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Sean Whaley

MGM shareholder suit dismissal upheld

2 January 2014

The Nevada Supreme Court on Tuesday upheld the dismissal of shareholder complaints against several current and former officers and directors of MGM Resorts International over construction of the CityCenter project in Las Vegas.

The complaints were filed in 2009 by Charles Kim and Sanjay Israni on behalf of MGM Mirage Hospitality, LLC and named 14 people, including now-former board member Kirk Kerkorian.

The merits of the case were not at issue in the ruling. Instead, both the lower court and the Supreme Court found that the two stockholders failed to take their complaint to the board before proceeding to the court system.

The stockholders alleged that several of the board members and officers issued misleading statements about the troubled CityCenter project and sold stock when it was near an all-time high.

CityCenter opened in December 2009 at a cost of $9.2 billion.

In their appeal, Kim and Israni said the CityCenter project brought the company to the brink of bankruptcy. Before that occurred, the stockholders alleged, six of the individuals named in the lawsuit sold significant portions of their personally held MGM stock, reaping close to $81.5 million in proceeds based on their knowledge of adverse nonpublic information about the project.

In response, attorneys for the directors said the reality was that “MGM’s management, like so many others, did not fully predict the depth, severity or duration of the recession.”

Clark County District Judge Mark Denton ruled in favor of MGM in July 2011, and the stockholders appealed to the Supreme Court.

A three-member panel of the higher court found that Kim and Israni failed to make a pre-litigation demand on the corporation’s board of directors as required under Delaware law, where the company is incorporated. The demand is not required when it is deemed legally futile.

Kim and Israni alleged that such a demand was futile because five directors were interested in the alleged illegal stock sales and two others were beholden to Kerkorian, reaching the seven of 14 directors needed to excuse a pre-lawsuit demand.

The five directors alleged by Kim and Israni to have been involved in illicit insider stock sales were Robert Baldwin, Rose McKinney-James, Gary Jacobs, Alexis Herman and Jim Murren. All but Jacobs remain as directors of the company.

Attorneys for the directors said that by failing to make a pre-lawsuit demand, Kim and Israni did not give the board an opportunity to determine whether prosecuting the claims would be in the company’s interest. While not at issue in the ruling, the attorneys for the directors also noted that Kim and Israni have not stated any specific facts that would call the stock trades into question.

But the state Supreme Court said the claim that two directors were beholden to Kerkorian was irrelevant because he was not alleged to have been interested in any of the challenged stock transactions. Kerkorian left as a director of the company in June 2011 but has a major stake in the company as an investor.

“Thus, appellants failed to demonstrate a reasonable doubt as to whether a majority of MGM’s directors could exercise independent judgment and reasoning when considering a pre-suit demand,” the court said.
MGM shareholder suit dismissal upheld is republished from