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EGLESTON v. McCLENDON2014 OK CIV APP 11318 P.3d 210Case Number: 111833Decided: 12/19/2013Mandate Issued: 01/14/2014DIVISION I
As Corrected: February 13, 2014THE COURT OF CIVIL APPEALS OF THE STATE OF OKLAHOMA, DIVISION ICite as: 2014 OK CIV APP 11, 318 P.3d 210
GREGORY M. EGLESTON, derivatively on behalf of CHESAPEAKE ENERGY 
CORPORATION, Plaintiff/Appellant,v.AUBREY K. McCLENDON, MERRILL A. 
MILLER, V. BURNS HARGIS, LOUIS ALLEN SIMPSON, ARCHIE W. DUNHAM, BOB G. 
ALEXANDER, VINCENT J. INTRIERI, R. BRAD MARTIN, FREDERIC M. POSES, CHARLES T. 
MAXWELL, RICHARD K. DAVIDSON, KATHLEEN M. EISBRENNER, DONALD L. NICKLES and 
FRANK A. KEATING, Defendants/Appellees,andCHESAPEAKE ENERGY CORPORATION, 
Nominal Defendant/Appellee.

APPEAL FROM THE DISTRICT COURT OF OKLAHOMA COUNTY, OKLAHOMA
HONORABLE PATRICIA G. PARRISH, JUDGE

AFFIRMED

Mark A. Waller, David Jorgenson, Sneed Lang P.C., Tulsa, Oklahoma, for 
Appellant,Spencer F. Smith, McAfee & Taft, A Professional Corporation, 
Oklahoma City, Oklahoma, for Appellee Chesapeake Energy Corporation.


Larry Joplin, Chief Judge:
¶1 Plaintiff/Appellant Gregory M. Egleston (Plaintiff), derivatively on 
behalf of Chesapeake Energy Corporation, seeks review of the trial court's order 
granting the motion to dismiss of Nominal Defendant/Appellee Chesapeake Energy 
Corporation (Chesapeake). Plaintiff asserts the trial court erred in dismissing 
his Verified Shareholder's Derivative and Demand Refused Petition on the finding 
that Chesapeake's current Board of Directors, Defendants Aubrey K. McClendon, 
Archie W. Dunham, Frederic M. Poses, Bob G. Alexander, R. Brad Martin, Vincent 
J. Intrieri, Merrill A. Miller, V. Burns Hargis, and Louis Allen Simpson, 
exercised reasonable business judgment when it deferred action on Plaintiff's 
litigation demand.
¶2 On November 9, 2012, Plaintiff filed his Verified Shareholder's Derivative 
and Demand Refused Petition. Plaintiff alleged that Defendant Aubrey K. 
McClendon is a co-founder of Chesapeake, and has served as its Chief Executive 
Officer since its inception. Plaintiff also alleged that McClendon and the 
remaining Defendants were and/or are members of the Chesapeake Board of 
Directors at all times relevant to the allegations of Plaintiff's Petition.1
¶3 Plaintiff alleged that he had reviewed the books and records produced by 
Chesapeake, filings by the Securities Exchange Commission, and other publicly 
available documents and reports which revealed, inter alia, a pattern of 
self-dealing, usurpation of corporate opportunities and conflicts of interest by 
McClendon and former and/or current members of the Board of Directors, in 
derogation of corporate rules of governance and their fiduciary duties, to the 
damage of the company and its shareholders. Plaintiff also alleged that, on or 
about August 10, 2012, he made a Demand on Cheasapeake's Board of Directors to 
take immediate legal action against McClendon and former members of the Board of 
Directors to recover damages for breach of fiduciary duty, to enforce the rules 
of corporate governance, and to remove McClendon as CEO. Plaintiff further 
alleged the Board of Directors refused his Demand, and "defer[red] further 
action on the Demand during the pendency of related litigation, Board review, 
and administrative inquiries and investigations," but "failed to meet the 
standard of good faith and did not exercise valid judgment in refusing the 
Demand because" the Board failed to conduct any investigation of the allegations 
of the Petition and decided to defer action on the Demand after a single 
meeting, tainted by the presence of former Board members against whom the 
Petition set forth allegations of wrongdoing.2
¶4 Chesapeake filed a motion to dismiss. Chesapeake alleged that the matters 
complained-of in Plaintiff's petition were the subject of other shareholder 
derivative suits, and investigations by the Board of Directors, the Securities 
Exchange Commission or Department of Justice or the Michigan Attorney General in 
fourteen different venues or proceedings.3 Chesapeake further asserted that it complied with 
Plaintiff's requests for the production of corporate books and records in good 
faith, and that, in the valid exercise of reasonable business judgment, for the 
good of the company, its Board elected to defer proceeding on Plaintiff's Demand 
pending further action in the other litigations and investigations. Chesapeake 
argued that, by making Demand on its Board, Plaintiff had conceded its 
independence and disinterest, and had failed to allege specific wrongful acts 
either demonstrating the lack of any rational business purpose and overcoming 
the Board's presumed-correct exercise of its business judgment.
¶5 Plaintiff responded. Plaintiff asserted the Board's decision to defer 
action on his Demand, without substantial independent investigation and in the 
presence of directors against whom he alleged wrongful acts, demonstrated its 
failure to exercise good faith or valid business judgment. Plaintiff further 
asserted the decision to defer action on his Demand constituted neither the 
grant or denial of his Demand, and did not preclude this action. Plaintiff 
lastly requested leave to amend his petition if the trial court granted the 
motion to dismiss.
¶6 Chesapeake responded, and the trial court ordered further briefing. After 
hearing the parties' arguments, and considering the briefs and materials 
submitted, the trial court held:


. . . Chesapeake's Board of Directors exercised reasonable business 
    judgment in deferring any action on Plaintiff's litigation demand. 
    Specifically, the Court finds the Board's concern that if Chesapeake pursues 
    litigation at this time there may be adverse consequences to it due to the 
    ongoing investigation by the SEC, DOJ and the Michigan Attorney General.
For this reason, Plaintiff's Shareholder's Derivative and Demand Refused 
    Petition is dismissed with prejudice.
Plaintiff appeals, and the matter stands submitted on the trial court 
record.4
¶7 Oklahoma statute provides:


In a derivative action brought by one or more shareholders or members to 
    enforce a right of a corporation or of an unincorporated association, the 
    corporation or association having failed to enforce a right which may 
    properly be asserted by it, the petition shall be verified and shall allege 
    that the plaintiff was a shareholder or member at the time of the 
    transaction of which he complains or that his share or membership thereafter 
    devolved on him by operation of law. The petition shall also allege with 
    particularity the efforts, if any, made by the plaintiff to obtain the 
    action he desires from the directors or comparable authority and, if 
    necessary, from the shareholders or members, and the reasons for his failure 
    to obtain the action or for not making the effort. The derivative action may 
    not be maintained if it appears that the plaintiff does not fairly and 
    adequately represent the interests of the shareholders or members similarly 
    situated in enforcing the right of the corporation or association. The 
    action shall not be dismissed or compromised without the approval of the 
    court, and notice of the proposed dismissal or compromise shall be given to 
    shareholders or members in such manner as the court 
directs.
12 O.S. §2023.1. So, "[a] 
stockholder . . . may bring suit only when the corporation refuses to maintain 
or defend an action." Hargrave v. Canadian Valley Elec. Coop., Inc., 1990 OK 43, ¶11, 792 P.2d 50, 54; Kurtz v. 
Clark, 2012 OK CIV APP 103, 
¶20, 290 P.3d 779, 787. "The 
demand requirement exists to protect the decision making authority of the 
corporate board, and the board's right to manage the affairs of the corporation, 
which includes the authority to make decisions on whether to initiate 
litigation." Kurtz, 2012 OK 
CIV APP 103, ¶20, 290 P.3d at 787. (Citations omitted.)
¶8 That is to say, "the purpose of the demand requirement is to ensure that 
the corporate board's management decisions are respected, [and] a critical 
inquiry in any shareholder's derivative suit is whether the board, upon 
receiving a shareholder's demand, conducted an investigation in good faith and 
made a determination that initiating litigation was not in the corporation's 
best interest." Kurtz, 2012 
OK CIV APP 103, ¶21, 290 P.3d at 787. (Citations omitted.) "When applying 
the business judgment rule, courts presume that 'in making a business decision 
the directors of a corporation acted on an informed basis, in good faith and in 
the honest belief that the action taken was in the best interests of the company 
and its shareholders.'" Beard v. Love, 2007 OK CIV APP 118, ¶29, 173 P.3d 796, 804. (Citations 
omitted.) "Whenever any action or inaction by a board of directors is subject to 
review according to the traditional business judgment rule, the issues before 
the Court are independence, the reasonableness of its investigation and good 
faith," and "when a board refuses a demand, the only issues to be examined are 
the good faith and reasonableness of its investigation." Kurtz, 2012 OK CIV APP 103, ¶24, 290 P.3d 
at 788, fn. 12. (Citations omitted.)
¶9 In this respect, Plaintiff alleged that, in refusing his Demand, 
Chesapeake's Board "failed to meet the standard of good faith and did not 
exercise valid judgment in refusing the Demand." Particularly, Plaintiff alleged 
Board determined to refuse his Demand after a single meeting, conducted no 
adequate independent investigation, nor appointed any special or independent 
committee to review the allegations of the Demand. Plaintiff further alleged 
that, in the discussion of the Demand, Board failed to exclude McClendon and 
former members of the Board against whom the Demand alleged wrongdoing, thereby 
compromising the ability of the current Board to validly exercise its business 
judgment, and demonstrating the current Board's "bad faith." Plaintiff lastly 
alleged the current Board, as the Demand-alleged recipients of excessive 
compensation, were "interested" and "incapable of considering and reviewing the 
Demand."
¶10 Oklahoma law in this area is not well-developed. This being so, and our 
law patterned on that of the state of Delaware, we may look to the decisions of 
the Delaware courts for instruction. Kurtz, 2012 OK CIV APP 103, ¶19, 290 P.3d 
at 786-787; Beard, 2007 OK 
CIV APP 118, ¶20, 173 P.3d at 80; Woolf v. Universal Fidelity Life Ins. 
Co., 1992 OK CIV APP 129, ¶6, 
849 P.2d 1093, 1095.
¶11 Regarding the allegation of the Board's insufficient investigation, "[b]y 
electing to make a demand, a shareholder plaintiff tacitly concedes the 
independence of a majority of the board to respond." Spiegel v. Buntrock, 
571 A.2d 767, 777 (Del. 1990). A board's refusal to accede to a shareholder's 
demand is subject to judicial review according to the traditional business 
judgment rule." Spiegel, 571 A.2d at 775-76. "[W]hen a board refuses a 
demand, the only issues to be examined are the good faith and reasonableness of 
its investigation." Spiegel, 571 A.2d at 777. "Reasonableness implicates 
the business judgment rule's requirement of procedural due care; that is, 
whether the . . . Board acted on an informed basis in rejecting [the 
shareholder's] demand." Levine v. Smith, 591 A.2d 194, 212-213 (Del. 
1991).
¶12 However, "there is obviously no prescribed procedure that a board must 
follow." Levine, 591 A.2d 194, 214 (Del.1991). "[A] formal investigation 
will not always be necessary because the directors may already have sufficient 
information regarding the subject of the demand to make a decision in response 
to it." Rales v. Blasband, 634 A.2d 927, 935, fn. 11 (Del. 1993). See 
also, Halpert Enterprises, Inc. v. Harrison, 2008 WL 4585466 (2nd Cir. 
(N.Y.) 2008).5
¶13 In the present case, the Petition and Board's response to Plaintiff's 
demand demonstrate that Board appreciated the substance of Plaintiff's 
complaints. The Petition and Board's response also demonstrate that Board was 
sufficiently informed to conclude the substance of Plaintiff's complaints were 
the subject of its own investigation, other shareholder derivative suits, and 
investigations by the Department of Justice, the Securities Exchange Commission, 
and the Michigan Attorney General. The record does not demonstrate that Board 
acted otherwise than adequately informed of the substance of Plaintiff's 
complaints.
¶14 Regarding the allegations of Board's lack of independence, a Board 
member's receipt of compensation does not ipso facto establish a conflict 
of interest. In re E.F. Hutton Banking Practices Litigation, 634 F.Supp. 
265, 271 (S.D.N.Y. 1986). Even where the Board has previously approved its own 
compensation, later challenged as improper, "[t]he fact that a Corporation's 
directors have previously approved transactions subsequently challenged in a 
derivative suit does not inevitably lead to the conclusion that those directors, 
bound by their fiduciary obligation to the corporation, will refuse to take up 
the suit," and absent a specific allegation that the approval of their 
compensation packages "themselves or calculation thereof involved some form of 
self-dealing," a conflict of interest is not shown. Id.
¶15 In this respect, however, "the size and structure of executive 
compensation are inherently matters of judgment," and, unless constituting a 
waste of corporate assets, i.e., "an exchange of corporate assets for 
consideration so disproportionately small as to lie beyond the range at which 
any reasonable person might be willing to trade," executive compensation set by 
a Board's compensation committee, and later approved by the Board, falls within 
the protection of the business judgment rule. Brehm v. Eisner, 746 A.2d 
244, 263 (Del. Supr. 2000). (Footnotes omitted.) In the present case, the Board 
members' compensation was set by a Compensation Committee, apparently operating 
within its delegated authority, and, as a matter of "waste," Board's approval of 
an executive compensation package "will be upheld unless it cannot be 
'attributed to any rational business purpose.'" In re Walt Disney Co. 
Derivative Litigation, 906 A.2d 27, 74 (Del. Supr. 2006.) (Footnotes 
omitted.) Plaintiff's Petition does not allege sufficient facts to establish 
Board's conflict of interest as a result of the member's receipt of 
compensation.
¶16 The Plaintiff's allegations of Board's dominance by McClendon and/or the 
previous Board members, divesting Board of its presumption of disinterest, are 
reasonably specific. On the issue of a director's independence, the decisions 
are in accord:


For a director to be "independent," he or she must be both disinterested 
    and free from 'the influence of other interested persons.' Rales, 634 
    A.2d at 936; see also Aronson v. Lewis, 473 A.2d 805, 816 (Del. 
    1984), overruled on other grounds by Brehm, 746 A.2d 244 (stating 
    that an independent director must be able to make a decision "based on the 
    corporate merits of the subject before the board rather than extraneous 
    considerations or influences"). "To establish lack of independence, 
    [plaintiffs] must show that the directors are 'beholden' to the [interested 
    directors] or so under their influence that their discretion would be 
    sterilized." Rales, 634 A.2d at 936; see also In re Oracle Corp. 
    Derivative Litig., 824 A.2d 917, 938-39 (Del. Ch.2003) (citations 
    omitted) (noting that a director may be "beholden" due to "personal or other 
    relationships" with an interested party).
Sachs v. Sprague, 401 F. SupP.2d 159, 164 (D. Mass. 2005).
¶17 That said, the decisions are also in accord that a board's decision to 
defer or refuse action on a shareholder's demand due to the pendency of related 
litigations constitutes a reasonable exercise of business judgment. In 
Maccoumber v. Austin, 2004 WL 1745751, (N.D. Ill. 2004), a federal 
District Court in the Northern District of Illinois held that a board's decision 
to delay investigation of the shareholder's demands pending the outcome of 
related litigation in state court was not unreasonable and dismissed the 
derivative petition as premature. In Mozes v. Welch, 638 F. Supp. 215 (D. 
Conn. 1986), the federal District Court in Connecticut held that a board's 
decision to delay investigation of the shareholder's demands pending the outcome 
of related grand jury proceedings was not only reasonable, but required. 638 F. 
Supp. at 222.6 
And, in Furman v. Walton, 320 Fed.Appx. 638, 2009 WL 784261 (9th Cir. 
(Cal.), the Court of Appeals for the Ninth Circuit, relying on Levine and 
Brehm, affirmed dismissal of a derivative suit for the same "compelling," 
"rational business purpose":


We assess the [F.R.C.P.] Rule 23.1 motion according to the law of 
    Delaware, the state in which Wal-Mart is incorporated. In challenging the 
    Wal-Mart board's refusal of her demand, Furman made only conclusory 
    allegations unsupported by any "allegations of specific fact. . . ." The 
    board presented several "rational business purpose[s]" for refusing to act 
    on Furman's demand. Those stated reasons justify protection from suit under 
    the business judgment rule.
The district court did not err by dismissing Furman's complaint without 
    leave to amend. The board asserted that bringing suit as per Furman's 
    demand might have constituted a harmful admission in litigation pending 
    against Wal-Mart. Furman cannot refute this compelling business purpose. 
    . . .
320 Fed. App'x. at 639. (Emphasis added.)
¶18 Board's decision to defer action on Plaintiff's derivative petition 
constituted a denial of Plaintiff's demand. Furman v. Walton, 2007 WL 
1455904, *2, fn. 1 (N.D. Cal. 2007). Board's decision to defer action on 
Plaintiff's derivative petition pending the outcome of related investigations by 
the Department of Justice, the Securities Exchange Commission, the Michigan 
Attorney General, and other shareholder derivative actions constituted a 
reasonable exercise of business judgment. The trial court did not err in so 
holding and dismissing the Plaintiff's petition.

¶19 The order of the trial court is AFFIRMED.

BELL, Acting P.J., and MITCHELL, J. (sitting by designation), 
concur.

FOOTNOTES

1 
Plaintiff alleged that Defendants McClendon, Miller, Hargis, Simpson, Maxwell, 
Keating, Nickles and Eisbrenner were members of the Chesapeake Board of 
Directors until June 21, 2012. Plaintiff further alleged that Defendants Dunham, 
Poses, Alexander, Martin, Intrieri, McClendon, Miller, Hargis and Simpson 
constitute the current Board of Directors, and have been on the Board since June 
21, 2012.

2 To his 
Petition, Plaintiff attached a copy of a letter from Cheaspeake's Senior 
Vice-President, Treasurer and Corporate Secretary, informing him of the Board's 
action on his Demand:
I am writing to update our previous correspondence regarding your August 10, 
2012 demand, on behalf of Mr. Gregory M. Egleston, that Chesapeake's Board of 
Directors take action regarding (i) Aubrey McClendon's personal loans and 
compensation packages; (ii) Mr. McClendon's participation in the Founder Well 
Participation Program (the "FWPP") and his purported conflicts with Company 
interests; (iii) Mr. McClendon's participation in negotiating asset sales on the 
behalf of the Company; (iv) the purported breach of lease agreements "leading to 
$100 million in liability for the Company"; ([v]) Company business and 
communications with Encana Corp.; and ([vi]) certain related issues (the 
"Demand"). The Board considered the Demand on September 20, 2012, at the first 
regularly scheduled meeting after the Demand was received.
As you may be aware, a number of Chesapeake shareholders are pursuing 
multiple lawsuits related to the allegations and subject matter set forth in the 
Demand. In addition, the Board is in the midst of the review announced in the 
Company's April 26, 2012 press release, which includes the allegations and 
subjects set forth in the Demand. There are also ongoing inquiries and 
investigations into the allegations and subject matter set forth in the demand 
by the SEC, the DOJ and other administrative agencies.
In light of these facts, and after being briefed on the status of the 
litigation and the administrative inquiries and investigations, taking into 
account the principals set forth in the case of Furman v. Walton, 2007 WL 
1455904 (N.D. Cal. May 16, 2007), aff'd, 320 F. App'x. 638 (9th Cir. 2009), and 
receiving legal advice from counsel, the Board determined that it was in the 
best interests of the Company and its shareholders to defer further action on 
the Demand during the pendency of the related litigation, Board review and 
administrative inquiries and investigations. In the meantime, the Board would be 
happy to consider any additional information that you may be able to 
provide.

3 See, 
footnote 2, supra.

4
See, Rules 4(m), 13(h), Rules for District Courts, 12 O.S., Ch. 2, App.; 
Okla.Sup.Ct.R. 1.36, 12 O.S., Ch. 15, App.

5 "An 
investigating board generally is under no obligation to make use of any 
particular investigative technique. 'While a board of directors has a duty to 
act on an informed basis in responding to a demand . . . , there is obviously no 
prescribed procedure that a board must follow.' More specifically, '[i]n any 
investigation, the choice of people to interview or documents to review is one 
on which reasonable minds may differ. . . . Inevitably, there will be potential 
witnesses, documents and other leads that the investigator will decide not to 
pursue.' This principle is derived from the underlying norm of the business 
judgment rule-when making a business decision, such as whether to pursue 
litigation in response to a shareholder demand, a board must be free to exercise 
its broad discretion without excessive judicial fetters. As such, there is no 
rule of general application that a board must interview every possible witness 
who may shed some light on the conduct forming the basis of the litigation." 
(Citations omitted.)

6 
"Plaintiff argues that the grand jury proceedings 'involved an investigation of 
individuals other than the instant defendants' and that '[t]he testimony and 
outcome of those proceedings therefore has no bearing on the liability of the 
defendants.' This argument, however, is made with the clarity one gains with the 
proverbial twenty/twenty vision garnered from hindsight. Plaintiff's demand 
letter instructed the Board to take action against, inter alia, 'those persons 
responsible for making, presenting and supervising false labor-cost claims to 
the government.' It is therefore beyond cavil that the Special Litigation 
Committee should have awaited the final results of the government's 
investigations before issuing a final report and recommendation to the full 
Board in order to fully comply with plaintiff's demand. The court would be 
remiss in its duties if it did not encourage, indeed require, the Special 
Litigation Committee to conduct the most thorough investigation under the 
circumstances."


Citationizer© Summary of Documents Citing This DocumentCite
Name
Level
None Found.Citationizer: Table of AuthorityCite
Name
Level
Oklahoma Court of Civil Appeals Cases CiteNameLevel 1992 OK CIV APP 129, 849 P.2d 1093, 64 OBJ        1114, Woolf v. Universal Fidelity Life Ins. Co.Discussed 2007 OK CIV APP 118, 173 P.3d 796, BEARD v. LOVEDiscussed at Length 2012 OK CIV APP 103, 290 P.3d 779, KURTZ v. CLARKDiscussed at LengthOklahoma Supreme Court Cases CiteNameLevel 1990 OK 43, 792 P.2d 50, 61 OBJ        1134, Hargrave v. Canadian Valley Elec. Co-op., Inc.DiscussedTitle 12. Civil Procedure CiteNameLevel 12 O.S. 2023.1, Derivative Actions by ShareholdersCited










