At issue in this shareholders' derivative action for breach of fiduciary duty is whether plaintiff properly pleaded demand futility under Fed.R.Civ.P. 23.1. The District Court dismissed under Fed.R.Civ.P. 12(b)(6). We will affirm.

Rhoda Kanter, a shareholder of MedQuist, Inc., a New Jersey corporation, brought a shareholders' derivative suit against MedQuist, ten individuals identified as members of MedQuist's board of directors, and Koninklijke Philips Electronics N.V. (which owned 71 percent of MedQuist's unrestricted stock) for breach of fiduciary duty.1

MedQuist provides health information services and medical transcription services, such as the transcription of doctors' voice-recorded dictation of medical reports for inclusion in patient files. According to the complaint, MedQuist bills clients for transcription services on a cost per line basis. "Line" is defined as an "AAMT line," which contains 65 characters, including any letter, number, symbol or function key necessary for the final appearance, such as space bar, carriage return, underscore, bold, and any characters contained in the macro, header or footer.2 To calculate the number of lines, the characters are totaled and divided by 65.

The complaint alleges MedQuist systematically inflated its character counts by counting a single character as multiple characters, which resulted in artificially high bills for MedQuist's customers. In March 2004, MedQuist announced it would delay its annual filings with the Securities and Exchange Commission pending completion of an independent outside review of the company's billing practices. Kanter contends this review was undertaken in response to allegations by one of MedQuist's employees of improper billing practices. The key findings of the independent review were released in July 2004, allegedly revealing an unlawful billing scheme. MedQuist's board of directors responded to the findings by taking unspecified "disciplinary action" against five MedQuist employees. In October 2004, MedQuist issued a press release stating that its financial filings and statements for the two prior years should no longer be relied upon.3 In November 2004, Kanter filed this shareholders' derivative suit alleging defendants violated their fiduciary duties to the company by (1) failing to adequately ensure accurate and lawful billing practices, (2) failing to prevent the artificial inflation of billing figures, and (3) failing to accurately report the company's true financial condition in its published financial statements. Kanter made no demand on the board of directors before filing suit.

All defendants filed Fed.R.Civ.P. 12(b)(6) motions to dismiss. In her brief opposing the motions to dismiss, Kanter requested leave to amend her complaint. Following oral argument, the District Court determined the proposed amendment would be futile, denied Kanter's motion, and granted defendants' motions to dismiss with prejudice. The District Court held Kanter had failed to make demand of the board of directors, and had failed to plead facts with sufficient particularity to merit excuse of the demand requirement of Fed.R.Civ.P. 23.1. After denial of Kanter's motion for reconsideration, this appeal followed.

On appeal, Kanter contends the District Court erred by applying improper legal standards in granting the motion to dismiss and denying her request to amend her complaint.

The District Court had jurisdiction over this case under 28 U.S.C. § 1332. We have appellate jurisdiction under 28 U.S.C. § 1291.

We review a district court's ruling on demand futility under Fed.R.Civ.P. 23.1 for abuse of discretion. Garber v. Lego, 11 F.3d 1197, 1200 (3d Cir.1993); Blasband v. Rales, 971 F.2d 1034, 1040 (3d Cir.1992). We review denial of leave to amend a complaint for abuse of discretion. In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1434 (3d Cir.1997).

The central issue in this appeal is whether Kanter should have been excused from the ordinary requirement that she make a demand on the board of directors before filing a shareholders' derivative action in the name of the corporation. We hold the District Court did not abuse its discretion in granting the motions to dismiss because Kanter's pleading lacked the factual particularity required to excuse demand. The Federal Rules of Civil Procedure provide that a complaint "shall contain (1) a short and plain statement of the grounds upon which the court's jurisdiction depends . . . (2) a short and plain statement of the claim showing that the pleader is entitled to relief, and (3) a demand for judgment for the relief the pleader seeks." Fed.R.Civ.P. 8(a).4 Notice pleading requires a plaintiff to provide the opponent with fair notice of a claim and the grounds on which that claim is based.

But there are three notable exceptions to notice pleading that mandate a heightened standard requiring that facts be pleaded with particularity: (1) pleading fraud, Fed.R.Civ.P. 9(b), the "who, what, when, where, and how" of the events at issue, Burlington Coat Factory, 114 F.3d at 1422 (citation omitted); (2) pleading scienter under the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(b), foreclosing "boilerplate and conclusory allegations," In re Rockefeller Ctr. Props., Inc. Secs. Litig., 311 F.3d 198, 216 (3d Cir.2002) (citation omitted); and (3) pleading demand futility in shareholder derivative suits under Fed.R.Civ.P. 23.1.5 Rule 23.1 requires a plaintiff to plead with particularity either the efforts made to spur directors to take the action sought, and why these efforts were unsuccessful, or the reasons why no effort was made to demand action from the board. Where a plaintiff has made no demand on the board, a court may excuse the rule's requirement if it determines that demand would have been futile. But a plaintiff is obliged to plead, with particularity, facts that establish demand futility. Fed. R.Civ.P. 23.1.

The purpose of Rule 23.1's demand requirement is to "affor[d] the directors an opportunity to exercise their reasonable business judgment and waive a legal right vested in the corporation in the belief that its best interests will be promoted by not insisting on such right." Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 96, 111 S. Ct. 1711, 114 L. Ed. 2d 152 (1991) (internal quotation marks omitted). The Court has noted the "demand requirement" of Rule 23.1 relates to the "adequacy of the shareholder representative's pleadings," and does not itself necessarily require demand. Id. at 96, 111 S. Ct. 1711. Furthermore, "the function of the demand doctrine in delimiting the respective powers of the individual shareholder and of the directors to control corporate litigation clearly is a matter of `substance,' not `procedure.'" Id. at 96-97, 111 S. Ct. 1711. Thus, federal courts hearing shareholders' derivative actions involving state law claims apply the federal procedural requirement of particularized pleading, but apply state substantive law to determine whether the facts demonstrate demand would have been futile and can be excused. Id. at 98-99, 111 S. Ct. 1711.

At issue is whether Kanter's pleading contained sufficiently particularized facts under New Jersey's substantive standards for determining that demand of the MedQuist board would have been futile.

The New Jersey Supreme Court in In re PSE & G Shareholder Litigation, 173 N.J. 258, 801 A.2d 295 (2002), set forth the standard for analyzing shareholders' derivative suits under its own procedural rule, New Jersey Rule of Court 4:32-3.6 Drawing guidance from two Delaware cases,7 Aronson v. Lewis, 473 A.2d 805 (Del.1984) and Brehm v. Eisner, 746 A.2d 244 (Del. 2000), the New Jersey Supreme Court articulated New Jersey's two-pronged standard for shareholder plaintiffs to withstand a motion to dismiss for failure to make a demand. The Court stated:

[T]hey must plead with particularity facts creating a reasonable doubt that: (1) the directors are disinterested and independent, or (2) the challenged transaction was otherwise the product of a valid exercise of business judgment. If either prong is satisfied, demand will be excused under [Rule 4:32-3].

PSE & G, 801 A.2d at 310. See also, Aronson, 473 A.2d at 814; Brehm, 746 A.2d at 256.

In an earlier case, the Chancery Division of the New Jersey Superior Court applied the Aronson two-prong approach in In re Prudential Ins. Co. Derivative Litig., 282 N.J.Super. 256, 659 A.2d 961 (1995). The Prudential court found that the first prong was not satisfied in that case because plaintiffs had made "mere `conclusory allegations'" about the directors lack of independence and disinterestedness. PSE & G, 801 A.2d at 309 (quoting Prudential, 659 A.2d at 971). The court noted the pleading did not differentiate among the directors and set forth no facts showing that defendants had actual knowledge of the alleged wrongdoing. The court also rejected the suggestion that demand was futile because directors would have to sue themselves, calling this a "bootstrap argument" that, if accepted, would "weaken the managerial power of directors." Id.

The Prudential court also found the second prong was not satisfied because the allegations involved inaction by the board. This, the court reasoned, made it "impossible to perform the essential inquiry contemplated by Aronson, whether the directors have acted in conformity with the business judgment rule in approving the challenged transaction." Id. at 309 (quoting Prudential, 659 A.2d at 975) (internal quotation marks omitted); Rales v. Blasband, 634 A.2d 927, 933 (Del.1993). Thus, when the complaint asserts inaction by the board, as here, courts will not excuse demand "in the absence of allegations demonstrating why the board is incapable of considering a demand."8 Prudential, 659 A.2d at 975; Rales, 634 A.2d at 934.

In reviewing a grant of a motion to dismiss, federal courts "are required to accept as true all allegations in the complaint and all reasonable inferences that can be drawn therefrom, and view them in the light most favorable to the plaintiff." Evancho v. Fisher, 423 F.3d 347, 350 (3d Cir.2005). "However, a court need not credit either `bald assertions' or `legal conclusions' in a complaint when deciding a motion to dismiss." Id. at 351.9 Kanter's pleadings fail to create reasonable doubt about the directors' independence and disinterestedness or their valid exercise of business judgment.

Because the New Jersey Supreme Court in PSE & G sought guidance from Delaware's decisional law, we will do the same here. To be independent, "`a director's decision is based on the corporate merits of the subject before the board rather than extraneous considerations or influences.'" Rales, 634 A.2d, at 936 (quoting Aronson, 473 A.2d at 816). Impartiality and objectivity are the primary concerns. "Directorial interest exists whenever divided loyalties are present, or where the director stands to receive a personal financial benefit from the transaction not equally shared by the shareholders." Blasband v. Rales, 971 F.2d 1034, 1048 (3d Cir.1992) (citing Aronson, 473 A.2d at 812). A director who is beholden to an interested director or "so under [another's] influence that [his] discretion would be sterilized" would lack independence. Rales, 634 A.2d at 936.

Kanter contends Philips controlled the board because it owned 71 percent of MedQuist's common stock, a fact she says strengthens the inference that the directors nominated by Philips can exert considerable influence over other directors. She contends that seven directors were either current or former employees of Philips and so were not independent of Philips because they were beholden to it for continued employment, salary and benefits. Thus, she contends a majority of the board could not reasonably be expected to consider Kanter's demand impartially because a majority was controlled by Philips.10

But ownership of a majority stake in MedQuist alone does not necessarily demonstrate a lack of ability to act with the company's best interests in mind. Conversely, that Philips owned such a significant stake in MedQuist may suggest that its interests were aligned with those of other stockholders or that it would benefit from the company's success. McGowan v. Ferro, 859 A.2d 1012, 1029 (Del.Ch. Ct.2004); see Kaster v. Modification Sys. Inc., 731 F.2d 1014, 1019 (2d Cir.1984) (in derivative action, the bare fact of 71 % ownership by an alleged wrongdoer was insufficient to excuse demand). The Aronson court noted that a director's nomination or election at the behest of a controlling shareholder is not enough to show a lack of independence because that "is the usual way a person becomes a corporate director." Aronson, 473 A.2d at 816. The focus should be on the director's "care, attention and sense of individual responsibility to the performance of one's duties, not the method of election, that generally touches on independence." Id.

Despite Kanter's assertions of misfeasance or non-feasance, the only board actions cited in her complaint—those detailing the board of directors' response when it was informed of the allegedly improper billing scheme—suggest that the board reacted appropriately. The board hired two outside firms—law firm Debevoise & Plimpton LLP and accounting firm PricewaterhouseCoopers, LLP—to conduct an independent investigation. Following results of this investigation, the board disciplined several employees; and it notified shareholders and the general public of inaccuracies in its financial reports for the relevant periods. The complaint fails to create a reasonable doubt that the MedQuist board lacked independence as a result of Philips' ownership of a majority stake in MedQuist.

Kanter also contends that defendant A. Fred Ruttenberg, a partner at the law firm Blank Rome Comisky & McCauley LLP11 and an outside MedQuist director, was not independent because his firm had acted as outside counsel to MedQuist. She asserts Ruttenberg was beholden to Philips to maintain the business relationship between his firm and MedQuist.

The Court of Appeals for the Sixth Circuit found no automatic inference of bias or control on the part of a director who had himself given legal assistance to the company as outside counsel.12 In re Gen. Tire & Rubber Co. Sec. Litig., 726 F.2d 1075, 1084 (6th Cir.1984). We agree. Kanter has failed to create a reasonable doubt of Ruttenberg's independence on this ground.13

Kanter also fails to create a reasonable doubt as to the directors' disinterestedness. As noted, "[d]irectorial interest exists when divided loyalties are present, or where the director stands to receive a personal financial gain from the transaction not equally shared by the shareholders." Prudential, 659 A.2d at 971; Aronson, 473 A.2d at 812. "A director is not to be viewed as being `interested' merely because he or she may have approved the challenged transaction or because a shareholder alleges that the directors would be reluctant to sue a fellow corporate decision-maker." PSE & G, 801 A.2d at 314; Prudential, 659 A.2d at 971. "A plaintiff may not bootstrap allegations of futility merely by alleging that the directors participated in the challenged transaction or that they would be reluctant to sue themselves." Prudential, 659 A.2d at 971.

As the District Court noted, the complaint does not place specific blame on any director, nor does it assert they had knowledge of the alleged billing practice or that they benefitted from the use of this practice. In Prudential, the court was faced with similarly unspecific pleadings about director interest. It wrote:

The amended complaint does not single out, among current or past directors, which directors participated in the alleged wrongdoing, which directors "control" the board and which are, in turn, "controlled." No individual directors or group of directors are set apart; in fact, many allegations do not differentiate among the directors and the other defendants. Nor does the amended complaint plead any facts showing that past directors had actual knowledge of the alleged wrongdoings at the time they were committed.

Id., at 971.

Here the complaint fails to allege specific actions by any of the defendants, nor does it assert knowledge of alleged wrongdoings. The District Court found these conclusory allegations insufficient to satisfy the heightened pleading requirements of Rule 23.1. We agree.

Kanter's pleadings are non-specific, and fail to differentiate between directors other than to assert all the Philips-nominated directors were controlled by Philips and that Ruttenberg was beholden to Philips for law firm business. With the exception of Ruttenberg, no specific director is alleged to have any interest in the alleged scheme that would differ from the shareholders'. And in Ruttenberg's case, as noted, that allegation is attenuated.

The bare allegation that a board is interested because its members would be reluctant to sue themselves has been considered and rejected. See Prudential, 659 A.2d at 972; Aronson, 473 A.2d at 816. Kanter has not pled sufficiently particularized facts to show director interest or lack of independence

Kanter has also failed to create a reasonable doubt that the board exercised valid business judgment in the challenged transaction, thus failing to satisfy the second prong of the analysis adopted by the New Jersey Supreme Court in PSE & G.

Aronson and Prudential noted the difficulty of overcoming the valid business judgment presumption in situations where the allegations involved inaction by a board. Aronson, 473 A.2d at 813; Prudential, 659 A.2d at 974-75. As noted, the PSE & G Court held that where inaction is the heart of the allegation, the plaintiff bears the burden of demonstrating a reasonable doubt as to the validity of the business judgment presumption.

Kanter challenges broad inaction by the board. The only actions pleaded—the actions taken by the board after learning of the alleged improper billing scheme—cut against her argument rather than bolster it. Her pleaded facts do not suggest incompetence or misfeasance that might call into question the board's business judgment.

The board's actions included an independent investigation by Debevoise & Plimpton and PricewaterhouseCoopers, a public statement that the company's financial filings and statements during the relevant period should not be relied on, and the discipline of several employees. These appear to be precisely the types of actions an independent board exercising valid business judgment should take when made aware of a serious problem. By themselves they do not create reasonable doubt as to the validity of its judgment.

Kanter does not plead facts showing that the board or Philips were involved in the scheme, that they conceived it or covered it up, or that they acted improperly once made aware of it. The absence of such facts in her pleading—and the presence of facts that undercut her contention—defeats her argument that demand of the board would have been futile. Kanter has failed to satisfy the second prong of the PSE & G test.

The District Court also rejected Kanter's attempt to paint her claim as fitting under In re Caremark International, Inc. Derivative Litigation, 698 A.2d 959 (Del.Ch.1996). The District Court noted that Kanter's claims were "empty of the kind of fact pleading that is critical to a Caremark claim," which would have to show the directors were conscious of the fact they were not doing their jobs. See Guttman v. Huang, 823 A.2d 492 (Del.Ch. 2003). Such pleading should have alleged the lack of an audit committee, or the existence of an audit committee whose work was patently inadequate or that functioned with clear notice of serious accounting irregularities, the District Court noted.

We agree. Kanter has failed to plead there were any red flags that should have alerted the directors to the problems. Rather, she pleaded the opposite, that MedQuist had a functioning audit committee that appears to have been functioning and meeting properly, and that the board's actions when it learned of the problem were responsive and appropriate.

Kanter also appeals the denial of her motion for leave to amend her complaint. Fed.R.Civ.P. 15(a) provides that leave to amend a complaint shall be freely given when justice so requires. Generally, a plaintiff will be given the opportunity to amend her complaint when there is an asserted defense of failure to state a claim. Shane v. Fauver, 213 F.3d 113 (3d Cir. 2000); 6 Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure § 1473 (2d ed.1990). We review for abuse of discretion, and there is none where pleading deficiencies would not have been remedied by proposed amendments. In re Adams Golf, Inc. Sec. Litig., 381 F.3d 267, 280 (3d Cir.2004). Where an amended pleading would be futile, that alone is sufficient ground to deny leave to amend. See Burlington Coat Factory, 114 F.3d at 1434-35; Lake v. Arnold, 232 F.3d 360, 373 (3d Cir.2000).

After oral argument, the District Court denied Kanter's motion for leave to amend. A review of the transcript demonstrates that Kanter offered no new facts demonstrating demand futility.14

The District Court did not abuse its discretion in denying leave to amend the complaint.15

For these reasons, we will affirm the judgment of the District Court.