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July 18 — Investors can't proceed on a lawsuit alleging that Wynn Resorts Ltd. directors breached their fiduciary duties and wasted corporate assets by authorizing the hotel and casino company's $135 million donation to the University of Macau Development Foundation, a federal appeals court ruled July 18 ( La. Mun. Police Emps.’ Ret. Sys. v. Wynn , 2016 BL 229530, 9th Cir., No. 14-15695, 7/18/16 ).
The derivative lawsuit also challenged the board's decision to forcibly redeem a $2.77 billion stake in the company held by Kazuo Okada—the only director to oppose the donation—in exchange for a $1.9 billion promissory note.
The U.S. Court of Appeals for the Ninth Circuit agreed with a lower court that the shareholder plaintiffs failed to show a pre-suit demand on the Nevada corporation's board to take action would have been excused (12 CARE 325, 3/21/14).
Under Nevada law, before investors can sue on a company's behalf, they must ask the company's board to take action. However, they don't have to make a pre-suit demand if they can show that a majority of the directors had a conflict of interest in the matter.
According to its website, the University of Macau Development Foundation is a nonprofit that promotes and supports the university. The investors alleged that the donation—made a month before the Macau government accepted Wynn's application for a lease agreement to build a resort and casino—appeared suspicious, causing the company to incur legal expenses and exposing it to potential liability.
According to the court's decision, Wynn opened its first hotel in Macau in 2006 under a lease from the government. In the same year, the company applied for a second agreement to build a new resort and casino.
The investors claimed that five years later, the lease was approved after Wynn made a donation to the foundation, which is overseen by many of the same government officials that control the territory's gaming and real estate industries.
The Securities and Exchange Commission initiated an investigation into the donation, but ended the probe without taking any action. The Nevada Gaming Commission Board also investigated the matter and found no violations of state law.
Writing for the Ninth Circuit, Judge Diarmuid O'Scannlain said the plaintiffs failed to show that a majority of Wynn's board lacked independence or faced a substantial likelihood of incurring personal liability. “Most importantly, even assuming that the Macau donation did in fact violate the [Foreign Corrupt Practices Act], the allegations do not create a reasonable inference that any of the individual directors intended or knew that it would do so, as Nevada law would require,” he wrote.
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