March 19, 2012
Shareholder suit against Sokol dismissed
The shareholder suit against Berkshire Hathaway's David Sokol (here, here, and here) was dismissed for failure to make demand. You'll remember that Sokol was accused by shareholders of taking a corporate opportunity when he learned about a corporate opportunity for Berkshire and then bought stock before bringing the opportunity to Buffet. Mr. Buffet wasn't too happy about it when he found out. Sokol was shown the door. Shareholders brought suit against Sokol and the Berkshire Hathaway board.
The question before the court today was whether the shareholders should have made demand of the corporation before bringing the derivative lawsuit. For derivative suits, shareholders have to make a demand that the board vindicate the corporation's rights or state why making such a demand would otherwise be futile. The shareholders argued that demand in this case would be futile for three reasons:
1) The fact that the board had not yet sued Sokol was evidence that they had no intention of doing so;
2) The board faced a substantial likelihood of liability such that it would cloud their ability to objectively resolve the question on their own; and finally,
3) That Warren Buffet is such a high-profile person that the board cannot be trusted to exercise their own independent business judgment in assessing the merits of a potential action against Mr. Sokol.
Looking at these questions, the court correctly determined that this is a case where demand should have been made, thus dismissing the case on the board's motion.
Of course, the board has already conducted an investigation into Mr. Sokol's trading and fired him for it. It might still bring a suit, but there is no requirement that it do so. It's well within the board's perogatives to determine what the proper level of "punishment" is for Mr. Sokol's trading. The substantial likelihood factor is unlikely to apply. There's allegation that the board itself did anything wrong. In fact, it appears that once the board found out about Mr. Sokol's trading, it took actions. Finally, I have no doubt that Mr. Buffet has a lot of influence over the Berkshire board. No doubt at all. But, I doubt that Mr. Buffet is all that happy about what Sokol did. He's already demonstrated that he isn't interested in ignoring it or sweeping it under a rug.
Anyway, rightly decided. That's enought corporate litigation review for today.
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