PHILIP S. GUTIERREZ, District Judge.
Pending before the Court are Nominal Defendant Bidz.com, Inc.'s Motion to Dismiss, and a Motion to Dismiss filed by Individual Defendants. The Court finds the matter appropriate for decision without oral argument. See Fed.R.Civ.P. 78; L.R. 7-15. After considering the moving and opposing papers, the Court GRANTS Defendant Bidz.com, Inc's Motion to Dismiss, rendering the Individual Defendant's Motion to Dismiss MOOT.
Nominal Defendant Bidz.com, Inc. ("Bidz") is an online jewelry retailer that sells its products through online auctions. See First Amended Consolidated Shareholder Derivative Complaint ("FAC") ¶ 2. The company is managed by a five-member Board of Directors ("the Board"), comprised of the following individuals: founder and Chief Executive Officer David Zinberg ("Zinberg"); Chief Financial Officer, Treasurer, and Secretary Lawrence Y. Kong ("Kong"); Chairman of the Board Peter G. Hanelt ("Hanelt"); Former Chief Financial Officer Gary Y. Itkin ("Itkin"); and Man Jit Singh ("Singh") (collectively, the "Board of Directors"). Id. ¶¶ 23-30. Also relevant are non-board members Chief Technology Officer and President Kuperman ("CTO" or "Kuperman") and Chief Operating Officer Claudia Liu ("COO" or "Liu") (along with the Board of Directors, the "Individual Defendants"). Id. ¶¶ 26-27. From August 2007 to the present ("the relevant period"), Bidz allegedly engaged in several wrongful or deceptive business practices. The Board allegedly knew and approved of "shill bidding"
In November 2007, the alleged problems at the company were revealed when the website Citron Research published two reports ("the Citron reports") that included accusations of shill bidding. See id. ¶ 6, 55-62. Zinberg held a conference call after the first Citron report was published, during which he denied the allegations of shill bidding and defended the company. See id. ¶ 57. Following publication of the Citron reports, the price of Bidz stock dropped approximately 27%. See id. ¶ 59. In addition to the Citron reports accusing Bidz of allowing shill bidding in its auctions, three anonymous complaints were posted on the website Ripoff Report accusing Bidz of shill bidding, and the Better Business Bureau gave Bidz an "F" rating based on complaints of inflated jewelry valuations and fake merchandise. See id. ¶¶ 49-52. As a result of the company's alleged lack of oversight and internal controls, Bidz also allegedly made false and misleading statements in press releases, in SEC filings, and during conference calls. See id. ¶¶ 106-23. Before the accusations of shill bidding surfaced, Zinberg and Liu allegedly engaged in insider trading based on the knowledge of the company's alleged deceptive practices. See id. ¶¶ 169-82.
Plaintiffs Farris Hassan and David Hughes (collectively, "Plaintiffs") were Bidz shareholders during the relevant period, and they brought a derivative action against Bidz and the Individual Defendants for engaging in the allegedly deceptive business practices. Plaintiffs assert causes of action for breach of fiduciary duty, insider selling, violation of California Corporations Code § 25402, waste, and unjust enrichment.
On April 27, 2010, the Court granted Bidz's motion to dismiss for failure to adequately allege that pre-suit demand on the Board of Directors would have been futile. See Dkt. # 78 (the "April 27 Order"). The Court gave Plaintiffs leave to amend and a Verified Amended Consolidated Shareholder Derivative Complaint was filed on May 27, 2010. See Dkt. # 81. Not long after, Bidz filed the pending motion to dismiss for failure to make pre-suit demand and the Individual Defendants filed a motion to dismiss for failure to state a claim.
Bidz's moves to dismiss Plaintiffs' derivative action pursuant to Federal Rules of Civil Procedure 12(b)(6) and 23.1 on the grounds that Plaintiffs failed to make any pre-litigation demand on Bidz's Board of Directors and failed to adequately allege, with the requisite specificity, that demand would have been futile.
Pursuant to Federal Rule of Civil Procedure 12(b)(6), a defendant may move to dismiss a cause of action if the plaintiff fails to state a claim upon which relief can be granted. Although detailed factual allegations are not required to survive a Rule 12(b)(6) motion to dismiss, a complaint "that offers `labels and conclusions' or `a formulaic recitation of the elements of a cause of action will not do.'" Ashcroft v. Iqbal, ___ U.S. ___, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)).
In resolving a Rule 12(b)(6) motion, the Court must engage in a two-step analysis. See id. at 1950. The Court must first accept as true all non-conclusory, factual allegations made in the complaint. See Leatherman v. Tarrant County Narcotics Intelligence & Coordination Unit, 507 U.S. 163, 164, 113 S.Ct. 1160, 122 L.Ed.2d 517 (1993). Based upon these allegations, the Court must draw all reasonable inferences in favor of the plaintiff. See Mohamed v. Jeppesen Dataplan, Inc., 579 F.3d 943, 949 (9th Cir.2009). After accepting as true all non-conclusory allegations and drawing all reasonable inferences in favor of the plaintiff, the Court must then determine whether the complaint alleges a plausible claim to relief. See Iqbal, 129 S.Ct. at 1950. In determining whether the alleged facts cross the threshold from the possible to the plausible, the Court is required "to draw on its judicial experience and common sense." Id. "Rule 8 marks a notable and generous departure from the hyper-technical, code-pleading regime of a prior era, but it does not unlock the doors of discovery for a plaintiff armed with nothing more than conclusions." Id.
Additionally, the Federal Rules of Civil Procedure impose unique pleading requirements in derivative actions. Under Federal Rule of Civil Procedure 23.1, a shareholder seeking to vindicate the interests of a corporation may bring a derivative action on the corporation's behalf only if the shareholder pleads with particularity that a demand was made on the board or the reasons why a demand would have been futile. See Fed.R.Civ.P. 23.1(b)(3). In the context of a pre-suit demand, directors are entitled to a presumption that they fulfilled their fiduciary duties, and "the burden is upon the plaintiff in a derivative action to overcome that presumption" with particularized factual allegations. Beam v. Stewart, 845 A.2d 1040, 1048-49 (Del.2004).
As in the original Complaint, the Amended Complaint includes Plaintiffs' acknowledgement that no pre-suit demand was made upon Bidz's Board of Directors. See FAC ¶ 187. Bidz moves to dismiss the First Amended Complaint on the same grounds that warranted dismissal of the Complaint; that Plaintiffs were required under Delaware law to include particularized factual allegations to create a reasonable doubt that a majority of the board could have remained independent and disinterested in responding to their demand,
In the April 27 Order, the Court applied the Rales demand futility test. See Dkt. #78. Nothing alleged by Plaintiffs changes the Court's reasoning in the April 27 Order and the Court again applies the Rales test to determine whether pre-suit demand on the Board of Directors is excused as futile.
The Federal Rules of Civil Procedure do not specify the type of allegations required to adequately allege that demand would have been futile. As a result, a federal court is required to look to the law of the state of incorporation defining the demand futility requirement. See Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 96, 108-09, 111 S.Ct. 1711, 114 L.Ed.2d 152 (1991). As determined in the April 27 Order, Delaware law applies because Bidz is incorporated in Delaware. See Dkt. # 78 at 5. Depending upon the nature of the allegations in the derivative action, Delaware courts apply one of two demand futility tests: the Aronson test or the Rales test. See Aronson v. Lewis, 473 A.2d 805 (Del.1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del.2000) ("the Aronson test"); Rales v. Blasband, 634 A.2d 927 (Del.1993) ("the Rales test").
Delaware courts apply the Aronson test if the derivative action challenges a particular decision or transaction of the corporation's board of directors. See Rales, 634 A.2d at 933 (citing Pogostin v. Rice, 480 A.2d 619, 624 (Del.1984)); In re Computer Sciences Corp. Derivative Litig., 2007 WL 1321715, at *4 (C.D.Cal. Mar. 26, 2007) (Pfaelzer, J.). Under the Aronson test, the plaintiff must plead particularized facts that create a reasonable doubt that either (1) the directors were disinterested and independent, or (2) the challenged transaction was the product of a valid exercise of business judgment. See Aronson, 473 A.2d at 812.
On the other hand, Delaware courts apply the Rales test if the derivative suit challenges an act that does not constitute a business decision by the board, or in circumstances in which the board composition has since changed. See Computer Sciences, 2007 WL 1321715, at *4; see also Guttman v. Huang, 823 A.2d 492, 499-500 (Del.2003) (applying the Rales test where the plaintiffs alleged that director defendants individually breached their fiduciary duties to the corporation and failed "to ensure that [the corporation] had in place the financial control systems necessary to ensure compliance with applicable accounting standards."). The Rales test simply requires the plaintiff to offer particularized allegations to create a reasonable doubt as to the first prong of the Aronson test:
Rales, 634 A.2d at 934.
Plaintiffs' Amended Complaint suggests that demand on the Board would have been futile for the following reasons: (1) Zinberg dominates and controls the board; (2) each member of the board faces a substantial likelihood of liability related
"`Where the subject of a derivative suit is not a business decision of the Board but rather a violation of the Board's oversight duties,' the trial court must apply the Rales test." In re Intel Corporation Derivative Litigation, 621 F.Supp.2d 165, 170 (D.Del.2009) (emphasis added) (quoting Wood v. Baum, 953 A.2d 136, 140 (Del. 2008)). Plaintiffs balk at Bidz's suggestion that the Rales test applies to considered inaction by a Board of Directors, and cites to the Seventh Circuit's decision in In re Abbott Labs. Derivative Shareholders Litigation, 325 F.3d 795 (7th Cir.2001) for the proposition the Aronson test applies where a corporation's Board of Directors makes an informal but informed and conscious decision not to act. See Opp'n 9:21-10:3 (citing In re Abbott Labs., 325 F.3d at 805-07). This Court is required to apply Delaware law, however, and as noted by a district court in Delaware facing a similar question in light of Abbott Labs, "the Court is unable to identify any Delaware authority holding that the Aronson standard should be applied to allegations of conscious inaction." In re Intel, 621 F.Supp.2d at 173. In fact, "Delaware courts have explained that `[w]here the complaint does not address an action taken by the board ... or alleges that the board failed to act, the inquiry narrows'" because a court "cannot address the business judgment of an action not taken and, therefore, should concern itself with what is now known as the Rales test." Id. (citing In re infoUSA, Inc. S'holders Litig., 953 A.2d 963, 986 (Del.Ch.2007)); see also Seminaris v. Landa, 662 A.2d 1350, 1354 (Del.Ch.1995) ("[P]laintiff does not challenge any specific board action that approved or ratified these alleged wrongdoings. Therefore, Plaintiff must satisfy the one step test announced in Rales to demonstrate that he was excused from making a demand.").
Under the Rales test, Plaintiffs must offer particularized factual allegations that raise a reasonable doubt that a majority of the Board of Directors was capable of properly exercising independent and disinterested business judgment in responding to a demand. See Rales, 634 A.2d at 934. At the time the lawsuit was commenced, the Board of Directors was comprised of Defendants Zinberg, Kong, Hanelt, Itkin, and Singh.
Director independence exists when a director's "decision is based on the corporate merits of the subject before the board rather than extraneous considerations or influences." Aronson, 473 A.2d at 816. When alleging lack of independence in the demand futility context, "a plaintiff charging domination and control of one or more directors must allege particularized facts manifesting a direction of corporate conduct in such a way as to comport with the wishes or interests of the [person] doing the controlling." Id. (internal quotation and citation omitted). According to the Amended Complaint, the Board of Directors is dominated and controlled by Zinberg as primarily shown by (1) his 62% ownership interest in the company (when combined with his sister's shares), and (2) the Board of Directors' issuance to him of stock options to purchase six million shares of common stock that vested immediately. See FAC ¶¶ 189(a)-(b).
In the April 27 Order, this Court considered the allegation that a majority of the Board lacked independence because of Zinberg's 62% ownership interest. See Dkt. # 78, at 9-10. Plaintiffs' allegation in the Amended Complaint has not changed, nor has the Court's analysis. A majority ownership interest alone cannot establish dominance over the Board. See Beam, 845 A.2d at 1051 (finding that Martha Stewart's 94% ownership interest, even when combined with allegations of a professional and social relationship with a fellow director, were insufficient to rebut the presumption that the director remained independent from her influence); see also Aronson, 473 A.2d at 816 (even majority ownership "does not strip directors of presumptions of independence, that their acts have been taken in good faith and in the best interests of the corporation"). Similarly, Plaintiffs' claim that Itkin is beholden
For the first time the Amended Complaint, Plaintiffs also allege that the members of the Board were beholden to Zinberg as shown by their willingness to grant him stock options to purchase six million shares of common stock that vested immediately. See FAC ¶ 189. This transaction took place in 2004, a time when Singh and Hanelt were not yet on the Board. See id. ¶ 147. There are three primary problems with Plaintiffs' allegation that the 2004 Board of Directors' decision to award stock options to Zinberg shows those Board members' lack of independence for purposes of demand in this case. First, while the Amended Complaint indicates that Kong and Itkin were members of the 2004 Board of Directors, see FAC ¶ 147, there is no indication that Kong and Itkin voted to give Zinberg those stock options, see id. It could hardly be the case that Kong and Itkin are beholden to Zinberg if they voted to not give Zinberg the options. Failing to state whether Kong and Itkin voted to award the options falls well short of the requirement to provide "particularized" factual allegations related to director independence. Aronson, 473 A.2d at 816.
Moreover, even if Itkin and Kong did vote to award those options, Delaware law has erected a high hurdle to challenging compensation packages. See Brehm v. Eisner, 746 A.2d 244, 263, 266 (Del.2000) (absent corporate waste, "[i]t is the essence of business judgment for a board to determine if a particular individual warrants large amounts of money;" otherwise, courts are invited "to become super-directors, measuring matters of degree in business decision making and executive compensation"). In fact, a proper challenge to a compensation package requires a showing of bad faith or "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. at 263. Here, Plaintiffs allege only that Zinberg was awarded stock options, not that the options were awarded in bad faith, for an improper purpose or without any consideration. Finally, Bidz correctly points out that even if Kong and Itkin were beholden to Zinberg in 2004—the time of the stock option award—there is no particularized allegation suggesting that Zinberg's undue influence continued to 2009, when this case was filed. See Mot. 10:19-21.
For these reasons, Plaintiffs have failed to offer particularized factual allegations that raise a reasonable doubt that a majority of the Board of Directors were independent.
A reasonable doubt as to director disinterest will also excuse demand in shareholder derivative cases. See Rales, 634 A.2d at 934. Director interest exists where the director "will receive a personal financial benefit from a transaction that is not equally shared by the stockholders [or] where a corporate decision will have a materially detrimental impact on a director, but not on the corporation
Under its Articles of Incorporation, Bidz limits director liability to breaches of fiduciary duty to the full extent permitted under Delaware law. See January 22, 2010 Request for Judicial Notice, Ex. A, Art. 5, § 6 (Articles of Incorporation); July 12, 2010 Request for Judicial Notice, Ex. D, at 13 (2009 SEC Form 10-K); see also Opp'n 17:12-18:2 (recognizing the limitation on Bidz's director's liability via the "exculpatory clause"). Such a limitation of liability is permitted under Delaware law, see 8 Del.Code § 102(b)(7), which permits exculpation for fiduciary breaches unless made in bad faith, see In re Walt Disney Co. Derivative Litigation, 906 A.2d 27, 65 (Del.2006) ("Section 102(b)(7) ... authorizes Delaware corporations, by a provision in the certification of incorporation, to exculpate their directors from monetary damage liability for a breach of the duty of care. That exculpatory provision affords significant protection to directors of Delaware corporations. The statute carves out several exceptions, however, including most relevantly `for acts or omissions not in good faith.'" (citation omitted)). Therefore, in order to establish that demand on the Board would have been futile given the potential for personal liability, Plaintiffs must provide particularized allegations that any alleged fiduciary breaches were made (a) by a majority of the Board and (b) in bad faith. In order to allege bad faith, Plaintiffs must offer particularized allegations that the Directors intended to breach their fiduciary duties or acted with a "conscious disregard" toward their fiduciary duties. See Disney, 906 A.2d at 67; see also Stone v. Ritter, 911 A.2d 362, 370 (Del.Supr.2006) (Where "directors are exculpated from liability except for claims based on `fraudulent,' `illegal' or `bad faith' conduct, a plaintiff must also plead particularized facts that demonstrate the directors acted with scienter, i.e., that they had actual or constructive knowledge that their conduct was legally improper.").
Plaintiffs allege in the Amended Complaint that demand is excused based on director interest because: (1) each member of the board faces a substantial likelihood of liability in connection with shill bidding at Bidz; (2) each member of the board faces a substantial likelihood of liability for retaining or allowing Bidz to use "suspect" accountants; (3) Zinberg faces a substantial likelihood of liability for insider trading;
The gravamen of Plaintiffs' demand futility allegation related to shill bidding is that each individual director had knowledge of the existence of shill bidding at Bidz, "yet failed to take any action to curb the shill bidding." FAC ¶ 190. As many Delaware courts have explained, however, this type of "failure of oversight" theory is "possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment." In re Caremark Intern. Inc. Derivative Litig., 698 A.2d 959, 967 (Del.Ch.1996). To prove such a claim, a plaintiff is required to demonstrate gross negligence, such that "the directors were conscious of the fact that they were not doing their jobs." Guttman, 823 A.2d at 505-06. Plaintiffs must allege particularized facts demonstrating that the directors "knew that they were not discharging their fiduciary obligations" and failed to act "in the face of a known duty to act, thereby demonstrating a conscious disregard for their responsibilities." Stone, 911 A.2d at 369-70. Here, Plaintiffs fail to allege particularized facts demonstrating that the Outside Directors actually knew about the alleged shill bidding, failed to act in light of such knowledge, and did so knowing their conduct breached their fiduciary duties to the company or otherwise broke the law.
First, Plaintiffs suggest that Itkin, Hanelt and Singh each knew about the existence of shill bidding as a result of a few different market reports that included coverage of Bidz. For example, Plaintiffs claim that "[t]he Board members were on notice of the shill bidding practice at Bidz, at the absolute latest, when the Citron reports emerged in November 2007." FAC ¶ 190(g). As mentioned, Citron Research published two reports online in November of 2007 stating that "[o]ne common complaint that we see online is `shill bidding'" and "Citron Research believes the bidding process at Bidz.com leaves a lot of unanswered question." Id. ¶¶ 55-56. The day after the first Citron report was released, Zinberg held a conference call and
Notably absent from the Amended Complaint, however, is any allegation—let alone a particularized allegation—that Itkin, Hanelt or Singh ever saw or knew about the existence of any of these reports. As the Court explained in the April 27 Order, "[s]uch warnings, and others alleged in the Complaint, are more akin to `red flags' that the Board `should have recognized' rather than particularized allegations that each member of the Board `knew' of the alleged problems." See Dkt. #78, at 8. There is nothing suggesting that the Board was ever presented with these "red flags," and although there are conclusory allegations that the Board consciously disregarded the warnings, Plaintiffs' conclusion requires the Court to make a logical leap it cannot do in light of the requirement that Plaintiffs provide particularized factual allegations of, at the least, knowledge. See Abbott Labs., 325 F.3d at 799 (holding that the Board of Directors had knowledge of potential misconduct where "formal certified" warning letters were sent from the U.S. Food and Drug Administration directly to the Board); see also In re Pfizer Inc. S'holder Derivative Litig., 722 F.Supp.2d 453, 460 (S.D.N.Y.2010) (letters to the board from the FDA); In re Intel, 621 F.Supp.2d at 174 ("Plaintiff identifies a number of so-called `red flags' [but] fails to identify what the Directors actually knew about the `red flags' and how they responded to them"); In re Citigroup, 964 A.2d at 128 ("Plaintiffs fail to plead particularized facts suggesting that the Board was presented with `red flags' alerting it to potential misconduct at the Company." (internal quotations omitted)). At the most, the factual allegations related to "red flag" reports expose Itkin, Hanelt and Singh to a "mere threat of liability," but are not so severe that they face the required "substantial likelihood of liability." See Rattner v. Bidzos, 2003 WL 22284323, at *13 (Del.Ch. Oct. 7, 2003) ("claimed red flags are only useful when they are either waived in one's face or displayed so that they are visible to the careful observer").
Nor does the allegation that each of the members of the Board knew about shill bidding because, collectively, the "Individual Defendants knew that Bidz's core business revolved around its online auction processes, [and] that the Company's revenue is dependent on its ability to generate a high volume of traffic to its website" excuse demand. See FAC ¶ 65. Just because Bidz's business is based on online auctions does not mean that the directors knew about any alleged shill bidding, and the generalized allegations that the "Individual Defendants" as a whole understood
Similarly, the remaining allegations related to the Board of Directors' knowledge are not sufficient to plead demand futility. For example, the Amended Complaint alleges that the Board of Directors had knowledge of shill bidding because of the existence of Bidz's "Corporate Governance Principles." See FAC ¶ 68. These principles provide for "regularly-scheduled presentations to the Board from finance, sales and marketing and the major lines of business and operations of the Company," and give the Board "complete access to any information about the Company that it deems necessary or appropriate to carry out its duties." Id. Moreover, the "CEO and other executive officers are responsible for running the Company's day-to-day operations and appropriately informing the Board of the status of such operations." Id. Even assuming that these "Corporate Governance Principles" were followed, there is still no particularized factual allegation suggesting that Itkin, Singh or Hanelt actually knew of any shill bidding and consciously decided not to act. In addition, the fact that a case was pending in this Court against Bidz and Zinberg does not establish Hanelt, Itkin or Singh's knowledge of shill bidding at the time the Complaint in this case was filed, nor that the other case—in which they were not named defendants—creates a substantial likelihood of liability here. See FAC ¶ 52 (referencing Tidenberg v. Bidz.com, Inc., et al., No. CV 08-5553 PSG (FMOx) (C.D.Cal. Aug. 11, 2008)).
Plaintiffs offer other allegations that "the members of the Board knew" of certain facts, and therefore knew that shill bidding was occurring at Bidz. Specifically, the Board allegedly "knew" that 44% of actions did not result in transactions, see FAC ¶ 190(c), "knew" the average selling price for items sold in the auctions, see FAC ¶ 190(d), and "knew" that sales of "high end items to hundred thousand dollar accounts were not being completed," see FAC ¶ 190(f). These allegations, suffer from many of the pleading inadequacies identified above. Not only are the allegations that the collective Board of Directors "knew" of certain business facts insufficient in and of themselves as they do not identify who had the knowledge or how it was acquired,
Finally, Plaintiffs point to statements made to the Securities and Exchange
Plaintiffs have failed to offer particularized allegations that Individual Defendants Itkin, Hanelt and Singh intended to breach their fiduciary duties or acted with "conscious disregard" toward those duties. See Disney, 906 A.2d at 67. As a result, the Court cannot conclude that any of them faces a substantial likelihood of liability related to shill bidding at Bidz.
As an independent basis for excusing demand, Plaintiffs allege that each of the members of the Board face a substantial likelihood of liability for retaining or allowing Bidz to use Stonefield as Bidz's accounting auditor. See FAC ¶¶ 191-92. After this Court's April 27 Order, Plaintiffs
Similarly, though not cited as a reason for excusing demand in the Amended Complaint, Plaintiffs allege that the Individual Defendants breached their fiduciary duties to Bidz by using a suspect Jewelry Appraiser. See id. ¶¶ 85-90. Not only do the allegations fail to amount to a charge of bad faith or intentional breach of fiduciary duties by the Outside Directors, but the allegations also fail to link the appraiser's alleged improprieties to Bidz. For example, the Amended Complaint says that the owner and manager of the appraiser, Norman Monteau, "admitted that he had falsely appraised jewelry sold via an online auction." Id. ¶ 86. Notably absent from that same paragraph, however, is (a) when Monteau admitted to that (i.e., before or after demand should have been made), (b) Monteau's, or anyone else's, identification of Bidz as the online auction site benefiting from the false appraisals, and (c) that the Board of Directors knew or should have known of Monteau's appraisal record at the time of demand.
Finally, Plaintiffs allege that demand is excused because Itkin, in particular, has an interest in this case due to the fact that the SEC is investigating Bidz's accounting practices from February 1999 until 2000, a period when Itkin was CFO. See FAC ¶ 195. By the Court's interpretation, the premise of the allegation related to Itkin is that because there is an SEC investigation into accounting practices occurring before the relevant period in this case that may expose Itkin to separate liability, Itkin is not disinterested for purposes of judging demand in this case. Yet, the test for demand considers the likelihood that a director would expose himself to personal liability if he responds to a demand. See Guttman, 823 A.2d at 503 ("the key inquiry in the Rales analysis is whether the plaintiffs have pled facts that show that these five directors face a sufficiently substantial threat of personal liability to compromise their ability to act impartially on a demand"). As indicated above, Plaintiffs have not made such a showing with respect to Itkin and the existence of an SEC investigation does not alter that fact.
Because Plaintiffs have failed to make particularized factual allegations that the Outside Directors faced a substantial likelihood of personal liability if they acted upon a demand, the Court finds that Plaintiffs have failed to raise a reasonable doubt as to their disinterest in assessing such a demand.
Having found each of Plaintiffs' allegations insufficient in isolation, the Court is required to determine whether the totality of Plaintiffs' allegations demonstrate a reasonable doubt about the Board's impartiality. See Harris v. Carter, 582 A.2d 222, 229 (Del.Ch.1990). As discussed at length above, Rule 23.1 raises the pleading standard in this case and requires that the allegations in the Complaint
As Plaintiffs have failed to adequately allege that demand would have been futile, the Court does not excuse their failure to make pre-suit demand upon the Board. Accordingly, the Court GRANTS Bidz's motion to dismiss without leave to amend.
The Individual Defendants move to dismiss the Complaint under Rule 12(b)(6) for failure to state a claim. As was the case with the April 27 Order, because the Court grants Bidz's motion to dismiss, the Individual Defendants' motion to dismiss is MOOT.
Based on the foregoing, the Court GRANTS Bidz's motion to dismiss without leave to amend, rendering the Individual Defendants' motion to dismiss MOOT.
