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Rosenquist v Economou [2011] MHSC 1; Supreme Court Case 2010-002 (3 October 2011)

IN THE SUPREME COURT
OF THE
REPUBLIC OF THE MARSHALL ISLANDS

Supreme Court Case No. 2010-002

High Court Civil Action No. 2009-056

JOSEPH ROSENQUIST, derivatively) on behalf of Nominal Defendant DRYSHIPS, INC.,

Plaintiff-Appellant,

vs

GEORGE ECONOMOU, GEORGE DEMATHAS, CHRYSSOULA KANDYLIDIS (A/K/A CHRYSSOULA KANDYLIDI OR CHRYSOULA KANDYLIDIS), EVANGELOS MITILINAIOS (A/K/A EVANGELOS MYTILINAIOS OR EVANGELOS MYTILINAEOS), ANGELOS PAPOULlAS, AND GEORGE XIRADAKIS,

Defendants-Appellees,

and

DRYSHIPS, INC.,

Nominal Defendant.

OPINION

Before: CADRA, Chief Justice; SEABRIGHT^[1] and KURREN^[2] Acting Associate Justices.

KURREN, Acting Associate Justice:

INTRODUCTION

This is a shareholder derivative action brought by Plaintiff-Appellant Joseph Rosenquist, derivatively on behalf of Nominal Defendant DryShips, Inc. Plaintiff is a shareholder of DryShips and filed this lawsuit against the following current and former members of its Board of Directors ("Board"): Defendants-Appellees George Economou, Chryssoula Kandylidis (a/k/a Chryssoula Kandylidi or Chrysoula Kandylidis), George Demathas, Evangelos Mitilinaios (a/k/a Evengelos Mytilinaios or Evangelos Mytilinacos), George Xiradakis, and Angelos Papoulias (collectively, "Defendants"). Plaintiff alleges that Defendants breached their fiduciary duty of good faith, committed waste by approving transactions that were not the product of good faith business judgment, and were unjustly enriched at DryShips's expense.

Plaintiff did not make a demand on the DryShips Board before instituting this action against Defendants. In the Amended Complaint, asserted that any such demand would have been "futile and useless because the Board is incapable of making an independent and disinterested decision to institute and vigorously prosecute this action." Absent a demand on the Board, Defendants moved the High Court of the Republic of the Marshall Islands to dismiss the Amended Complaint. The High Court agreed with Defendants and dismissed the Amended Complaint, concluding that it did "not contain particularized allegations that raise a reasonable doubt that at the time the lawsuit was filed a majority of the directors were disinterested and independent or that the challenged transactions were the product of a valid exercise of business judgment." Although Plaintiff was permitted to move for leave to amend the Amended Complaint, he chose to appeal the High Court's decision to this Court.

As discussed below, the Court AFFIRMS the dismissal of the Amended Complaint.

BACKGROUND

A. Factual Background

Plaintiff is a shareholder of DryShips, which is a corporation incorporated under the laws of the Republic of the Marshall Islands and headquartered in Athens, Greece. Defendant Economou founded DryShips in 2004 as a holding company engaged in the ocean transportation of dry bulk cargoes worldwide. DryShips's assets are managed by Cardiff Marine, Inc., an entity owned 70% by Economou and 30% by his sister, Defendant Kandylidis. Fabiana Services S.A. is a corporation owned by Economou, which "provides the services of the individuals who serve in the positions of chief executive and chief financial officer of the Company." DryShips's articles of incorporation contain an exculpation clause, which exempts directors from liability for breaches of the duty of care.

Defendant Economou has served as DryShips's chairman of the Board, president, chief executive officer, interim chief financial officer and, at the times DryShips entered into the transactions at issue, he owned between 9.0% and 31.0% of DryShips common stock.

Defendant Kandylidis, Economou's sister, has served as a non-executive director of DryShips since March 5, 2008. Defendant Demathas served as a non-executive director since July 18, 2006 and was a member of the Audit, Compensation, and Nomination Committees at all times relevant. Defendant Xiradakis has served as a non-executive director since 2006 and was a member of the same Committees at all times relevant. Defendant Papoulias served as a non-executive director from April 2005 until December 22, 2008. Defendant Mitilinaios has served as a non-executive director for and was a member of the Audit Committee since December 22, 2008. At the time this action was commenced, the Board consisted of: Economou, Kandylidis, Demathas, Mitilinaios, and Xiradakis.^[3]

In the Amended Complaint, Plaintiff alleges that Economou dominates and controls DryShips through his ownership of the company, his positions within the company, "anti-takeover provisions" of the company's articles and bylaws, and "director appointments and compensation." Plaintiff further alleges that Economou's control of DryShips "resulted in Board approval of transactions that appear to have been designed to benefit Economou, not DryShips." The transactions for which Plaintiff seeks relief in this case are: (1) the Primelead Transaction, (2) the July and October Agreements, and (3) Economou's compensation.

1.The Primelead Transaction

On October 3, 2008, DryShips entered into a share purchase agreement to acquire equity interests of DrillShips Holdings, which was controlled by clients of Cardiff, including Economou, in exchange for 25% of the equity of Primelead Shareholders Inc., which is a DryShips subsidiary ("the Primelead Divestment"). In connection with this transaction, DryShips "assumed installment payment obligations of $1.1 billion and debt obligations of $261.1 million."

Nine months later on July 9, 2009, after the shipping industry suffered an economic downturn, DryShips "announced that 'it has entered into an agreement to acquire the remaining 25% of the total issued and outstanding capital stock of Primelead'" ("the Primelead Acquisition").^[4] The Primelead Acquisition would cause "Primelead [to] become a wholly-owned subsidiary of [DryShips]." The Primelead Acquisition "resulted in [DryShips] paying to Economou a one-time $50.0 million cash payment, and issuing to Economou 33,955,224 shares of DryShips convertible preferred stock." "Economou's 25% equity interest in Primelead that DryShips acquired in the Primelead Acquisition was worth approximately $122 million at the time of the transaction, and the Preferred Stock that Economou received in the Primelead Acquisition was worth approximately $185 million." The Amended Complaint alleges that, in sum, "DryShips paid Economou a total of approximately $235 million ($50 million in cash and $185 million in Preferred Stock) for equity worth only $122 million, an overpayment of approximately $113 million, or 93%."

2. The July and October Agreements

On July 3, 2008, DryShips entered into the July Agreement to purchase four Panamax bulk carriers for $400 million from companies beneficially owned by Economou. DryShips paid to the selling entities a cash deposit of $55 million or 13.75% of the purchase price, which is higher than the industry standard of 10%. Defendants Demathas, Kandylidis, Mitilinaios, and Xiradakis approved the July Agreement.

On October 6, 2008, Dryships entered into the October Agreement to purchase nine special-purpose companies that each owned one Capesize bulk carrier. The special purpose companies were each owned by Cardiff or undisclosed clients of Cardiff. DryShips agreed to pay "more than $689 million in newly-authorized DryShips stock, and to assume $216 million in debt and $262 million in remaining shipyard installments to complete construction of some of the dry bulk carriers."

As 2008 progressed, "the health of the shipping industry deteriorated" and "the daily average of charter rates... [fell] over 90% from May 2008 through October 2008 and over 70% in October 2008 alone." Consequently, the Board terminated the July and October Agreements.

As to the July Agreement, DryShips paid for an "option to purchase the very same dry bulk carriers on an en bloc basis at a fixed purchase price of $160 million. In exchange for this Option, DryShips paid $26.25 million per vessel, or $105 million." As for the October Agreement, upon termination, "DryShips granted to Economou warrants to purchase Company stock..., the intrinsic value of these warrants is approximately $82.5 million." DryShips also "granted to 'clients' of Cardiff... $6.5 million shares of Dryships stock worth approximately $68,185,000."

3. Economou's Compensation

On January 21, 2009, Demathas and Xiradakis, as members of the Compensation Committee, approved a $6.98 million bonus payable to Economou for services rendered during 2008. On the same day, the Compensation Committee "also approved an increase in the annual fee to Fabiana" by $597,000, which further increased Economou's annual compensation.

B. Procedural Background

Plaintiff commenced this action on March 2, 2009. On August 12, 2009, Plaintiff filed the Amended Complaint, in which he asserts nine causes of action against Defendants for breach of fiduciary duty (Counts I – III), waste of corporate assets (Counts IV-VI), and unjust enrichment (Counts VII-IX).

Prior to filing this action, Plaintiff did not make a demand upon the Board to initiate litigation. On September 11, 2009, Defendants moved the High Court to dismiss the Amended Complaint for failure to do so. The High Court agreed with Defendants and dismissed the Amended Complaint. Although Plaintiff was allowed to file a motion to amend the Amended Complaint, he chose to appeal the High Court's decision to this Court.

STANDARD OF REVIEW

This Court reviews dismissal of a complaint de novo. Momotaro v. Chief Elec. Off., 2 MLR 237, 241 (2004); Beam ex rel. Martha Stewart Living Omnimedia. Inc. v. Stewart, 845 A.2d 1040, 1048 (Del. 2004). In reviewing complaints on a motion to dismiss, "'[p]laintiffs are entitled to all reasonable factual inferences that logically flow from the particularized facts alleged, but conclusory allegations are not considered as expressly pleaded facts or factual inferences."' White v. Panic, 783 A.2d 543, 549 (Del. 2001). The Court does not "blindly accept as true all allegations, nor [does it] draw all inferences from them in plaintiffs' favor unless they are reasonable inferences." Id. "[I]nferences that are not objectively reasonable cannot be drawn in the plaintiffs favor." Beam, 845 A.2d at 1048.

DISCUSSION

The parties correctly agree that because DryShips is a Marshall Islands corporation, Marshall Islands law controls. See Kamen v. Kemper Finan. Servs., Inc., [1991] USSC 70; 500 U.S. 90, 98-99 (1991). Under Marshall Islands law, a shareholder asserting claims derivatively on behalf of a corporation shall first make a demand on the board of directors to initiate the litigation. 52 MIRC, Part I, § 79(3). Where a shareholder plaintiff fails to make such a demand, he must allege "with particularity" the reasons why that demand would have been futile. Id.; MIRCP 23.1 ("The complaint shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors... and the reasons for the plaintiffs failure to obtain the action or for not making the effort").

The parties also correctly agree that Marshall Islands law instructs this Court to look to Delaware corporate law. See 52 MIRC, Part I, § 13 (noting the Marshall Islands Business Corporations Act "shall be applied and construed to make the laws of the Republic... uniform with the laws of the State of Delaware"). Pursuant to Delaware law, where a plaintiff fails to make a demand on the board of directors to initiate litigation, courts apply the two-part test for demand futility set forth in Aronson v. Lewis, 473 A.2d 805 (Del. 1984), overruled in part on other grounds by Brehm v. Eisner, 746 A.3d 244 (Del. 2000). Under that test, courts "must decide whether, under the particularized facts alleged, a reasonable doubt is created that: (1) the directors are disinterested and independent and (2) the challenged transaction was otherwise the product of a valid exercise of business judgment." Aronson, 473 A.2d at 814; In re Citigroup Inc. S'holder Derivative Litig., 964 A.2d 106, 120 (Del. Ch. 2009) ("the complaint must plead with particularity facts showing that a demand on the board would have been futile"). "These prongs are in the disjunctive. Therefore, if either prong is satisfied, demand is excused." Brehm, 746 A.2d at 256. Further, as to the first prong of the test, a plaintiff shall "establish[] the lack of independence or disinterestedness of a majority of the directors." Aronson, 473 A.2d at 817 (emphasis added).

In determining whether demand is excused, courts "must accept as true the well pleaded factual allegations in the Complaint." In re Citigroup, 964 A.2d at 120. "The pleadings, however, are held to a higher standard... than under the permissive notice pleading standard under Court of Chancery Rule 8(a)." Id. To establish that demand is excused, "the pleadings must comply with 'stringent requirements of factual particularity' and set forth 'particularized factual statements that are essential to the claim.'" Id. at 120-21. "A prolix complaint larded with conclusory language does not comply with these fundamental pleading mandates." Id. at 121 (ellipses points omitted).

"[F]utility is gauged by the circumstances existing at the commencement of a derivative suit." Aronson, 473 A.2d at 810. At the time this action was filed on March 2, 2009, the Board consisted of five directors; Economou, Kandylidis, Demathas, Mitilinaios, and Xiradakis.^[5] The parties agree that allegations relating to Defendant Papoulias are irrelevant to the demand futility analysis because he resigned on December 22, 2008 and was no longer on the Board when this suit was commenced.

A. Whether Plaintiff Alleges Particularized Facts Creating a Reasonable Doubt That the Directors Are Disinterested and Independent

1. Defendants Economon and Kandylidis

As to Economou and Kandylidis, the High Court concluded that Plaintiff sufficiently alleged particularized facts of self-dealing in the Amended Complaint that create reasonable doubt that they were disinterested in the relevant transactions. In this context, "disinterested" "means that directors can neither appear on both sides of a transaction nor expect to derive any personal financial benefit from it in the sense of self-dealing, as opposed to a benefit which devolves upon the corporation or all stockholders generally." Aronson, 473 A.2d at 812.

On appeal, neither party disputes that Economou and Kandylidis are not disinterested. Indeed, the particularized facts alleged in the Amended Complaint assert that Economou stood on both sides of the subject transactions, while Kandylidis stood on both sides of the July and October Agreements and the Primelead Transaction. Further, the Amended Complaint alleges that Kandylidis is the sister of Economou, who is interested in all of the -transactions. Accordingly, this Court agrees with the High Court and the parties, and concludes that particularized facts alleged as to Economou and Kandylidis create a reasonable doubt that they are disinterested. See Aronson, 473 A.2d at 812. Consequently, demand is excused as to Economou and Kandylidis under the first prong of Aronson. Brehm, 746 A.2d at 256 ("if either prong of the Aronson test] is satisfied, demand is excused"). Because demand must be excused for a "majority" of the Board under the first prong, the Court now turns to the other Board members, Aronson, 473 A.2d at 817.

2. Defendants Demathas, Mitilinaios, and Xiradakis

As to Defendants Demathas, Mitilinaios, and Xiradakis, the High Court noted that Plaintiff did not argue that they are "interested" but only that they are not "independent" from Economou. The court concluded that Plaintiff "failed to rebut the presumption of the business judgment rule that [these Defendants], all of whom are sophisticated business people with years of experience, were independent." On appeal, as before the High Court, Plaintiff argues only that Demathas, Mitilinaios, and Xiradakis lack "independence" and does not argue that they were "interested" in the transactions.

"Independence means that a director's decision is based on the corporate merits of the subject before the board rather than extraneous considerations or influences." Aronson, 473 A.2d at 816.

Such extraneous considerations or influences may exist when the challenged director is controlled by another. To raise a question concerning the independence of a particular board member, a plaintiff asserting the "control of one or more directors must allege particularized facts manifesting 'a direction of corporate conduct in such a way as to comport with the wishes or interests of the corporation (or persons) doing the controlling.' The shorthand shibboleth of 'dominated and controlled directors' is insufficient." This lack of independence can be shown when a plaintiff pleads facts that establish "that the directors are 'beholden' to the controlling person or so under their influence that their discretion would be sterilized."

Orman v. Cullman, 794 A.2d 5, 24 (Del. Ch. 2002) (footnote and brackets omitted). As the Aronson court noted: "While directors may confer, debate, and resolve their differences through compromise, or by reasonable reliance upon the expertise of their colleagues and other qualified persons, the end result, nonetheless, must be that each director has brought his or her own informed business judgment to bear with specificity upon the corporate merits of the issues without regard for or succumbing to influences which convert an otherwise valid business decision into a faithless act." 473 A.2d at 816.

Plaintiff argues that particularized facts show that a reasonable doubt exists that Demathas, Mitilinaios, and Xiradakis are independent from Economou based on the following: (1) DryShips's organizational structure; (2) historical transactions allegedly designed to benefit Economou, and (3) the compensation received by these Defendants.

a. DryShips's Organizational Structure

Plaintiff contends that "Economou has dominated DryShips since it set sail in 2004" and points to the following facts in the Amended Complaint as support: Economou implemented the articles of corporation and bylaws that relate to the Board, Economou caused DryShips to adopt a "poison pill" plan, and Economou is the "largest shareholder" and was the "only senior officer" until 2009. Plaintiff asserts that these facts show that "Economou has retained for himself total control over the Company's operations and that "Economou unequivocally controls DryShips."

Even if this Court were to agree with Plaintiff that the foregoing facts establish that Economou has total control over DryShips, Economou's control over the company is distinct from his control over its directors. "A stockholder's control of a corporation does not excuse presuit demand on the board without particularized allegations of relationships between the directors and the controlling stockholder demonstrating that the directors are beholden to the stockholder." Beam, 845 A.2d at 1054; see Aronson, 473 A.2d at 815 ("proof of majority ownership of a company does not strip the directors of the presumption of independence"). Indeed, Plaintiff must allege particularized facts showing that the other directors "would be more willing to risk [their] reputation than risk the relationship with the interested director." Id. Plaintiffs allegations that Economou controls DryShips does not establish that he controls the other directors and, therefore, the Court concludes that demand is not excused on this ground.

b. Historical Transactions

Plaintiff next argues that Economou's control over Defendants is "demonstrated by years of gratuitous self-interested transactions that the Board has either approved or failed to stop." According to Plaintiff, the following transactions approved by the Board show Economou's control over the other directors: DryShips leases office space from Economou, issued stock to Economou instead of a cash dividend received by all other shareholders, issued stocks to Economou "at the lowest 8-day average closing price" during the third quarter of 2006, purchased shares of Ocean Rig, and paid to Cardiff fees for arranging the Ocean Rig purchase. Plaintiff asserts that these prior transactions "demonstrate a pattern of differential and preferential treatment of Economou by Demathas and Xiradakis" and "demonstrate[] that Demathas and Xiradakis lack independence."

As previously found by Delaware courts, Plaintiff's argument that Defendants' past approval of transactions that benefitted "interested" Economou does not excuse demand futility, for it is circular in reasoning. In In re Tyson Foods Inc. Consolidated Shareholder Litigation, 919 A.2d 563, 588 (Del. Ch. 2007), the factual allegations stated that "the board members... have 'demonstrated a consistent and unvaried pattern of deferring to anything the Tyson family wants, and of failing to exercise independent business judgment."' The Delaware court stated that this argument is "wholly circular" for the following reasons:

in order to find that defendants lack independence, [the court] must conclude that they failed to exercise independent business judgment by approving self interested transactions; and yet in order to find those very transactions beyond the bounds of business judgment, [the court] must conclude that the defendants lacked independence. Such a decision would be contrary to the presumption of business judgment that directors enjoy, however, and cannot be supported.

Id.

Similarly, in In re InfoUSA, Inc. Shareholders Litigation, 953 A.2d 963, 989 (Del. Ch. 2007), the court came to the same conclusion as in Tyson that the plaintiffs' argument was circular. In that case, the plaintiffs argued that the director defendants "must be interested" because of their prior actions, which included exempting the CEO and largest shareholder of the company from a poison pill plan, permitting him to use a corporate jet, and approving certain transactions. Id. The Delaware court held that the plaintiffs' "argument fails due to its circular nature." Id. The court explained:

In most derivative suits claiming waste, excessive executive or director compensation, or harm from other self-interested transactions, a plaintiff will argue that the board's decision to allow a transaction was a violation of its fiduciary duties. If the plaintiff can then avoid the demand requirement by reasoning that any board that would approve such a transaction (or as here, a history of past transactions) is by definition unfit to consider demand, then in few (if any) such suits will demand ever be required. This does not comport with the demand requirement's justification as a bulwark to protect the managerial discretion of directors.

To excuse demand in this case it is not enough to show that the defendants approved a discriminatory poison pill, granted [the company's CEO] generous share options or allowed the [CEO's] family to carry out self-interested transactions. Instead, the plaintiff must provide the Court with reason to suspect that each director did so not because they felt it to be in the best interests of the company, but out of self-interest or a loyalty to, or fear of reprisal from the CEO].

Id. (emphasis added).

As in Tyson and InfoUSA, Plaintiff's argument here is circular. He points to prior transactions approved by Demathas and Xiradakis that benefitted Economou and argues that they establish a "pattern of differential and preferential treatment of Economou" that "demonstrates that Demathas and Xiradakis lack independence." However, as stated by the InfoUSA court, "it is not enough to show that the defendants approved . . . self-interested transactions." 953 A.2d at 989. Rather, Plaintiff "must provide the Court with reason to suspect that each director did so... out of self-interest or a loyalty to, or fear of reprisal from [Economou]." Id. However, the Amended Complaint lacks particularized facts alleging that Defendants' decisions were made out of loyalty to or fear of reprisal from Economou, that they are so "'beholden' to [Economou] or so under [his] influence that their discretion would be sterilized," or that they "would be more willing to risk [their] reputation than risk the relationship with [Economou.]" Beam, 845 A.2d at 1054; InfoUSA, 953 A.2d at 989; Orman, 794 A.2d at 24. Without alleging such facts, Plaintiff fails to show that demand is excused based on the Board's prior decisions.

c. Director Compensation

Plaintiff argues that Defendants' director compensation further shows that they "are beholden to Economou and are incapable of acting in the Company's best interests." Plaintiff notes that "Demathas and Xiradakis received the first ever non-executive director equity grant mere days before approving the Primelead Divestment and October Purchase Agreements." Plaintiff argues that this equity grant "demonstrate[s] that Demathas and Xiradakis are incapable of acting independently of Economou."^[6]

In the Amended Complaint, Plaintiff alleged that Demathas and Xiradakis "approved grants in the amount of 9,000 vested restricted shares and 9,000 unvested restricted shares to each non-executive director of the Company." Plaintiff explained that the equity grants were "made pursuant to the Company's 2008 Equity Incentive Plan." However, Plaintiff provides no allegations as to the value of the grants and how that value relates to the usual and customary fee typically received by directors. In re Nat'l Auto Credit, Inc. S'holders Litig., No. Civ. A. 19028, 2003 WL 139768, at *11 (Del. Ch. Jan. 10, 2003) ("This Court's view of the disqualifying effect of {directors'] fees might be different if the fees were shown to exceed materially what is commonly understood and accepted to be a usual and customary director's fee."). Without more, Plaintiff's allegations regarding the equity grant fail to show that Demathas and Xiradakis lacked independence from Economou. Jacobs v. Yang, No. Civ. A. 206-N, 2004 WL 1728521, at *4 (Del. Ch. Aug 2, 2004) ("[a]llegations [stating that] one's position as director and the receipt of director's fees, without more... are not enough for purposes of pleading demand futility").

3. Directors Kerames and Karamitsanis

Kerames and Karamitsanis became Board members after this action was commenced. In the Amended Complaint, Plaintiff states: "Kerames and Karamitsanis, who were appointed to the Board after this action was commenced, are not relevant to the issue of demand futility." On appeal to this Court, Plaintiff provides no argument as to these directors' actions at all — much less that they

affect demand futility — and thus the Court concludes that they do not excuse the demand requirement.

4. Summary of the First Prong of the Aronson Test

As discussed above, the Court concludes that only Defendants Economou and Kandylidis were "interested" in the subject transactions. The Court concludes that none of the other Board members was "interested" or "dependent" under the Aronson test. Consequently, Plaintiff has failed to establish a reasonable doubt as to "the lack of independence or disinterestedness of a majority of the directors." Aronson, 473 A.2d at 817. The Court therefore moves to the second prong of the Aronson test for demand futility.

B. Whether Plaintiff Alleges Particularized Facts Creating a Reasonable Doubt That the Challenged Transactions Were Otherwise the Product of a Valid Exercise of Business Judgment

In order to establish a reasonable doubt that the challenged transactions were the product of a valid exercise of business judgment, Plaintiff must set forth particularized facts rebutting the "presumption 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." Aronson, 473 A.2d at 812. This is a high burden, where "a plaintiff must plead specific facts to 'overcome the powerful presumptions of the business judgment rule before they will be permitted to pursue the derivative InfoUSA, 953 A.2d at 972 (quoting Roles v. Blasband, 634 A.2d 927, 933 (Del. 1993)). "This presumption protects decisions unless they cannot be 'attributed to any rational business purpose."' Id. (quoting Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720 (Del. 1971)). Because DryShips's articles of incorporation contain an exculpation clause, the Amended Complaint must "plead facts suggesting that the... directors breached their duty of loyalty by somehow acting in bad faith for reasons inimical to the best interests of [DryShips's] stockholders." In re Lear Corp. S'holder Litig., 967 A.2d 640, 648 (Del. Ch. 2008).

Mere disagreement with a director's decision "cannot serve as grounds for imposing liability." Brehm, 746 A.2d at 266. Indeed, courts do not second-guess business decisions, for doing so "would invite courts to become super-directors, measuring matters of degree in business decisionmaking and executive compensation" and "would run counter to the foundation of our jurisprudence." Id. Rather than question the merits of Board decisions, courts question "the informational component of the directors' decisionmaking process" and "the motivations or the good faith of those charged with making the decision." Id. at 259 ("in making business decisions, directors must consider all material information reasonably available"); InfoUSA, 953 A.2d at 984 NA] skilled litigant, and particularly a derivative plaintiff... places before the Court allegations that question not the merits of a director's decision, a matter about which a judge may have little to say, but allegations that call into doubt the motivations or the good faith of those charged with making the decision.").

1. Primelead Transaction

The Amended Complaint alleges that Demathas and Xiradakis approved the Primelead Divestment and that Demathas, Xiradakis, and Mitilinaios approved the Primelead Acquisition. Plaintiff argues on appeal that the "Primelead Acquisition resulted in the Company paying to Economou 93% more than the fair market value of his US$122 million Primelead equity interest" and that approval of the Acquisition "clearly exceeds the bounds of rationality, and is therefore not protected by the business judgment rule." Plaintiff also asserts that Demathas, Mitilinaios, and Xiradakis "failed to properly apprise themselves of the value of Primelead and the assets being exchanged therefore."

The Court rejects Plaintiff's first argument that the Board's decision as to the Primelead Transaction "exceeds the bounds of rationality." That Plaintiff disagrees with the Board's decision is insufficient to rebut the powerful presumptions of the business judgment rule." InfoUSA, 953 A.2d at 972. Indeed, this Court will not second-guess the Board's decision unless that decision "cannot be 'attributed to any rational business purpose."' Id. However, the allegations of the Amended Complaint reveal a rational business purpose for approving the Primelead Acquisition. The Amended Complaint expressly states that the Primelead Transaction took place over nine months in which "the Company's financial condition deteriorated dramatically as the shipping and oil industries buckled under the pressure of the world-wide economic downturn," Further, the Amended Complaint alleges that "oil prices plummeted in 2008" and "the Company had no means of financing the $1.1 billion in installment payments needed to complete the newbuilding drillships." The Amended Complaint also alleges that the "offshore drilling industry is replete with risk." The downturn of economic conditions for DryShips and the entire industry, as well as the risk involved in the offshore drilling industry, provide a "rational business purpose" for the Board's decision to approve the Primelead Acquisition. The Court therefore concludes that this decision is not one of the "rare cases" that is "so egregious on its face that board approval cannot meet the test of business judgment." InfoUSA, 953 A.2d at 972.

The Court likewise rejects Plaintiff's argument that Demathas, Mitilinaios, and Xiradakis "failed to properly apprise themselves of the value of Primelead and the assets being exchanged therefore." Plaintiff contends that these Defendants "took undisclosed 'appropriate steps' to ensure the fairness of the Primelead Acquisition." Plaintiff argues that "the Company's failure to describe these 'appropriate steps' ... creates a reasonable inference that [Defendants]... failed to properly inform themselves in connection with the Primelead Round-Trip Transaction."

As noted above, "in making business decisions, directors must consider all material information reasonably available." Brehm, 746 A.2d at 259. Further, presuit demand will only be excused where "particularized facts in the complaint create a reasonable doubt that the informational component of the directors' decisionmaking process... included consideration of all material information reasonably available." Here, the Amended Complaint lacks particularized facts creating such reasonable doubt. It only contains allegations that DryShips "has not disclosed what 'appropriate steps' were taken in connection with the negotiation of the Primelead Acquisition" but does not include particularized facts that Defendants "act[ed] in bad faith for reasons inimical to the best interests of [DryShips's] stockholders." Lear, 967 A.2d at 648.

Without alleging facts that Defendants failed to consider all material information reasonably available to them, Plaintiff does not meet the second prong of the Aronson test with respect to the Primelead Transaction.

2. July and October Agreements

Plaintiff contends that facts relating to Defendants' decisions with respect to the deposit amount for the July Agreement, as well as the termination fee amounts for the July and October Agreements, rebut the presumption that their decisions were "attributed to any rational business purpose." InfoUSA, 953 A.2d at 972.

With respect to the 13.75% deposit that DryShips paid in connection with entering the July Agreement, the Amended Complaint alleges that the industry standard is a 10% deposit and that DryShips had previously paid 10% deposits in other transactions. As for the termination fees of the Agreements, the Amended Complaint alleges that DryShips paid $105 million with respect to the July Agreement and granted Economou warrants worth $82.5 million as to the October Agreement. Importantly, the facts alleged do not indicate that Defendants negotiated the deposit or fees in bad faith. Lear, 967 A.2d at 648, 652 n.47 (noting the complaint must contain "allegations that the defendant directors breached their duty of loyalty by engaging in intentional, bad faith, or self-interested conduct that is not immunized by the exculpatory charter provisions").

Furthermore, the Amended Complaint lacks any facts discussing the context of entering the July Agreement, which would have dictated the July deposit amount. With respect to the termination fees, the Amended Complaint states that, "[a]s 2008 progressed,... the health of the shipping industry deteriorated" and "the world fell further into economic crisis." Indeed, "daily average of charter rates... [fell] 90%." In light of these facts as to the global economic downturn, it was entirely rational for the Board to terminate the agreement to purchase the various carriers for hundreds of millions of dollars. InfoUSA, 953 A.2d at 972 (the business judgment presumption "protects decisions unless they cannot be 'attributed to any rational business purpose" (quoting Sinclair Oil, 280 A.2d at 720)).

Additionally, as noted above, courts do not second-guess business decisions but instead question "the informational component of the directors' decisionmaking process" and "the motivations or the good faith of those charged with making the decision." Brehm, 746 A.2d at 266; InfoUSA, 953 A.2d at 984. However, the Amended Complaint lacks any particularized facts that Defendants failed to consider all available information or were motivated by bad. faith or lacked good faith in deciding the termination fee amounts.

With respect to the termination fee for the July Agreement, Plaintiff alleges in the Amended Complaint that the $105 million fee was paid solely "for the 'opportunity' to purchase the Panamax vessels... in the event that the world-wide economy recovers." However, the High Court discredited that "unsubstantial allegation... [because] that allegation is contradicted by the Company's securities filings." The High Court and this Court may take judicial notice of Securities and Exchange Commission documents and may disregard facts in the Amended Complaint that are "at odds" with those documents. See Lagrone v. American Morten Corp., Nos. 04C-10-116-ASB, 07C-12-019-JRS, 2008 WL 4152677, at *4 (Del. Sept. 4, 2008). In Form 6-K filed on December 10, 2008, DryShips's public disclosures stated that the $105 million was paid "[i]n consideration of the cancellation of the acquisitions and the exclusive purchase option granted to [DryShips]." Therefore, the $105 million was paid not only for the "'opportunity' to purchase the Panamax vessels" but it was also consideration for cancelling a $400 million contract. The decision to pay $105 million for relief from a $400 million contract for ships worth far less than that, while obtaining an option to purchase the ships at a later date, is a rational decision by the Board. InfoUSA, 953 A.2d at 972 (noting the business judgment presumption "protects decisions unless they cannot be 'attributed to any rational business purpose"' (quoting Sinclair Oil, 280 A.2d at 720)).

Absent particularized facts creating reasonable doubt that the fees paid in relation to the July and October Agreements were the product of a valid exercise of business judgment, the Court concludes that Plaintiff fails to meet the second prong of the Aronson test with respect to these Agreements. Aronson, 473 A.2d at 814.

3. Economou's Compensation

According to the Amended Complaint, Demathas and Xiradakis approved a $6.98 million bonus to Economou for services rendered during 2008 and an increase in the annual fee to Fabiana, which "increased Economou's annual compensation by approximately $576,000." On appeal, Plaintiff contends that "such a significant increase in Economou's compensation at such a perilous time cannot be considered a good faith decision."

According to the Supreme Court of Delaware, [i]t is the essence of business judgment for a board to determine if a particular individual warrants large amounts of money, whether in the form of current salary or severance provisions." Brehm, 746 A.2d at 263 (internal quotation marks and brackets omitted). Stated differently, "the size and structure of executive compensation are inherently matters of judgment." Id.; see also Gagliardi v. TriFoods Intl, Inc., 683 A.2d 1049, 1051 (Del. Ch. 1996) ("In the absence of facts casting a legitimate shadow over the exercise of business judgment reflected in compensation decisions, a court, acting responsibly, ought not to subject a corporation to the risk, expense and delay of derivative litigation, simply because a shareholder asserts, even sincerely, the belief and judgment that the corporation wasted corporate funds by paying far too much."). Although the compensation paid to Economou was generous, the Board's decision as to the amount of his compensation is inherently a matter of business judgment. The Court therefore concludes that Plaintiff fails to meet the second prong of the Aronson test with respect to Economou's compensation. Aronson, 473 A.2d at 814.

C. Allegations of Waste

Plaintiff argues that the Amended Complaint contains "particularized allegations demonstrat[ing] that Demathas, Mitilinaios, and Xiradakis wasted corporate assets in connection with the Primelead Round-Trip Transaction, the [July and October] Agreements, the 2008 Bonus, and the Services Agreement."

A transaction constitutes "waste" if it is "an exchange that is so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration." Brehm, 746 A.2d at 263.

[A] waste entails 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. Most often the claim is associated with a transfer of corporate assets that serves no corporate purpose; or for which no consideration at all is received. Such a transfer is in effect a gift. If, however, there is any substantial consideration received by the corporation, and if there is a good faith judgment that in the circumstances the transaction is worthwhile, there should be no finding of waste, even if the fact finder would conclude ex post that the transaction was unreasonably risky. Any other rule would deter corporate boards from the optimal rational acceptance of risk...Courts are ill-fitted to attempt to weigh the "adequacy" of consideration under the waste standard or, ex post, to judge appropriate degrees of business risk.
Id.

The Court concludes that the Amended Complaint lacks facts establishing that the transactions challenged by Plaintiff served no purpose, involved less than substantial consideration to DryShips, or were so one-sided as to constitute waste. In the Primelead Transaction, DryShips received drillships. With the termination of the July and October Agreements, DryShips reduced its capital expenditures at a time when the company was financially suffering. As to Economou's compensation, the Amended Complaint lacks facts showing that the "directors irrationally squander[ed] or g[a]ve away corporate assets." Brehm, 746 A.2d at 263. Accordingly, the facts alleged in the Amended Complaint do not establish that the challenged transactions constitute "waste" and do not excuse Plaintiffs failure to make a demand on the Board.

CONCLUSION

For the foregoing reasons, the Court concludes that Plaintiff failed to plead particularized facts in the Amended Complaint establishing that demand is excused. The Court therefore AFFIRMS the High Court's February 19, 2010 Order Granting Individual Defendants' Motion to Dismiss the Verified Amended Complaint

AFFIRMED.

Dated: October 3, 2011

Daniel N. Cadra., Chief Justice
J. Michael Seabright, Associate Justice
Barry M. Kurren, Associate Justice

^[1] Honourable J. Michael Seabright, United States District Judge, District of Hawaii, sitting by designation of the Cabinet.
^[2] Honourable Barry M. Kurren, United States Magistrate Judge, District of Hawaii, sitting by designation of the Cabinet.
^[3] By the time the Amended Complaint was filed, the Board had two additional members: Harry Kerames and Vassilis Karamitsanis
^[4] Together, the Primelead Divestment and the Primelead Acquisition are referred to as the "Primelead Tarnsaction."
^[5] As noted earlier, by the time the Amended Complaint was filed, the Board had two additional directors: Kerames and Karamitsanis.
^[6] In his appellate brief, Plaintiff also argued that Demathas's and Xiradakis's increase in compensation for services rendered in 2008 show they are not "independent" of Economou. In his brief, Plaintiff argued that each of Demathas's and Xiradakis's "compensation skyrocketed to US$705,000, a 729% increase over their 2007 compensation." However, at the oral argument before this Court, Plaintiff conceded that he agreed with the High Court and Defendants that the $705,000 compensation was divided between the various Board members.