BETH BLOOM, UNITED STATES DISTRICT JUDGE.
Plaintiff brings the present action derivatively and on behalf of National Beverage Corp. ("NBC"), a Delaware corporation with its principal place of business in Fort Lauderdale, Florida.
Many, if not all, of Plaintiff's allegations stem from alleged omissions or inconsistencies between the provisions of the Agreement and NBC's filings with the Securities and Exchange Commission ("SEC") during the Relevant Period. For instance, under the Agreement, CMA provides its management services and other functions to NBC for an annual fee of 1 percent of NBC's net sales. See Id. at ¶ 41. However, the proxy statements filed with the SEC during the Relevant Period state that CMA is "entitled to a fee for rendering advice and expertise in connection with significant transactions up and above the 1% of net revenues management fee." See Id. at ¶ 89.
Within the proxy statements filed with the SEC during the Relevant Period, NBC stated that the only perquisite received by its employees beyond retirement, health, and insurance benefits, was a car allowance. See Id. at ¶ 83. Nevertheless, Plaintiff alleges that NBC paid for N. Caporella's personal use of an aircraft partly owned by NBC while failing to disclose this use in the company's proxy statements.
As a result of these allegedly false acts, statements, and omissions, Plaintiff filed the present action against Defendants on behalf of NBC, bringing forth claims for breach of fiduciary duty (Count I) and corporate waste (Count II) under Delaware law, and violations of Section 14(a) of the Securities and Exchange Act (Count III) in connection with the proxy statements filed during the Relevant Period. See Id. at 44-47. On November 20, 2017, Defendants filed the Motion. See ECF No. [25]. Plaintiff timely filed his response, ECF No. [36], and Defendants timely filed their reply, ECF No. [37]. On May 15, 2018, the Court held a hearing on the Motion. See ECF Nos. [42]-[43]. The Motion is ripe for adjudication.
Rule 8 of the Federal Rules of Civil Procedure requires that a pleading contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). Although a complaint "does not need detailed factual allegations," it must provide "more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007); see Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (explaining that Rule 8(a)(2)'s pleading standard "demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation"). In the same vein, a complaint may not rest on "`naked assertion[s]' devoid of `further factual enhancement.'" Iqbal, 556 U.S. at 678, 129 S.Ct. 1937
When reviewing a motion under Rule 12(b)(6), a court, as a general rule, must accept the plaintiff's allegations as true and evaluate all plausible inferences derived from those facts in favor of the plaintiff. See Miccosukee Tribe of Indians of Fla. v. S. Everglades Restoration Alliance, 304 F.3d 1076, 1084 (11th Cir. 2002); AXA Equitable Life Ins. Co. v. Infinity Fin. Grp., LLC, 608 F.Supp.2d 1349, 1353 (S.D. Fla. 2009). However, this tenet does not apply to legal conclusions, and courts "are not bound to accept as true a legal conclusion couched as a factual allegation." Twombly, 550 U.S. at 555, 127 S.Ct. 1955; see Iqbal, 556 U.S. at 678, 129 S.Ct. 1937; Thaeter v. Palm Beach Cnty. Sheriff's Office, 449 F.3d 1342, 1352 (11th Cir. 2006). Moreover, "courts may infer from the factual allegations in the complaint `obvious alternative explanations,' which suggest lawful conduct rather than the unlawful conduct the plaintiff would ask the court to infer." Am. Dental Ass'n v. Cigna Corp., 605 F.3d 1283, 1290 (11th Cir. 2010) (quoting Iqbal, 556 U.S. at 682, 129 S.Ct. 1937).
A court considering a Rule 12(b)(6) motion is generally limited to the facts contained in the complaint and the attached exhibits, including documents referred to in the complaint that are central to the claim. See Wilchombe v. TeeVee Toons, Inc., 555 F.3d 949, 959 (11th Cir. 2009); Maxcess, Inc. v. Lucent Technologies, Inc., 433 F.3d 1337, 1340 (11th Cir. 2005) ("[A] document outside the four corners of the complaint may still be considered if it is central to the plaintiff's claims and is undisputed in terms of authenticity.") (citing Horsley v. Feldt, 304 F.3d 1125, 1135 (11th Cir. 2002)). "[W]hen the exhibits contradict the general and conclusory allegations of the pleading, the exhibits govern." Griffin Indus., Inc. v. Irvin, 496 F.3d 1189, 1206 (11th Cir. 2007). It is through this lens that the Court addresses the instant Motion.
Defendants have moved to dismiss all of Plaintiff's claims against them. As the primary basis for dismissal, Defendants assert that Plaintiff has not met the heightened pleading standards that govern derivative suits in Delaware. In the alternative, Defendants also allege that Plaintiff has failed to state his claims as a matter of law. The Court will first address Plaintiff's claims arising under Delaware law, and will then discuss Plaintiff's federal claim against Defendants.
It is undisputed that both of Plaintiff's claims for breach of fiduciary duty and for corporate waste are subject to Delaware's Court of Chancery Rule 23.1. "Because the shareholders' ability to institute an action on behalf of the corporation inherently impinges upon the directors' power to manage the affairs of the corporation[,] the law imposes certain prerequisites on a stockholder's right to sue derivatively." Kaplan v. Peat, Marwick, Mitchell & Co., 540 A.2d 726, 730 (Del. 1988). Under Rule 23.1, stockholders may "initiate a derivative suit to enforce unasserted rights of the corporation without the board's approval where they can show either that the board wrongfully refused the plaintiff's pre-suit demand to initiate
In Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984), the Supreme Court of Delaware held that a demand on the board is excused only if the complaint contains particularized factual allegations raising a reasonable doubt that either: "(1) the directors are disinterested and independent" or "(2) the challenged transaction was otherwise the product of a valid exercise of business judgment." At the motion to dismiss stage, "[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." Brehm v. Eisner, 746 A.2d 244, 255 (Del. 2000). As will be explained in further detail below, Plaintiff has not made the requisite showing under Aronson to excuse pre-suit demand on the NBC board.
The directors of the NBC board during the Relevant Period are N. Caporella, J. Caporella, Conlee, Hathorn, and Sheridan. "To establish demand futility under Aronson . . . Plaintiff must impugn the ability of at least half of the directors in office when it initiated this action . . . to have considered a demand impartially." Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera, 119 A.3d 44, 57 (Del. Ch. 2015).
At the hearing, Plaintiff admitted that he should have filed an amended complaint rather than make arguments for the first time in his response to the Motion that Conlee, Hathorn, and Sheridan were not disinterested due to their compensation and stock options. Nevertheless, when specifically asked by the Court, Plaintiff stated that there were no other facts he would have used or included in an amended complaint to support his demand futility allegations, and, as such, all the facts in support of those allegations were before the Court. The Court also notes that Plaintiff had ample time and opportunity to file an amended complaint, yet did not do so.
Plaintiff has not alleged that any of the directors apart from N. Caporella are "interested" in the Agreement or any of the transactions at issue.
In the demand futility context, directors are "presumed to be independent." Id. at 59. Under Delaware law, "[i]ndependence means that a director's decision is based on the corporate merits of the subject before the board rather than extraneous considerations or influences." Id. "[A] lack of independence can be shown by pleading facts that support a reasonable inference that the director is beholden to a controlling person or `so under their influence that their discretion would be sterilized.'" Id. (quoting Rales v. Blasband, 634 A.2d 927, 936 (Del. 1993)). Thus, a non-interested director is not independent if particularized allegations support the inference that he or she "would be more willing to risk his or her reputation than risk the relationship with the interested [person]." Id.
Plaintiff contends that Conlee, Hathorn, and Sheridan are "incapable of making an impartial decision to . . .vigorously prosecute" this action as a result of their "longstanding professional relationships" with N. Caporella. ECF No. [1], at ¶ 108. In particular:
"Further,. . . Conlee, Hathorn and Sheridan are beholden to N. Caporella, as they are dependent on him for their position as NBC directors. The combination of their reliance on N. Caporella, as well as their longstanding professional relationship with him, render . . .Conlee, Hathorn and Sheridan incapable of objectively and fairly evaluating a demand by Plaintiff." See Id. at ¶ 109.
These allegations are not sufficient to satisfy Aronson's first prong, as Delaware courts have dismissed derivative complaints containing allegations that are more particularized than those presented by Plaintiff in this case. For instance, in Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040 (Del. 2004), a shareholder brought a derivative action claiming that the board of directors lacked independence for purposes of considering a pre-suit demand from the company's controlling shareholder, Martha Stewart. At issue on appeal was the independence of three directors. The first director, Arthur C. Martinez, had served on the board of the company since 2001, had previously established a relationship with the company while an officer and director of Sears, had been recruited to the board of the company by Stewart's longtime personal friend, Charlotte Beers, and was himself a "longstanding personal friend" of Stewart and another director named Sharon L. Patrick, who stated in a 2001 article that "[Martinez] is an old friend to both me and Martha." Id. at 1045. The second director, Darla D. Moore, had also served on the board of the company since 2001 and was "a longstanding friend" of Stewart, having attended a wedding reception in 1995 that was hosted by Stewart's personal lawyer and in which Stewart was also in attendance. See Id. In 1996, moreover, Fortune magazine printed an article highlighting Moore's "close personal relationship" with Stewart and Beers, whom Moore replaced when Beers resigned from the company's board. See Id. Finally, director Naomi O. Seligman was alleged to have been a director since 1999 and, according to a 2002 story that appeared in the Wall Street Journal, contacted the CEO of a publishing house (where Seligman was also a director) at the behest of Stewart "to express concern over its planned publication of a biography that was critical of Stewart." Id. at 1045-46.
The Supreme Court of Delaware, however, held that even though the shareholder "attempted to plead affinity beyond mere friendship between Stewart and the other directors, . . . her attempt [was] not sufficient to demonstrate demand futility." Id. at 1051. This is because:
Id. In the present case, Plaintiff has not even alleged that Conlee, Hathorn, or Sheridan shared "a particularly close or intimate personal" affinity with N. Caporella. Id. Nor has Plaintiff provided any "evidence that in the past the relationship
Instead, Plaintiff's allegations — which are limited to the business relationships between N. Caporella and the three directors — "largely boil down to a `structural bias' argument, which presupposes that the professional and social relationships that naturally develop among members of a board impede independent decisionmaking." Id. at 1050-51. As the Delaware Supreme Court stated in Aronson, 473 A.2d at 815 n.8, however, "[t]he difficulty with structural bias in a demand futile case is simply one of establishing it in the complaint for purposes of Rule 23.1. We are satisfied that. . .review by the Court. . . of complaints alleging specific facts pointing to bias on a particular board will be sufficient for determining demand futility." No such allegations are present in this case.
In his response to the Motion, Plaintiff states that the Court "should draw the inference that long-standing ties across two companies existed between N. Caporella and Conlee extending back approximately 40 years, Hathorn [and Sheridan] extending back over 30 years," and that these ties should put the directors' independence in doubt. ECF No. [36], at 17. It is true that "it may be possible to plead additional facts concerning the length, nature or extent of. . .previous relationships that would put in issue that director's ability to objectively consider the challenged transaction." Orman v. Cullman, 794 A.2d 5, 27 (Del. Ch. 2002). Nevertheless, "the Court cannot make a reasonable inference that a particular [relationship is of a bias-producing nature] without specific factual allegations to support such a conclusion." Beam, 845 A.2d at 1050 (emphasis in original). Here, Plaintiff has simply alleged that N. Caporella and the three directors have served on the board of two companies for a long time. These allegations, absent more particularized facts regarding "the nature of the relationship or additional circumstances," Id. at 1052, are not sufficient to demonstrate demand futility.
Delaware law is clear that "[a]llegations of mere personal friendship or a mere outside business relationship, standing alone, are insufficient to raise a reasonable doubt about a director's independence." Id. at 1050. Plaintiff's allegations surrounding the business relationships between N. Caporella and the three directors as a result of their service on the board of a couple of companies over a long span of time do not create a reasonable doubt that
Plaintiff can still excuse pre-suit demand upon the NBC board if he can show that the Agreement and the other transactions at issue were not the result of a valid exercise of business judgment.
In Count I, Plaintiff claims that Defendants breached their fiduciary duties by: (1) allowing for materially inadequate controls over NBC's policies and practices as evidenced by the lack of definition and duplication of functions between employees of NBC and CMA; (2) approving the Agreement every year during the Relevant Period even though it contains the illegal Standard of Care provision, one year termination clause, and potential additional fees to be earned by CMA in connection with significant transactions; and (3) allowing NBC to file false and misleading periodic reports such as the 2015-17 proxy statements with the SEC in violation of federal regulations. See ECF No. [1], at ¶ 112. As will be explained below, Plaintiff must show that directors Conlee, Hathorn, and Sheridan acted in bad faith when both approving the Agreement (allegation two) and in failing to provide the proper oversight (allegations one and three). This is a high standard, and one that Plaintiff has failed to meet.
The Delaware Court of Chancery's decision in Caremark
Id. (internal citations omitted) (emphasis in original). Plaintiff's allegations again fall short. For instance, regarding Plaintiff's contention that the directors allowed for materially inadequate controls over NBC's policies and practices as evidenced by the lack of definition and duplication of functions between employees of NBC and CMA, Plaintiff has not provided the Court with any information about the "internal controls" (or lack thereof) that led to the supposed duplication of services. Nor has Plaintiff alleged with particularity which employees are being compensated for performing these duplicated functions,
Plaintiff's Caremark claim pertaining to the filing of false and misleading periodic reports, such as the 2015-17 proxy statements, with the SEC in violation of federal regulations is similarly deficient. First, Plaintiff admitted in the hearing that there is no evidence that the directors knew or authorized N. Caporella's personal use of the aircraft.
"In the absence of red flags, good faith in the context of oversight must be measured by the directors' actions `to assure a reasonable information and reporting system exists' and not by second-guessing after the occurrence of employee conduct that results in an unintended adverse outcome." Stone, 911 A.2d at 373 (quoting Caremark, 698 A.2d 967-68, 971). Plaintiff has not provided the Court with particularized factual allegations regarding the directors' implementation or monitoring of NBC's internal controls, let alone that the directors knew they were not discharging their fiduciary obligations or that the directors demonstrated a conscious disregard for their responsibilities. Plaintiff's director oversight liability claims under Caremark thus fail.
Plaintiff has also alleged that Defendants breached their fiduciary duties to NBC by approving the Agreement every year during the Relevant Period despite the Agreement containing the illegal Standard of Care provision, one year termination clause, and potential additional fees to be earned by CMA in connection with significant transactions. In Aronson, 473 A.2d at 815, the Supreme Court of Delaware made clear that "the mere threat of personal liability for approving a questioned transaction, standing alone, is insufficient to challenge either the independence or disinterestedness of directors, although in rare cases a transaction may be so egregious on its face that board approval cannot meet the test of business judgment, and a substantial likelihood of director liability therefore exists." In situations where, as here, a corporation's charter includes an exculpatory provision pursuant to 8 Del C. § 102(b)(7), see ECF No. [25-7], at 24 (Eighth Article), a substantial likelihood of liability "may only be found to exist if the plaintiff pleads a non-exculpated claim against the directors based on particularized facts." Wood v. Baum, 953 A.2d 136, 141 (Del. 2008) (emphasis in original); see also In re Baxter Int'l, Inc. Shareholders Litig., 654 A.2d 1268, 1270 (Del. Ch. 1995) ("When the certificate of incorporation exempts directors from liability, the risk of liability does not disable them from considering a demand fairly unless particularized pleading permits the court to conclude that there is a substantial likelihood that their conduct falls out-side the exemption."). The exculpatory provision in NBC's charter does not eliminate or limit director liability:
ECF No. [25-7], at 24 (Eighth Article).
Plaintiff has not met this high burden. Specifically, Plaintiff has not pled with particularity that the NBC board engaged in bad faith or intentional misconduct when they approved the Agreement's provisions. For instance, Plaintiff has not pointed the Court to any authority stating that there is anything wrong or improper (let alone illegal) with the Agreement's "onerous" one-year termination provision. Similarly, regarding the additional fees that CMA can potentially earn in connection with significant transactions, Plaintiff has not provided the Court with any specific financial information regarding the amount of fees CMA can earn or has earned for these "significant transactions." As a result, the Court cannot determine that the provision for additional fees is "so facially unfair as to constitute a lack of good faith" by the directors. See Teamsters, 119 A.3d at 64.
Plaintiff contends that the Standard of Care provision is illegal because it purports to exculpate NBC's officers when Delaware law only allows for the exculpation of directors in the corporate charter. Even disregarding the fact that the exculpatory provision in the Agreement is a contractual clause limiting liability (rather than an exculpatory provision in the charter) that is qualified by another clause in the Agreement stating that "each term. . .shall be valid and be enforced to the fullest extent permitted by law," the deficiency of Plaintiff's claim here is more basic. The Complaint does not allege that the directors had actual or even constructive knowledge that the Standard of Care provision was illegal, yet they included it anyway. See Solak v. Sarowitz, 153 A.3d 729, 745 (Del. Ch. 2016), appeal refused sub nom. Paylocity Holding Corp. v. Solak, 154 A.3d 1167 (Del. 2017) ("According to plaintiff, the individual defendants must have known they were violating the law when they approved the Fee-Shifting Bylaw because they took this action `more than six months after [the amendment to] Section 109(b) became effective.' This single allegation is insufficient. . .to support a reasonable inference that [the] directors acted with scienter — that they knew they were violating the law — when they approved the Fee-Shifting Bylaw.").
In sum, Plaintiff's claims that the aforementioned provisions are "unreasonable and unfair to NBC" are too sparse and
At the hearing, the parties agreed that Count II for corporate waste is limited to NBC allegedly paying for N. Caporella's personal use of the company aircraft. "A board's decisions do not constitute corporate waste unless they are exceptionally one-sided." White v. Panic, 783 A.2d 543, 554 (Del. 2001). Accordingly, the Supreme Court has defined "waste" to mean "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." Id. "As a practical matter, a stockholder plaintiff must generally show that the board `irrationally squander [ed]' corporate assets — for example, where the challenged transaction served no corporate purpose or where the corporation received no consideration at all." Id.
Plaintiff admitted at the hearing that there is nothing to suggest that the members of the board knew or authorized N. Caporella's personal use of the aircraft. In other words, there is no board transaction for the Court to scrutinize. As a result, Plaintiff's corporate waste claim fails. See In re The Home Depot, Inc. S'holder Derivative Litig., 223 F.Supp.3d 1317, 1327-28 (N.D. Ga. 2016), appeal dismissed sub nom. Bennek v. Ackerman, No. 16-17742-DD, 2017 WL 6759075 (11th Cir. Oct. 24, 2017) ("The problem with the Plaintiffs' argument is that there is no transaction. Corporate waste claims typically involve situations where there has been an exchange of corporate assets for no corporate purpose or for no consideration; in effect, waste is a gift. The Plaintiffs cite no case law to suggest anything to the contrary.").
In sum, Plaintiff has not met his burden under either of Aronson's prongs to excuse pre-suit demand on NBC's board. See Teamsters, 119 A.3d at 65 ("In the absence of well pleaded allegations of director interest or self-dealing, failure to inform themselves, or lack of good faith, the business decisions of the board are not subject to challenge because in hindsight other choices might have been made instead."). His claims under Delaware law for breach of fiduciary duty and corporate waste must therefore be dismissed.
In Count III, Plaintiff alleges that directors N. Caporella, J. Caporella, Conlee, Hathorn, and Sheridan violated Section 14(a) of the Securities and Exchange Act in connection with the proxy statements filed by the company with the SEC in 2015, 2016, and 2017. See ECF No. [1], at 46. Specifically, Plaintiff claims that these proxy statements were deficient because they failed to disclose: (1) that N. Caporella, J. Caporella, and Bracken were or are affiliated with Broad River; (2) that Broad River is the predominant owner of NBC's aircraft; (3) that N. Caporella utilized the airplane for personal trips; and (4) all of the provisions of the Agreement. See Id. at 46-47.
"Section 14(a) and Rule 14-A-9 promulgated thereunder require that proxy statements not be false or misleading with regard to any material statement, nor omit to state any material fact necessary in order to make the statements therein not false or misleading. A fact or
Plaintiff alleges that the "omissions and misrepresentations were material to a reasonable investor in deciding to vote on the issues presented by the 2015, 2016 and 2017 Proxies, including the election of the Current Director Defendants."
For instance, in Edward J. Goodman Life Income Tr. v. Jabil Circuit, Inc., 594 F.3d 783, 796 (11th Cir. 2010), the shareholders alleged "that several individual Jabil insiders violated section 14(a) by making false statements in proxy solicitations related to Jabil's stock option compensation policy. . . .They contend[ed] that they relied on these false statements in approving corporate compensation and stock option policies and that the nondisclosure prevented them from removing the offending corporate directors." Relying on the Third Circuit's decision General Electric Company by Levit v. Cathcart, 980 F.2d 927 (3d Cir. 1992),
The same is true in the instant case. Even assuming that (1) the directors had a duty to disclose the information Plaintiff believes should have been included in the proxies; (2) the omitted information was material; and (3) Plaintiff's allegations of materiality are sufficient to demonstrate transaction causation, Plaintiff has failed to show loss causation. Like in Jabil Circuit, the reelection of the directors was not an essential link to the supposed losses that Plaintiff complains of: that is, the "wast[ing] of corporate assets" stemming from the duplication of services or N. Caporella's personal use of the aircraft, see ECF No. [1], at ¶¶ 92, 126, "was not accomplished or endorsed by any proxy solicitation materials," Jabil Circuit, Inc., 594 F.3d at 797. Because the Complaint fails to allege a link between the proxy statements and Plaintiff's alleged damages, Plaintiff's Section 14(a) claim must be dismissed.
