                              In the

    United States Court of Appeals
                For the Seventh Circuit
                    ____________________
No. 15-1828
IN RE: BIGLARI HOLDINGS, INC. SHAREHOLDER DERIVATIVE
LITIGATION.

CHAD R. TAYLOR and EDWARD DONAHUE,
                                             Plaintiffs-Appellants,

                                v.

SARDAR BIGLARI, et al.,
                                            Defendants-Appellees.
                    ____________________

        Appeal from the United States District Court for the
         Southern District of Indiana, Indianapolis Division.
      No. 1:13-cv-00891-SEB-MJD — Sarah Evans Barker, Judge.
                    ____________________

  ARGUED DECEMBER 4, 2015 — DECIDED FEBRUARY 17, 2016
               ____________________

   Before POSNER, FLAUM, and WILLIAMS, Circuit Judges.
    POSNER, Circuit Judge. This is a shareholder derivative
suit against the directors of an Indiana company, Biglari
Holdings, Inc., that owns two restaurant chains, Western
Sizzlin’ and Steak ‘n Shake, both of which operate some res-
taurants, and franchise others, in many U.S. states. Sardar
2                                                 No. 15-1828


Biglari is the CEO of Biglari Holdings and also the chairman
of the company’s board of directors. There are five other di-
rectors. Biglari Holdings used to own an investment compa-
ny named Biglari Capital Corporation, which is the control-
ling partner in a pair of private investment entities called
The Lion Fund and The Lion Fund II. Biglari Holdings had
bought Biglari Capital Corporation from Sardar Biglari in
2010, but sold it back to him in 2013.
     The basis of this suit is a claim by two shareholders of
Biglari Holdings that in 2013 the board had approved three
transactions (one of them the sale of Biglari Capital Corpora-
tion) that the plaintiffs call “entrenchment transactions,” in-
tended they say to cement Biglari’s control of the company
and enrich him at the expense of the other shareholders. One
of the challenged transactions, a stock offering, was ap-
proved by the entire board and the other two were approved
by the Governance, Compensation and Nominating Com-
mittee, consisting of four members of the board. The plain-
tiffs regard the board’s members as Biglari’s puppets.

     Normally the first step in a shareholder derivative action
is a demand that the board either correct the improprieties
alleged or initiate an action on behalf of the corporation
against members of the board. The plaintiffs did not make
such a demand but instead alleged “demand futility,” mean-
ing that it was a forgone conclusion that the board would
not respond to a demand by them. The suit is a diversity suit
and the governing substantive law, the parties agree, is that
of Indiana, under whose law demand futility can be shown
by facts that create a reasonable doubt that a majority of the
directors are disinterested (maybe they stood to gain a bene-
fit from board approval of the transactions that would not be
No. 15-1828                                                     3


shared with the company’s shareholders), or that the board
was independent, or that it had exercised responsible busi-
ness judgment. See Piven v. ITT Corp., 932 N.E.2d 664, 668
(Ind. 2010); Carter ex rel. CNO Financial Group, Inc. v. Hilliard,
970 N.E.2d 735, 748–49 (Ind. App. 2012).
    Indiana courts, although they seek guidance in such cas-
es from Delaware, have a higher threshold for proof of de-
mand futility. Demand is futile if a derivative claim poses a
significant risk of personal liability for the directors, Piven v.
ITT Corp., supra, 932 N.E.2d at 670, but “a director is not lia-
ble for any action taken as a director … unless … the breach
or failure to perform constitutes willful misconduct or reck-
lessness.” Ind. Code § 23-1-35-1(e)(2); see also Brane v. Roth,
590 N.E.2d 587, 590 (Ind. App. 1992). The official comment to
another Indiana statutory provision, Ind. Code § 23-1-32-4,
states that “the decision whether and to what extent to in-
vestigate and prosecute corporate claims … should in most
instances be subject to the judgment and control of the
board.”
    Thus “Indiana has statutorily implemented a strongly
pro-management version of the business judgment rule,” G
& N Aircraft, Inc. v. Boehm, 743 N.E.2d 227, 238 (Ind. 2001)—
the rule that creates “a presumption that directors making a
business decision, not involving self-interest, act on an in-
formed basis, in good faith and in the honest belief that their
actions are in the corporation’s best interest.” Grobow v.
Perot, 539 A.2d 180, 187 (Del. 1988), overruled on other
grounds in Brehm v. Eisner, 746 A.2d 244 (Del. 2000).
   The district judge ruled that the plaintiffs had failed to
demonstrate demand futility as defined in Indiana law, and
so dismissed their suit, precipitating this appeal.
4                                                 No. 15-1828


    Although we’ll see that of the six directors of Biglari
Holdings only Mr. Biglari stands to obtain a direct financial
benefit from the challenged transactions, the plaintiffs claim
that the transactions will “entrench” all six—that is, make it
impossible as a practical matter for them ever (or at least for
a very long time) to be removed from the board, even if the
company would benefit from such turnover. But as the dis-
trict judge pointed out, the plaintiffs have not alleged that
any of the directors were in peril of being removed from the
board and, if they were not, it is unlikely that their motiva-
tion for approving the challenged transactions was en-
trenchment. See Grobow v. Perot, supra, 539 A.2d at 188.
    The plaintiffs argue that some of the directors are be-
holden to Biglari and thus not independent. One is conceded
to have close personal ties to him, dating from the time
when he was Biglari’s professor at Trinity University in Tex-
as. This may raise a question about that director’s independ-
ence, but that leaves four other directors (besides Biglari).
They are a solid majority of the six-member board and the
entire membership of the Governance, Compensation and
Nominating Committee. One of the four had served on the
board of a company that Biglari tried unsuccessfully to take
over—but that doesn’t suggest he’s in Biglari’s pocket! An-
other, Ruth J. Person, resigned in 2014 as chancellor of the
University of Michigan-Flint, a branch of the University of
Michigan, and the plaintiffs argue that she’s now financially
dependent on her salary as a member of the board of Biglari
Holdings and so will kowtow to Biglari. That’s unlikely.
That a director is paid for his or her services does not estab-
lish the kind of financial interest that would excuse demand.
Grobow v. Perot, supra, 539 A.2d at 188. Nor is Person finan-
cially dependent on her income as a member of Biglari Hold-
No. 15-1828                                                   5


ings’ board. She did not retire from the university, but mere-
ly returned to her professorship (she is a professor of man-
agement) at the university. Her website recites an extensive
list of distinguished positions that she has held. “Ruth Per-
son, Ph.D., Professor of Management,” www.umflint.
edu/som/ruth-person (visited Feb. 16, 2016).
    Kenneth Cooper, another member of the board, has more
entanglements with Biglari. He is the founder of Ascot Man-
agement, LLC, and Biglari is on the board of that company.
Cooper is also an investor in The Lion Fund(s). Biglari Hold-
ings is the largest investor in those funds, however, and so
the shareholders of Biglari Holdings are indirect investors in
them—thus aligning Cooper’s interest with their own. As for
his personal relationship with Biglari, “allegations of mere
personal friendship or a mere outside business relationship,
standing alone, are insufficient to raise a reasonable doubt
about a director’s independence.” Beam ex rel. Martha Stewart
Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1050 (Del.
2004).
    Finally, board member James Mastrian is also on the
board of a company that Biglari Holdings owns a 12.8 per-
cent share of, a fact omitted from a required filing with the
Securities and Exchange Commission. But the plaintiffs have
not explained how the connection between the two compa-
nies, or the filing omission, makes Mastrian a puppet of
Biglari. And the fact that Biglari and Mastrian “developed
business relationships before joining the board … [is] insuf-
ficient, without more, to rebut the presumption of independ-
ence.” Id. at 1051.
    This leaves the plaintiffs to argue that the board of direc-
tors approved three transactions that were so obviously im-
6                                                  No. 15-1828


proper from the standpoint of benefiting the shareholders as
a whole that the board cannot be thought to have been act-
ing in their interest.
    One involves a licensing agreement approved by the
board’s Governance, Compensation and Nominating Com-
mittee in 2013 that allows the company to use Biglari’s name
and likeness in its advertising without payment so long as
he remains as CEO, but requires it to pay him 2.5 percent of
the company’s gross revenues from products and services
that bear Biglari’s name as royalties for the use of his name
and likeness for five years if he’s removed as CEO, resigns
because of an involuntary termination event, or loses his sole
authority over capital allocation, or a majority of the board is
replaced, or someone other than Biglari or the company’s
existing shareholders obtains more than 50 percent of the
shares and therefore acquires control of the company.
    The plaintiffs argue that these provisions are designed to
entrench the board and Biglari by making a change of con-
trol unlikely because a replacement of a majority of the
board or of Biglari himself would trigger costly royalty obli-
gations. They point out that 2.5 percent of the company’s
gross revenues in 2012 (for example) would have been about
$17.5 million even though the company’s net earnings were
only $21.6 million—and so 81 percent of those earnings
would have gone to Biglari in the hypothetical event that
one of the triggering events had occurred that year, even if
he no longer had any involvement in the company.
   But the 81 percent figure is misleading. The $21.6 million
in net earnings is an accounting figure affected by the
amount the company decides to realize as earnings in a giv-
en year. At the oral argument the defendants’ lawyer told us
No. 15-1828                                                   7


that the actual value of Biglari Holdings’ assets, which in-
clude appreciation in the value of investments (for remem-
ber that Biglari Holdings has invested millions of dollars in
the two investment funds), is much greater. The company
does not realize all of its investment gains every year, and
gains not yet realized are not reported as income on the
company’s income statement. Thus the net earnings figure
does not reveal the true financial health of the company, and
so the required royalty need not have the grave impact that
the plaintiffs allege. And although at the end of fiscal year
2014 the value of Biglari Holdings’ investments totaled $766
million, a further increase in their value will not affect the
royalty obligation. For if a triggering event occurs, the com-
pany will be required to pay 2.5 percent of its gross revenues
only from products and services that bear Biglari’s name or
likeness.
     The defendants point out, moreover, that the company is
compensated (whether fully or not we don’t know) for the
cost to it of a triggering event by the fact that unless and un-
til it occurs the company remains free to use Biglari’s name
in licensing and advertising at no cost—which according to a
report prepared by outside counsel for the company’s direc-
tors before they entered into the agreement is unusual, be-
cause it amounts to giving the company a free trademark li-
cense. The plaintiffs’ riposte that Biglari’s name isn’t worth
much, for he is hardly a well-known celebrity. Yet he is rec-
ognized to be an up-and-coming entrepreneur (he is still in
his thirties). And as the defendants’ lawyer explained at oral
argument without contradiction, Biglari has already
achieved celebrity status in the Middle East, having fled Iran
(his birthplace) under dramatic circumstances and achieved
swift success as an American businessman. And so his name
8                                                  No. 15-1828


might be a selling point as Steak ‘n Shake expands by open-
ing franchises in Middle Eastern countries (perhaps not ex-
cluding Iran).
    The next transaction challenged by the plaintiffs is the
sale of Biglari Capital Corporation (BCC) by Biglari Hold-
ings to Mr. Biglari in 2013 for $1.7 million. Biglari Holdings
had bought BCC from him three years earlier for $4.2 mil-
lion, and the plaintiffs argue that by selling it back to him at
such a low price the board radically disserved the interests
of the shareholders.
    The Governance, Compensation and Nominating Com-
mittee of the board of directors had engaged a valuation
firm to value Biglari Holdings’ interest in BCC, and the firm
estimated the value as being between $8.8 and $10.2 million.
The Committee gave two reasons for nonetheless selling
BCC for a mere $1.7 million. First, prior to the sale but after
the valuation, BCC had distributed $5.7 million worth of as-
sets to Biglari Holdings, leaving BCC with assets worth only
$3.1 to $4.5 million. The Committee concluded that a further
reduction in the sale price was warranted because the valua-
tion “did not reflect any obligation that BH has to pay an in-
centive bonus” to Biglari for increases in Biglari Holdings’
book value attributable to BCC. The Committee estimated
the cost of this bonus obligation at $1.9 million. The Commit-
tee had “retained separate counsel, tax/accounting advisors,
an independent compensation consultant, and a financial
advisor to assist the Committee in the structuring, evalua-
tion, and negotiation of [the] transaction,” and after consul-
tation with these experts had unanimously approved the
$1.7 million sale figure. The defendants state without con-
tradiction that Biglari Holdings benefited from the sale of
No. 15-1828                                                   9


BCC by a reduction in regulatory burdens related to invest-
ments and by avoiding potential conflicts of interest by
clearly separating Biglari Holdings from The Lion Fund.
    The plaintiffs’ final challenge is to the board’s failure
(they allege) to deliberate adequately and to retain a finan-
cial advisor before completing a stock offering that raised
$75 million. But surely the company wanted to raise as much
money as possible, and if a financial advisor would have in-
creased the take from the offering by more than his fee why
would the company not have hired one? The plaintiffs argue
that Biglari was seeking to entrench himself and that the
board failed to consider the entrenching effects of the rights
offering. They point out that the offering allowed Biglari to
buy more shares than other offerees. The way this worked,
according to the plaintiffs, is that Biglari Holdings issued
shares of common stock but discounted them by between 30
and 40 percent relative to the share prices of stock in Biglari
Holdings. The offering contained an oversubscription fea-
ture, so if the offering was not fully subscribed by the exist-
ing shareholders other shareholders who had exercised their
rights could acquire the shares not taken. Biglari did just that
and purchased additional voting shares, thus increasing his
stake in the company, while shareholders who did not exer-
cise their option to purchase new shares saw their share val-
ues diluted. Biglari had the same right to purchase shares as
any other shareholder. And when the smoke cleared his
share of ownership of the stock of Biglari Holdings had risen
only from 15.4 to 16.1 percent.
    Given the stringency of the Indiana standard of demand
futility and the lack of strong support for the plaintiffs’
claims to demonstrate that futility, the three challenged
10                                               No. 15-1828


transactions, whether examined individually or together,
cannot be deemed so oppressive to shareholders as to create
a substantial doubt that the transactions were the product of
a valid exercise of business judgment by an unbiased and
independent board. Demand futility has not been shown.
The judgment of the district court is therefore
                                                  AFFIRMED.
