MEMORANDUM

EDUARDO C. ROBRENO, District Judge.

I. INTRODUCTION

Amidst allegations of corporate misconduct and associated qui tam litigation, Plaintiff Maurice Richelson ("Plaintiff") filed this derivative suit on behalf of nominal-defendant AmerisourceBergen Corporation ("AmerisourceBergen"). Plaintiff names as defendants several current and former directors and officers of AmerisourceBergen ("Defendants"), who move to dismiss the complaint under Rules 12(b)(6) and 23.1 of the Federal Rules of Civil Procedure. Defendants also seek monetary sanctions under Rule 11 in the form of an award of attorneys' fees. For the reasons set forth below, Defendants' motion to dismiss will be granted without prejudice and Defendants' motion for sanctions will be denied.1

II. BACKGROUND

A. Plaintiff's Allegations of Corporate Misconduct

Plaintiff alleges that Defendants breached their fiduciary duties by knowingly engaging or allowing AmerisourceBergen to engage in illegal conduct. More specifically, Plaintiff's derivative suit relates to damages AmerisourceBergen has allegedly sustained in the course of defending itself in a qui tam suit filed in the U.S. District Court for the District of Massachusetts. The complaint in that case ("Qui Tam Complaint") was filed on October 30, 2009, and averred violations of the False Claims Act, Medicaid Anti-Kickback Statute, unjust enrichment and fraud. (Compl. ¶ 3.) The U.S. government and several states ultimately intervened in the suit, which was dismissed without prejudice on April 26, 2010. See United States ex rel. Westmoreland v. Amgen, 707 F.Supp.2d 123, 140-41 (D.Mass.2010). Currently, an amended complaint has been filed and several of the intervening states have filed a Notice of Appeal.

According to Plaintiff, the qui tam suit arose because AmerisourceBergen, through its subsidiaries,2 (1) entered into an agreement with Amgen, Inc. ("Amgen")3 whereby medical providers were offered "kickbacks" to increase drug sales; and (2) encouraged physicians to bill Medicaid and third-party payers for drugs provided to the physicians for free. (Compl. ¶ 4.) This was allegedly accomplished via two contracts entered into by INN and Amgen in 2003 providing INN was to plan "advisory board" meetings for physicians. (Id. ¶ 45.) Under the contracts, the physicians who participated in these meetings would be "reimbursed for travel expenses" and be "paid an honorarium ... just to attend." (Id. ¶ 42.) The Qui Tam Complaint alleges these agreements were a "conduit" to "`provide kickbacks, including sham consultancy fee payments and all expense paid `weekend retreats,' to Aranesp nephrology-specialty customers.'" (Id. ¶ 45.) And, at these meetings, physicians were induced to purchase Aranesp by advocating and encouraging the physicians to bill for "extra product in excess of the labeled fill volume dosage" known as "overfill" that the physicians received for free. (Id. ¶ 40.)

Plaintiff's complaint additionally alleges that INN and Amgen entered into a Group Purchasing Organization Agreement on September 15, 2003 that was followed by a second agreement in 2006 whereby Amgen would pay INN a "volume-based performance administrative fee of up to two percent, plus an ... administrative fee of up to one percent." (Id. ¶ 43.) The Qui Tam Complaint alleges these fees fail to comply with the safe-harbor provisions of the federal Anti-Kickback Statute for group purchasers. (Id. ¶ 47.)

B. Plaintiff's Demand on the Board of Directors

On December 17, 2009, Plaintiff's attorney sent a letter to Richard C. Gozon, Chairman of AmerisourceBergen's Board, describing the allegations set forth in the Qui Tam Complaint. (See id. ¶ 55 (describing the December 17, 2009 letter as a demand on the Board of Directors).) Plaintiff's letter stated:

(Id., Ex. A.) Naming the individual defendants in Plaintiff's complaint as the responsible parties, the letter went on to describe the factual allegations relating to Plaintiff's demand:

(Id.) The letter went on to affirmatively demand that the board of directors take action against the culpable parties to recover damages for the corporation:

(Id.)

Upon receiving Plaintiff's letter, AmerisourceBergen checked the corporation's books and records to ensure Plaintiff had standing to make the demand. It was unable to confirm Plaintiff was, in fact, a shareholder of the corporation. (8/23/2010 Hrg. Tr. 10:12-24.) Thus, on December 28, 2009, AmerisourceBergen responded to acknowledge receipt of Plaintiff's December 17 letter and request additional information:

(Def's Mot. to Dismiss, Ex. A.)4

Plaintiff did not respond to AmerisourceBergen's December 28 letter requesting additional information. Instead, Plaintiff brought this derivative suit alleging he was a "shareholder of AmerisourceBergen at the time of the wrongdoing ... and ... continuously since that time," (Compl. ¶ 53), who is therefore entitled to sue derivatively because the Board did not properly act on Plaintiff's demand. (See id. ¶ 55 ("The Board has acknowledged receipt of the Demand but otherwise has not responded to the Demand nor indicated when a response might be forthcoming.").)

III. DEFENDANTS' MOTION TO DISMISS

Defendants seek to dismiss Plaintiff's suit on two grounds.5 First, Defendants argue Plaintiff does not have standing to sue derivatively. Second, Defendants argue Plaintiff's underlying allegations of a breach of fiduciary duty against the individual defendants fails to state a cognizable claim upon which relief can be granted. Because the Court will dismiss for lack of standing, the Court does not address the second basis for dismissing the action.

A. Standard of Review

In derivative suits in which a defendant seeks to dismiss for lack of standing, the standard of review is drawn from three sources: (1) Rule 12(b)(6), which is the procedural avenue by which the Court may dismiss a complaint; (2) Rule 23.1, which sets forth the applicable pleading standards; and (3) state law, which supplies the substantive requirements for a complaint to meet the particularized standard of Rule 23.1. In sum, coupled with Rule 12(b)(6), the combination of Rule 23.1 and state law furnish a basis for dismissing a plaintiff's derivative suit.6 See, e.g., Fagin v. Gilmartin, 432 F.3d 276, 281 (3d Cir.2005) (evaluating motion to dismiss for improper standing to bring a derivative suit under Rules 12(b)(6) and 23.1); see also Shlensky v. Dorsey, 574 F.2d 131, 142 (3d Cir.1978) (dismissing complaint under Rule 23.1 due to inadequate demand on the board).

1. Applicable Requirements Under Rule 12(b)(6)

In evaluating Defendants' motion, the Court "accept[s] 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 non-moving party." DeBenedictis v. Merrill Lynch & Co., Inc., 492 F.3d 209, 215 (3d Cir.2007) (internal citations omitted). Additionally, the complaint's "[f]actual allegations must be enough to raise a right to relief above the speculative level." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 & n. 3, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). This "requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Id. at 555, 127 S.Ct. 1955 (internal citation omitted). Although a plaintiff is entitled to all reasonable inferences from the facts alleged, a plaintiff's legal conclusions are not entitled to deference and the court is "not bound to accept as true a legal conclusion couched as a factual allegation." Papasan v. Allain, 478 U.S. 265, 286, 106 S.Ct. 2932, 92 L.Ed.2d 209 (1986) (cited with approval in Twombly, 550 U.S. at 555, 127 S.Ct. 1955).

2. Applicable Requirements Under Rule 23.1

Rule 23.1 provides that a complaint in a derivative action must be verified and:

Fed.R.Civ.P. 23.1(b). However, while Rule 23.1 sets forth the procedural requirements for pleading in a derivative suit, the substantive requirements of a demand are determined in accordance with applicable state law. See Kamen v. Kemper Fin. Servs., 500 U.S. 90, 97, 111 S.Ct. 1711, 114 L.Ed.2d 152 (1991) ("[I]n order to determine whether the demand requirement may be excused by futility in a derivative action ... we must identify the source and content of the substantive law that defines the demand requirement in such a suit."); see also Blasband v. Rales, 971 F.2d 1034, 1047 (3d Cir.1992) ("The substantive requirements of demand are a matter of state law."). Accordingly, Delaware law governs the substantive demand requirements in this case because AmerisourceBergen is incorporated in Delaware.7

3. Applicable Requirements Under Substantive State Law

Under Delaware law, a shareholder seeking to maintain a derivative action must "first make demand on that corporation's board of directors, giving the board the opportunity to examine the alleged grievance and related facts and to determine whether pursuing the action is in the best interests of the corporation." Ryan v. Gifford, 918 A.2d 341, 352 (Del.Ch.2007). This requirement relates to the "cardinal precept" of Delaware law that the "directors, rather than the shareholders, manage the business and affairs of the corporation" insofar as a derivative suit is an encroachment on this authority. Aronson v. Lewis, 473 A.2d 805, 811 (Del.1984), overruled on other grounds, Brehm v. Eisner, 746 A.2d 244 (Del.2000).

Nevertheless, the requirement of demand is excused "if a plaintiff can raise a reason to doubt that: (1) a majority of the board is disinterested or independent or (2) the challenged acts were the product of the board's valid exercise of business judgment." Id. This latter basis for satisfying Delaware's demand requirement— so-called "demand futility"—is limited in two ways. First, it is a very onerous standard for a plaintiff to meet. See id. at 352 n. 23 (describing the difficulty of establishing demand futility). Second, a shareholder who makes a demand on the board of directors waives the right to satisfy Delaware's demand requirement in this manner because, by doing so, "a stockholder tacitly acknowledges the absence of facts to support a finding of futility." Spiegel v. Buntrock, 571 A.2d 767, 775 (Del.1990); see Scattered Corp. v. Chi. Stock Exch., 701 A.2d 70, 74 (Del. 1997) ("If the stockholders make a demand ... they are deemed to have waived any claim they might otherwise have had that the board cannot independently act on the demand."), overruled on other grounds, Brehm, 746 A.2d 244; Rales v. Blasband, 634 A.2d 927, 935 n. 12 (Del.1993) ("Where a demand has actually been made, the stockholder making the demand concedes the independence and disinterestedness of a majority of the board to respond."); Spiegel, 571 A.2d at 775 ("A shareholder who makes a demand can no longer argue that demand is excused ....").

Accordingly, once a shareholder makes a demand to initiate litigation, "[t]he effect ... is to place control of the derivative litigation in the hands of the board of directors." Spiegel, 571 A.2d at 775. The board's power in this regard is not unbounded, however, because a stockholder's demand does not "waive the right to claim that demand has been wrongfully refused." Grimes v. Donald, 673 A.2d 1207, 1219 (Del.1996), overruled on other grounds, Brehm, 746 A.2d 244.

But the shareholder bears the weighty burden of rebutting the business judgment rule in such circumstances. As the Delaware Supreme Court has explained:

Spiegel, 571 A.2d at 777 (internal quotations and citation omitted). Thus, the board's actions following a shareholder's demand will be upheld as long as they are (1) reasonable; and (2) made in good faith. See id. ("[W]hen a board refuses demand, the only issues to be examined are the good faith and reasonableness of its investigation."); see also Levine v. Smith, 591 A.2d 194, 213 (Del.1991) (applying the "traditional business judgment rule" and therefore solely evaluating whether the board of directors' response to a shareholder's demand was made on an "informed basis" and in "good faith"), overruled on other grounds, Brehm, 746 A.2d 244.

B. Discussion

Pointing to the fact that Plaintiff's pleading acknowledges making a demand on the board, Defendants correctly note that the business judgment rule governs the board's action. (See Defs.' Mot. To Dismiss, at 13-14.) Plaintiff does not dispute this point, but characterizes the board's response as inadequate under the business judgment rule since the board never decided whether to act on Plaintiff's demand. Thus, the dispute hinges on whether Defendants' response to Plaintiff's demand requesting Plaintiff to confirm his status as a shareholder was a "refusal" of demand or a failure to respond to Plaintiff's demand and, correspondingly, whether Plaintiff's demand was legally sufficient under Delaware law.

Defendants argue Plaintiff's demand was not, itself, sufficient and that their response served to defer action on the demand until Plaintiff responded. On the other hand, according to Plaintiff, the board was not legally entitled to proof of Plaintiff's shareholder status as a condition precedent to evaluating whether to pursue the litigation requested by Plaintiff. Accordingly, Plaintiff asserts the board, by not investigating the charges contained in Plaintiff's demand letter, failed to discharge its obligation to decide whether or not to act on Plaintiff's demand. (See Pl.'s. Mot. In Opp'n To Defs.' Mot. To Dismiss, at 7-9.)

There is scant legal authority addressing whether a board of directors is legally obliged to act on a demand from an alleged shareholder whose status as a shareholder cannot be confirmed by the corporation. However, the mechanics of the derivative suit and applicable precedent confirm that Defendants had no such obligation.

First, both the pleading requirements in Rule 23.1 and substantive Delaware law require, as a preliminary matter, that the party seeking to sue derivatively actually be a shareholder at the time the transaction in question took place. This is the purpose of the requirement that a shareholder suing derivatively plead facts to that effect with particularity. See Fed. R.Civ.P. 23.1 (requiring verification of pleading that "plaintiff was a shareholder or member at the time of the transaction complained of"); see also Ryan, 918 A.2d at 352 n. 23 (noting that Chancery Rule 23.1, which is materially similar to Fed. R.Civ.P. 23.1, requires the complaint to "`allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors'"); Del.Code Ann. tit. 8 § 327 (2010) (requiring it to be "averred in the complaint that the plaintiff was a stockholder of the corporation at the time of the transaction of which such stockholder complains or that such stockholder's stock thereafter devolved upon such stockholder by operation of law").

Second, under Delaware law, the party seeking to sue derivatively must also be a shareholder throughout the duration of the litigation. See Parfi Holding AB v. Mirror Image Internet, Inc., 954 A.2d 911, 935 (Del.Ch.2008) (to have standing to bring a derivative suit, shareholders must "maintain their shareholder status throughout the litigation"). These requirements not only impact who may bring a derivative suit-they also affirmatively limit the class of plaintiffs who may properly make demand on the board. See Potter v. Hughes, 546 F.3d 1051, 1057 (9th Cir.2008) (applying California law, which follows Delaware law, and noting plaintiff was "not qualified to make a demand due to his lack of contemporaneous ownership").

It is true, as Plaintiff notes, that these pleading and substantive requirements do not explicitly impose an obligation on the shareholder making demand to affirmatively prove that he or she is a shareholder in the demand letter. However, these requirements do demonstrate that the board of directors need not act upon a purported shareholder's demand letter if, after reasonable investigation undertaken in good faith, the shareholder's status as a shareholder cannot be confirmed. A corporation's directors, after all, should not be expected or forced to investigate allegations from one who is neither (1) entitled to make the demand; nor (2) file a derivative suit. Cf. In re Schmitz, 285 S.W.3d 451, 455 (Tex.2009) (interpreting Texas law and holding that, although the relevant statute "does not expressly state that a presuit demand must list the name of a shareholder" the statute's "purposes would be defeated otherwise" and therefore "a demand cannot be made anonymously"); see also Model Bus. Corp. Act § 7.42 cmt. (2005) (stating that a shareholder's demand letter should "set forth the facts concerning share ownership").

For precisely this reason, courts have dismissed derivative actions predicated on demand where the demand was deemed legally inadequate based on its inability to inform the board as to the essential facts. See, e.g., Levner v. Saud, 903 F.Supp. 452, 456 (S.D.N.Y.1994) (stating that, under Delaware law, a demand must "at a minimum... identify the alleged wrongdoers, describe the factual basis of the wrongful acts and the harm caused to the corporation, and request remedial relief" and that the demand at issue failed to meet this standard (internal marks omitted) (quoting Allison v. General Motors Corp., 604 F.Supp. 1106, 1117 (D.Del.1985))), aff'd sub nom. Levner v. Prince Alwaleed, 61 F.3d 8 (2d Cir. 1995).

Smachlo v. Birkelo is illustrative of this point. In Smachlo, the board of directors received a purported demand letter from plaintiff's counsel that failed to identify the plaintiff-shareholder by name. 576 F.Supp. 1439, 1444 (D.Del.1983). Instead, the letter in Smachlo only stated that plaintiff's counsel "represent[s] the owners of approximately 2,000 shares of ... stock." Id. (internal marks omitted). In turn, the corporation replied to plaintiff's counsel, advising that the corporation would "not consider utilizing its corporate machinery in the ways requested ... without documentation that its shareholders are requesting such actions." Id. As in the present case, the Smachlo plaintiff failed to respond to the corporation's letter and instead filed a derivative suit. Id. In dismissing the suit for lack of standing, the court found the failure to identify the shareholder significant:

Id. (internal citations omitted). Further, the court stated that the plaintiff had a "duty" to respond to the corporation's request for more information and that, by filing a derivative suit instead, "plaintiff... hindered the demand requirement's important purpose `of allowing corporations to govern themselves to the extent possible, avoiding unnecessary judicial involvement in the internal affairs of business organizations, and discouraging harassing strike suits.'" Id. (quoting 7A Wright & Miller, Federal Practice and Procedure: Civil § 1831, at 382 (1972)).

Plaintiff attempts to distinguish Smachlo by noting that, in this case and unlike Smachlo, Plaintiff was specifically identified by name in the demand letter. However, the concerns the Smachlo court expressed in dismissing the action in that case apply with equal force here. The status of the party in the demand letter— not merely the party's name—is what is significant because, as noted, a non-shareholder has no right to make demand on the board or initiate a derivative suit. See Allison, 604 F.Supp. at 1117 ("Adequacy of demand is tied to its purpose .... [that] directors are answerable to the shareholders and are charged with the duty and responsibility to manage all aspects of corporate affairs." (emphasis added)). Thus, although the demand letter in this case identified the plaintiff by name and stated that he was a shareholder, it was reasonable for the corporation to request that Plaintiff confirm he was a shareholder before proceeding further after Amerisource-Bergen could not confirm the same after checking the corporation's books and records.8 See Smachlo, 576 F.Supp. at 1444 (explaining the board is "not charged with being clairvoyant").

And where, as here, the corporation cannot ascertain through the exercise of due diligence whether the demand letter is coming from a shareholder,9 the board would have been equally justified to discard Plaintiff's letter entirely. Of course, the corporation is free to, as it did here, request additional information which would verify a shareholder's status as a shareholder before proceeding on a demand. Equally, the shareholder is free to either provide the information as requested or, instead, stand on the demand letter and take his or her chances that the court will find the demand letter to be adequate. Under either scenario, whether the shareholder provides additional information as requested by the corporation or chooses to commence litigation, the ultimate legal issue is the same: is the demand letter sent to the board legally adequate? Here, it was not. Because Plaintiff's demand letter failed to apprise the board of the necessary facts attendant to any obligation to investigate whether to bring suit, Defendants' motion to dismiss for lack of standing will be granted without prejudice.10

IV. DEFENDANTS' MOTION FOR SANCTIONS

Asserting the same arguments concerning the Plaintiff's standing to assert a derivative claim, Defendants seek monetary sanctions in the form of an award of attorneys' fees to Defendants. Plaintiff seeks reasonable expenses incurred in opposing the motion.

A. Legal Standard

Under Rule 11, a party's filing represents to the court that the "claims, defenses and other legal contentions are warranted by existing law or by a nonfrivolous argument for extending, modifying, or reversing existing law or for establishing new law." Fed.R.Civ.P. 11(b)(2). "[T]he court may impose an appropriate sanction on any attorney, law firm, or party" that fails to comply with this rule. Fed.R.Civ.P. 11(c)(1). In determining whether sanctions are appropriate, the court applies an objective standard of reasonableness. See Bensalem Twp. v. Int'l Surplus Lines Ins. Co., 38 F.3d 1303, 1314 (3d Cir.1994) (explaining that Rule 11 "imposes an affirmative duty on the parties to conduct a reasonable inquiry into the applicable law and facts prior to filing" and that this standard is met if there is an "objective knowledge or belief at the time of the filing . . . that the claim was well-grounded in law and fact." (internal marks omitted) (quoting Ford Motor Co. v. Summit Motor Prods., Inc., 930 F.2d 277, 289 (3d Cir.1991))). A motion for sanctions should therefore not be granted if there "are grey areas" as to avoid penalizing a "confused but cautious litigant." Id.; see also id. (holding district court abused discretion by awarding sanctions where party filed a Rule 59(e) motion while a petition for rehearing was pending with the court of appeals because "the ripeness of an appeal [was] not clear" and "a party should not be sanctioned . . . for taking reasonable steps to perfect the appeal or clarify its status"). Rule 11 also provides that the "court may award to the prevailing party the reasonable expenses, including attorney's fees, incurred for the motion" for sanctions "[i]f warranted." Fed.R.Civ.P. 11(c)(2).

B. Discussion

Defendants argue sanctions are appropriate because (1) Plaintiff's suit was frivolous in light of the corporation's letter to Plaintiff requesting additional information; and (2) Plaintiff's reference to the corporation's letter in the complaint as an "acknowledgment" was disingenuous — particularly since the corporation's letter to Plaintiff was not affixed to the complaint as an exhibit alongside Plaintiff's demand letter.

Although the Court holds Plaintiff's demand letter did not satisfy the demand requirement for bringing a derivative action, Plaintiff's filing cannot be said to be objectively unreasonable in view of the sparse legal authority addressing whether a board of directors is legally obliged to act on a demand from an alleged shareholder whose status as a shareholder cannot be confirmed. See Bensalem Twp., 38 F.3d at 1314 (holding sanctions inappropriate because the law was unclear as to the merits of the filing). Therefore, the Court will deny Defendants' motion for sanctions.

It will similarly deny to grant Plaintiff attorneys' fees in defending against Defendants' motion for sanctions because Plaintiff (1) did not file a motion requesting as much; (2) has furnished no reasons for the Court to do so other than arguing that Plaintiff's position was not sanctionable; and (3) Defendants' request for sanctions was not objectively unreasonable. Cf. Zion v. Nassan, 727 F.Supp.2d 388, 413, 2010 WL 2926218, at *24 (W.D.Pa. July 23, 2010) (rejecting assertion of "entitlement to an award of counsel fees . . . incurred in responding to . . . `frivolous Rule 11 motion'" where plaintiffs did not file a motion or fully brief the issue, and the Rule 11 motion plaintiffs responded to raised "sufficient matters of concern" even though sanctions were not ultimately awarded).

V. CONCLUSION

For the foregoing reasons, Defendants' motion to dismiss will be granted without prejudice,11 and Defendants' motion for sanctions will be denied. An appropriate Order will follow.

ORDER

AND NOW, this 9th day of September 2010, it is hereby ORDERED that Defendants' motion to dismiss (doc. no. 9) is GRANTED without prejudice;

It is hereby further ORDERED that Defendants' motion for sanctions (doc. no. 20) is DENIED.

AND IT IS SO ORDERED.