to establish that demand on the subsidiary‟s
board is futile.”); Hamilton Partners, L.P. v. Englard, 11 A.3d 1180, 1206-07 (Del. Ch. 2010)
(“[b]ecause the parent corporation determines, through its 100 percent control, whether or not the
subsidiary will sue, „there is no basis in law or logic‟ to require a separate demand futility
analysis at the [wholly owned] subsidiary level. … For this reason, the Lambrecht Court
repeatedly observed that in a double derivative action involving a wholly owned subsidiary, a
stockholder plaintiff only must plead demand futility (or otherwise satisfy Rule 23.1) at the
parent level.”).
56
   Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984).
57
   Belendiuk v. Carrion, C.A. No. 9026-ML (May 7, 2014) (TRANSCRIPT) at 39.


                                               18
          Belendiuk instead advances three arguments why he should not be required to

show that demand on Verizon Wireless‟s board of representatives would be futile. First,

he argues that, although he named Verizon Wireless as a nominal defendant, this is not

really a double derivative action. Second, he argues that because Verizon Wireless now

is a wholly owned subsidiary of Verizon, he need not establish demand futility at the

subsidiary level. Third, he argues that the Demand – although it only was addressed to

Verizon‟s board – also in substance was directed to Verizon Wireless. Each argument

misstates either the record, Delaware law, or both.

          Belendiuk‟s argument that he is not asserting a double derivative claim is difficult

to square with his decision to name Verizon Wireless as a nominal defendant, and also

demonstrates a fundamental misunderstanding of Delaware law. Belendiuk argues that

“[i]t is questionable whether Verizon Wireless is even a necessary party to this

litigation,” asserting that “it was Verizon that was the principal actor in these events.”58

But the distinction between a derivative action and a direct action, and the attendant

determination of who “owns” the claim at issue, rests not on a determination of who

principally was involved in the underlying conduct, but rather solely on a determination

of “[w]ho suffered the alleged harm – the corporation or the suing stockholder

individually – and who would receive the benefit of the recovery or other remedy?”59

The harm Belendiuk alleges occurred as a result of the conduct he challenges is (a)

Verizon Wireless‟s payment of the $25 million “voluntary contribution,” and (b) the


58
     Pl.‟s Answering Br. in Opp‟n to Mot. to Dismiss at 25-26.
59
     Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1035 (Del. 2004).


                                                19
exposure of Verizon Wireless to potential additional sanctions from the FCC. Belendiuk

does not argue that Verizon or its stockholders suffered (or will suffer) directly from

those harms, nor would such an argument bear weight.                Because Verizon Wireless

suffered the alleged harm – and would benefit from any recovery in this action – it is

Verizon Wireless who owns and controls the claims at issue here, regardless of whether it

was Verizon employees, Verizon Wireless employees, or a combination thereof who

engaged in the alleged wrongdoing.

       Belendiuk next argues that because Verizon Wireless now is wholly owned by

Verizon, a showing of demand futility is not necessary at the subsidiary level, citing the

Delaware Supreme Court‟s decision in Lambrecht v. O’Neal and this Court‟s decision in

Hamilton Partners, L.P. v. Englard. Belendiuk concedes, however, that at the time he

made the Demand and filed the original complaint in this action, Verizon Wireless was

not wholly owned by Verizon. The question of whether a stockholder has satisfied the

requirements of Rule 23.1 is determined at the time the original derivative complaint is

filed, without regard for later developments. 60 Accordingly, the fact that Verizon

Wireless became a wholly owned subsidiary of Verizon several months after Belendiuk




60
  See, e.g., Cal. Public Emps. Ret. Sys. v. Coulter, 2002 WL 31888343, at *6 (Del. Ch. Dec. 18,
2002) (although composition of board changed before the filing of amended complaint, the board
as constituted at the time the original complaint was filed is the board for purposes of evaluating
whether demand is required or excused); Needham v. Cruver, 1993 WL 179336, at *3 (Del. Ch.
May 12, 1993) (“[t]he disinterestedness of the directors is determined as of the time the original
complaint is filed”); Harris v. Carter, 582 A.2d 222, 231 (Del. Ch. 1990) (“a change of control
[after a derivative complaint is filed] does not require a derivative plaintiff to present a demand
to the new board, or allege facts that would excuse demand as of the time a plaintiff elects to
amend his pleadings.”).


                                               20
initiated this action is not relevant to the Court‟s analysis of whether Belendiuk has met

the requirements of Rule 23.1.

       Finally, Belendiuk argues that – if the Court concludes he must satisfy Rule 23.1

at the subsidiary level – he has done so by making the Demand and showing (he

contends) that the Verizon board wrongfully refused that Demand. In other words,

Belendiuk concedes he cannot establish demand futility at the Verizon Wireless level, but

argues the Court should conclude that the Demand was directed to both Verizon and

Verizon Wireless, and that Verizon Wireless‟s board of representatives wrongfully

refused the Demand. This argument suffers at least two fatal flaws. As an initial matter,

I can find no case indicating that “wrongful refusal” is a proper inquiry at the subsidiary

level in a double derivative action; all the published double derivative cases speak to

establishing demand futility at the subsidiary level. This appears consistent with the

separate corporate existence and different ownership of a subsidiary. Belendiuk is a

stockholder of Verizon, not Verizon Wireless, and presumably could not make a demand

on Verizon Wireless. Second, even if I assumed that Belendiuk could make a demand on

the Verizon Wireless board of representatives and could satisfy Rule 23.1 by showing the

demand wrongfully was refused, Belendiuk‟s argument that the Demand was made on

both companies is not supported by the record. The Demand only was directed to

Verizon, not to the Verizon Wireless board of representatives.61 Belendiuk concedes this

point, but argues that this is merely a “technical failing,” and that he “effectively made


61
  Hannigan Aff. Ex. I (addressing Demand to the corporate secretary of Verizon and demanding
that the Verizon Board take legal action against various individuals).


                                            21
       [a] demand on Verizon and Verizon Wireless,” because it would not have “made sense”

       for Verizon Wireless to form a separate demand committee, and therefore making a

       separate demand on Verizon Wireless would be a “hollow technicality.”62 Again, this

       argument ignores the separate legal existence of Verizon Wireless and Verizon and

       glosses over the critical fact that Vodafone owned 45% of Verizon Wireless at the time

       the Demand was made and the original complaint was filed. 63               Verizon Wireless

       separately was represented by a board of representatives, and it would not be reasonable

       to infer that this board, consisting of representatives of both partners, was a mere “hollow

       technicality,” or would have agreed to defer to any determination by Verizon‟s Demand

       Committee.64

III.          Conclusion

              For the reasons set forth above, Belendiuk cannot satisfy the requirements of Rule

       23.1 at either the parent or subsidiary level, and I therefore recommend that the Court

       dismiss this double derivative complaint with prejudice. This is my final report and

       exceptions may be taken in accordance with Court of Chancery Rule 144.



                                                          /s/ Abigail M. LeGrow
                                                          Master in Chancery




       62
          Transc. at 40-41.
       63
          Compl. ¶ 14.
       64
          See Beam v. Stewart, 845 A.2d 1040, 1048 (Del. 2004) (“„conclusory allegations are not
       considered as expressly pleaded facts or factual inferences.‟ Likewise, inferences that are not
       objectively reasonable cannot be drawn in the plaintiff‟s favor.”).


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