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City of Harper Woods Employees' Retirement System v. Olver

September 11, 2008

CITY OF HARPER WOODS EMPLOYEES' RETIREMENT SYSTEM, DERIVATIVELY ON BEHALF OF BAE SYSTEMS PLC, PLAINTIFF,
v.
RICHARD (DICK) OLVER, ET AL., DEFENDANTS, AND BAE SYSTEMS PLC, NOMINAL DEFENDANT.



The opinion of the court was delivered by: Rosemary M. Collyer United States District Judge

MEMORANDUM OPINION

Plaintiff, City of Harper Woods Employees' Retirement System, alleges breach of fiduciary duty and waste of corporate assets by current*fn1 and former*fn2 directors of BAE Systems plc ("BAE plc" or the "Company"). BAE plc and the Individual Defendants (collectively, "Defendants") urge this Court to dismiss for any one of three separate and independently dispositive grounds. See Dkt. # 43. First, under the law of the United Kingdom ("U.K."), which Defendants contend governs this action, Plaintiff lacks standing to bring a shareholder derivative suit against BAE plc, and has failed to state a cognizable claim under the rule in Foss v. Harbottle, (1843) 2 Hare 461. Second, Defendants contend that this case should be dismissed on the basis of forum non conveniens. Finally, Defendants ask for dismissal because the Court allegedly lacks personal jurisdiction over BAE plc and the Individual Defendants.*fn3 For the reasons that follow, Defendants' Motion to Dismiss [Dkt. # 43] will be granted and this case will be dismissed.

I. BACKGROUND

The City of Harper Woods Employees' Retirement System is a pension fund located in Harper Woods, Michigan, that is operated for the benefit of thousands of retired City employees and their families. Compl. ¶ 18. Plaintiff is a holder of approximately 3500 BAE plc American Depositary Receipts ("ADRs")*fn4 and describes itself as a "shareholder and/or beneficial owner" of BAE plc. Id. ¶ 83. Nominal defendant BAE plc is a U.K. defense contractor headquartered in London. Id. ¶¶ 19, 21. It has a U.S. subsidiary, BAE Systems, Inc., but BAE Systems, Inc. is not named as a defendant in this case.

Plaintiff alleges that, commencing in the mid-1980s, the Individual Defendants permitted BAE plc to make a series of payments to Prince Bandar bin Sultan of Saudi Arabia in connection with the Al-Yamamah military program, by which the U.K. sold war planes to the Kingdom of Saudi Arabia. Id. ¶¶ 6-10, 111-30. Plaintiff asserts that the payments constituted improper bribes to Prince Bandar, son of the then-head of the Saudi Ministry of Defense, to secure the Company's role in the program. Id. ¶¶ 7-8. The payments are alleged to have been deposited for Prince Bandar's behalf "in significant part" in an account in Riggs Bank in Washington, D.C. Id. ¶¶ 1, 8, 50, 111-30. At the time in question, Prince Bandar was the Saudi Ambassador to the United States. Plaintiff claims that the payments to Prince Bandar, over a 20-year period, amounted to two billion dollars ($2,000,000,000). Id. ¶ 113. According to Plaintiff, The bribe money moved on a circuitous path to Prince Bandar's accounts at Riggs. The Saudis would pay for [warplanes] under the Al-Yamamah contract not in cash, but in oil. Britain would receive up to 600,000 barrels of oil a day for over 20 years in payment. The U.K. government, in turn, would sell the oil and the proceeds were deposited into an account at the Bank of England that BAE used. BAE then transferred oil sales proceeds from the Bank of England to be laundered in Saudi accounts at Riggs [Bank] in D.C., where Prince Bandar -- who resided in (or about) the District as the Saudi Ambassador to the U.S. -- was given unfettered access to them.

Pl.'s Opp'n to Defs.' Mot. to Dismiss ("Pl.'s Opp'n") [Dkt. # 79] at 7 (citing Compl. ¶ 11, Ex. A).

Plaintiff alleges that the Individual Defendants permitted or encouraged the alleged bribery to increase the Company's "success and profitability -- in the short term" and to enhance their own "power, prestige and profit." Compl. ¶¶ 3-4.*fn5 Plaintiff contends that the Individual Defendants jeopardized the Company's financial health because the Al-Yamamah payments breached the U.S. Foreign Corrupt Practices Act ("FCPA"), 18 U.S.C. § 371, and the Anti-Corruption Convention of the Organization for Economic Cooperation and Development ("OECD Convention"), exposing the Company to damages. Id. ¶¶ 4-5.*fn6 Plaintiff also claims that the Individual Defendants made misleading public statements to the effect that the Company operated in accordance with applicable rules and laws, including Section 463 of the U.K. Companies Act 2006. Id. ¶¶ 5, 86-110. These actions have "have exposed BAE to millions of dollars in damages and potentially hundreds of millions of dollars in remedial costs and possible debarment in the U.S., and have badly damaged BAE's corporate image and reputation." Id. ¶ 4.

Plaintiff's Complaint asserts two causes of action against the Individual Defendants: a derivative claim for breach of fiduciary duty and a derivative claim for waste of corporate assets. Id. ¶¶ 144-56. The Complaint also names as defendants Saudi Arabian Prince Bandar bin Sultan;*fn7 the PNC Financial Services Group, Inc. ("PNC"), as successor to Riggs National Corporation and Riggs Bank; and Joe, Robert, and Barbara Allbritton (the "Allbrittons"), individuals who formerly held a controlling interest in Riggs Bank. Id. ¶¶ 1, 58. Prince Bandar, PNC, and the Allbrittons are alleged to have aided and abetted the Individual Defendants in their breach of fiduciary duties. Id. ¶¶ 157-58.*fn8

There is no allegation that the wrongful activities described in the Complaint are continuing, and to the extent that Plaintiff specifies a time period for any of its allegations, the time period ranges from the 1980s to several years ago.

II. LEGAL STANDARD

Defendants move to dismiss the Complaint on three grounds: (1) lack of standing; (2) forum non conveniens; and (3) lack of personal jurisdiction. Because the first ground is dispositive of this case, the Court's analysis will begin and end there.

In this jurisdiction, a motion to dismiss for lack of standing is treated as a challenge to the subject matter jurisdiction of the court, and is properly analyzed under Rule 12(b)(1). See Haase v. Sessions, 835 F.2d 902, 906 (D.C. Cir. 1987) (explaining that "the defect of standing is a defect in subject matter jurisdiction").

Federal courts are courts of limited jurisdiction and the law presumes that "a cause lies outside this limited jurisdiction." Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994). Because subject matter jurisdiction is an Article III as well as a statutory requirement, "no action of the parties can confer subject-matter jurisdiction upon a federal court." Akinseye v. District of Columbia, 339 F.3d 970, 971 (D.C. Cir. 2003). On a motion to dismiss for lack of subject matter jurisdiction pursuant to Rule 12(b)(1), the plaintiff bears the burden of establishing that the court has subject matter jurisdiction. Rasul v. Bush, 215 F. Supp. 2d 55, 61 (D.D.C. 2002) (citing McNutt v. Gen. Motors Acceptance Corp., 298 U.S. 178, 182-83 (1936)).

The court must give a plaintiff's factual allegations closer scrutiny when resolving a Rule 12(b)(1) motion than would be required for a Rule 12(b)(6) motion for failure to state a claim. Macharia v. United States, 334 F.3d 61, 64, 69 (D.C. Cir. 2003). The court is not limited to the allegations contained in the complaint. Hohri v. United States, 782 F.2d 227, 241 (D.C. Cir. 1986), vacated on other grounds, 482 U.S. 64 (1987). Instead, to determine whether it has jurisdiction over the claim, the court may consider materials outside the pleadings, Herbert v. Nat'l Acad. of Scis., 974 F.2d 192, 197 (D.C. Cir. 1992), including expert testimony on the application of foreign law, see Fed. R. Civ. P. 44.1 ("the court, in determining foreign law, may consider any relevant material or source, including testimony, whether or not submitted by a party or admissible under the Federal Rules of Evidence"); Ganem v. Heckler, 746 F.2d 844, 854 (D.C. Cir. 1984).

III. DISCUSSION

A. Choice of Law

Plaintiff asserts that the Court has subject matter jurisdiction over this case based on diversity of citizenship. Compl. ¶ 16. A federal court sitting in diversity must apply the conflict of law rules of the forum in which it sits. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). Therefore, federal courts in the District of Columbia apply the District of Columbia's choice of law framework to determine which substantive law applies in a particular case. Council for Responsible Nutrition v. Hartford Cas. Ins. Co., No. 06-1590, 2007 WL 2020093, at *3 (D.D.C. July 12, 2007) (citing YWCA v. Allstate Ins. Co., 275 F.3d 1145, 1150 (D.C. Cir. 2002)).

1. Internal Affairs Doctrine

When faced with derivative claims of improper corporate governance, courts in the District of Columbia invoke the "internal affairs doctrine," and apply the law of the state of incorporation of the nominal defendant corporation. See, e.g., Labovitz v. Wash. Times Corp., 900 F. Supp. 500, 503 (D.D.C. 1995) ("When a particular claim addresses matters of corporate governance or other internal affairs of the organization, most states apply the law of the state where the corporation is incorporated, and the District of Columbia follows suit.") (citations omitted); see also Edgar v. MITE Corp., 457 U.S. 624, 625 (1982) (describing the doctrine as "a conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation's internal affairs"); Flocco v. State Farm Mut. Auto. Ins. Co., 752 A.2d 147, 151 (D.C. 2000) (applying the law of the state of incorporation, Illinois, in determining viability of derivative action).

The internal affairs doctrine is not limited to the application of the laws of the States of the United States. See, e.g., Meng v. Schwartz, 305 F. Supp. 2d 49, 58 (D.D.C. 2004) ("Because the plaintiffs' breach of fiduciary duty and negligence claims deal substantially with matters of corporate governance and the internal organizational affairs, the Court finds that Bermuda, as the place of incorporation, has the 'more substantial interest' in having its laws applied."); Feiner Family Trust v. VBI Corp., No. 07-1914, 2007 WL 2615448, at *5 (S.D.N.Y. Sept. 11, 2007) (applying law of the Cayman Islands in derivative shareholder suit); In re BP p.l.c. Derivative Litig., 507 F. Supp. 2d 302, 311 (S.D.N.Y. 2007) (applying U.K. law in derivative shareholder suit).

Based on the internal affairs doctrine, BAE plc, incorporated in the U.K., is subject to U.K. law. Plaintiff, however, asks the Court to invoke the local law or public policy exception to the doctrine. See Compl. ¶ 21; Pl.'s Opp'n at 35, 45. Such an exception to the internal affairs doctrine is sometimes available when "the pertinent laws of the jurisdiction of incorporation are objectively 'immoral' or 'unjust'" or "where 'application of the local law of some other state is required by reason of the overriding interest of that other state in the issue to be decided.'" In re BP p.l.c., 507 F. Supp. 2d at 308-09 (citations omitted); see also Restatement (Second) Conflict of Laws § 309 ("The local law of the state of incorporation will be applied to determine the existence and extent of a director's or officer's liability to the ...


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