MELINDA HARMON, District Judge.
Plaintiff Douglas Freuler, derivatively on behalf of Parker Drilling Company ("Parker Drilling" or the "Company"), alleges that Individual Defendants, all of whom are officers and Directors of Parker Drilling, failed to adequately oversee corporate compliance activities that were (1) in violation of the Foreign Corrupt Practices Act of 1977 ("FCPA"), 15 U.S.C. Sec. 78dd-1 et seq.,
Pending before the Court are the following motions:
Federal Rule of Civil Procedure 8(a)(2) provides, "A pleading that states a claim for relief must contain ... a short and plain statement of the claim showing that the pleader is entitled to relief." When a district court reviews a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), it must construe the complaint in favor of the plaintiff and take all well-pleaded facts as true. Randall D. Wolcott, MD, PA v. Sebelius, 635 F.3d 757, 763 (5th Cir.2011), citing Gonzalez v. Kay, 577 F.3d 600, 603 (5th Cir.2009).
"While a complaint attacked by a Rule 12(b)(6) motion to plaintiff's obligation to provide the `grounds' of his `entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do ....'" Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1964-65, 167 L.Ed.2d 929 (2007) (citations omitted). "Factual allegations must be enough to raise a right to relief above the speculative level." Id. at 1965, citing 5 C. Wright & A. Miller, Federal Practice and Procedure § 1216, pp. 235-236 (3d ed. 2004) ("[T]he pleading must contain something more ... than ... a statement of facts that merely creates a suspicion [of] a legally cognizable right of action"). "Twombly jettisoned the minimum notice pleading requirement of Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957) ["a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief"], and instead required that
Federal Rule of Civil Procedure 23.1(b), addressing pleading requirements for derivative actions, imposes a higher pleading standard than Rule 12(b)(6) and requires that
When a plaintiff's complaint fails to state a claim, the court should generally give the plaintiff at least one chance to amend the complaint under Rule 15(a) before dismissing the action with prejudice. Great Plains Trust Co. v. Morgan Stanley Dean Witter & Co., 313 F.3d 305, 329 (5th Cir.2002) ("District courts often afford plaintiffs at least one opportunity to cure pleading deficiencies before dismissing a case, unless it is clear that the defects are incurable or the plaintiffs advise the court that they are unwilling or unable to amend in a manner that will avoid dismissal."); United States ex rel. Adrian v. Regents of the Univ. of Cal., 363 F.3d 398, 403 (5th Cir.2004) ("Leave to amend should be freely given, and outright refusal to grant leave to amend without a justification ... is considered an abuse of discretion. [citations omitted]").
Federal Rule of Civil Procedure 15(a) provides in relevant part,
In a stockholder derivative suit, a stockholder pursues a cause of action that belongs to the corporation. Aronson v. Lewis, 473 A.2d 805, 811 (Del.1984), overruled on other grounds, Brehm v. Eisner, 746 A.2d 244 (Del.2000). Parker Drilling is a Delaware corporation. Because Federal Rule of Civil Procedure 23.1 does not identify applicable substantive standards, the particularity of a plaintiff's pleadings is governed by the standards of the state of incorporation, here, Delaware. Midwestern Teamsters Pension Trust Fund v. Baker Hughes, Inc., Civ. A. No. H-08-1809, 2009 WL 6799492, *4 ((S.D.Tex. May 7, 2009)) citing Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 92-99, 111 S.Ct. 1711, 114 L.Ed.2d 152 (1991), adopted, 2010 WL 3359560 (S.D.Tex. May 26, 2010).
In Delaware "[t]he decision whether to initiate or pursue a lawsuit on behalf of the corporation is generally within the power and responsibility of the board of directors. This follows from the `cardinal precept of the General Corporation law of the State of Delaware ... that directors, rather than shareholders, manage the business and affairs of the corporation.'" In re Citigroup Inc. Shareholder Deriv. Litig., 964 A.2d 106, 120 (Del.Ch.2009), citing Aronson, 473 A.2d at 811. Under Delaware law, "[b]ecause directors are empowered to manage, or direct the management of, the business and affairs of the corporation, 8 Del. C. Sec. 141(a), the right of a stockholder to prosecute a derivative suit is limited to situations where the stockholder has demanded that the directors pursue the corporate claim and they have wrongfully refused to do so or where demand is excused because the directors are incapable of making an impartial decision regarding such litigation." Rales v. Blasband, 634 A.2d 927, 932 (Del. 1993). See also Citigroup, 964 A.2d at 120 ("to cause the corporation to pursue litigation, a shareholder must either (1) make a pre-suit demand by presenting the allegations to the corporation's directors, requesting that they bring suit, and showing that they wrongfully refused to do so, or (2) plead facts showing that demand upon the board would have been futile. Where, as here, a plaintiff does not make a pre-suit demand of the board of directors, the complaint must plead with particularity facts showing that a demand would have been futile.").
Under Delaware law, directors are entitled to the presumption that they were faithful to their fiduciary duties. Beam ex rel. Martha Stewart Living Omnimedia v. Stewart, 845 A.2d 1040, 1048 (Del.2004). In the context of a pre-suit demand, plaintiff bears the burden of rebutting that presumption in a shareholder derivative action by pleading particularized facts as to each director creating a reasonable doubt about the independence of the majority of the board of directors. Id. at 1048-49.
Where the plaintiff challenges a decision of the board, to determine whether a demand on the Board should be excused as futile, the court must apply a test established in Aronson v. Lewis [the "Aronson test"], 473 A.2d 805, 814 (Del. 1984), overruled on other grounds, Brehm v. Eisner, 746 A.2d 244 (Del.2000): "whether under the particularized facts alleged, a reasonable doubt is created that: (1) the directors are disinterested and independent [or] (2) the challenged transaction was otherwise the product of a valid exercise of business judgment." Rales, 634 A.2d at 933, citing Aronson, 473 A.2d at 814. Demand is futile, and thus excused, only if the majority of the directors have so personal a stake in the matter at issue of the proposed litigation that they would be unable to make a proper business judgment if a demand is made. Aronson, 473 A.2d at 814. See also Beam v. Stewart, 845 A.2d 1040, 1046 (Del.2004) ("Demand is excused where a board is evenly divided between interested and disinterested directors."). "`Directorial interest exists whenever divided loyalties are present, or a director has received or is entitled to receive, a personal financial benefit from
Nevertheless, "[n]ot all derivative suits fall into [this] paradigm." Rales, 634 A.2d at 933. "Where there is no conscious decision by directors to act or refrain from acting, the business judgment rule has no application." Id., citing Aronson, 473 A.2d at 813. In such a circumstance the court must apply what is known "Rales test" and "determine whether or not the particularized factual allegations of a derivative stockholder complaint create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand. If the derivative plaintiff satisfies this burden, then demand will be excused as futile." Id. at 934 (in essence eliminating the second prong of the Aronson test). See also Citigroup, 964 A.2d at 120 (Where "plaintiffs complain of board inaction and do not challenge a specific decision of the board, there is no `challenged transaction,'" and the ordinary Aronson [two-prong] analysis does not apply. Instead to show demand futility where the subject of the derivative suit is not a business decision of the board, the plaintiff must allege particularized facts that "create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand."), citing Rales, 634 A.2d at 934.
To adequately plead a derivative suit, a plaintiff must meet stringent requirements of factual particularity; conclusory statements and mere notice pleading are insufficient. Brehm, 746 A.2d at 254. The "pleader must set forth ... particularized factual statements that are essential to the claim. Such facts are sometimes referred to as `ultimate facts,' `principal facts' or `elemental facts.'" Id. The plaintiff is not required to plead evidence. Id.
Failure to make a demand is not excused merely because directors would have to sue themselves. Citigroup, 964 A.2d at 121. Instead, "demand will be excused based on a possibility of personal director liability only in the rare case when a plaintiff is able to show director conduct that is `so egregious on its face that board approval cannot meet the test of business judgment, and a substantial likelihood of director liability therefore exists,'" and not just a mere threat. Id., citing Aronson, 473 A.2d at 815. The shareholder plaintiff must plead futility of a demand for a majority of the director defendants, with individual allegations for each director. Id. at 121 & n. 36.
In In re Caremark Int'l Inc. Derivative Litig., 698 A.2d 959, 967 (Del.Ch.1996) (emphasis in original), the court distinguished two different contexts for a breach of duty to exercise appropriate attention or oversight: (1) "a board decision that results in a loss because the decision was ill advised or `negligent'" and (2) an "unconsidered failure of the board to act in circumstances in which due attention would, arguably, have prevented the loss." "The first class of cases will typically be subject to review under the director-protective business judgment rule, assuming that the decision made was the product of a process that was either deliberately considered in good faith or was otherwise
Thus to establish oversight liability a plaintiff must show with particularized facts that the directors knew they were not discharging their fiduciary obligations or that the directors demonstrated a conscious disregard for their responsibilities such as failing to act in the face of a known duty to act. Caremark, 698 A.2d at 971. The test in rooted in concepts of bad faith; indeed a showing of bad faith is a necessary condition to director oversight liability. Id. Under Delaware law, the mere fact that a violation occurred does not demonstrate that the board acted in bad faith. Stone, 911 A.2d at 373. See also Desimone v. Barrows, 924 A.2d 908, 940 (Del. Ch.2007) ("Delaware courts routinely reject the conclusory allegation that because illegal behavior occurred, internal controls must have been deficient, and the board must have known so."); In re IAC/InterActiveCorp., 478 F.Supp.2d 574, 605 (S.D.N.Y.2007) ("Delaware courts recognize that no rationally designed system of information and reporting `will remove the possibility that the corporation will violate laws or regulations.'") (quoting Caremark, 698 A.2d at 970). Moreover, while to excuse demand, a derivative action plaintiff need only raise a reasonable doubt about the board's ability to impartially consider the demand, Rales, 634 A.2d at 934, where the plaintiff alleges the board cannot because it faces potential liability, the plaintiff needs to show "a substantial likelihood of personal liability exists since the mere threat of liability is insufficient." Aronson, 473 A.2d at 814.
Delaware law imposes a stringent standard for corporate waste and mandates that the plaintiff plead "`facts showing that no person of ordinary sound business judgment could view the benefits received in the transaction as a fair exchange for the consideration paid by the corporation.'" Lear Corp., 967 A.2d at 656, quoting Harbor Fin. Partners v. Huizenga, 751 A.2d 879, 892 (Del.Ch.1999). Moreover if any reasonable person reviewing the facts alleged in the complaint might conclude that the transaction "`made sense, the judicial inquiry ends.'" Id., quoting id.
Plaintiff Douglas Freuler ("Freuler"), at all relevant times a shareholder of Parker
In addition, in violation of the reporting requirements under the Securities Exchange Act of 1934, Individual Defendants caused or permitted the Company to file false and misleading statements with the U.S. Securities and Exchange Commission ("SEC") that did not reflect the amount and purpose of the payments made in violation of the FCPA.
Nevertheless some Individual Defendants signed certifications pursuant to the Sarbanes Oxley Act of 2002 ("SOX"), misrepresenting that the financial statements accurately reflected in all material respects the financial condition of the Company.
The Company's illegal bribery activities were investigated by federal authorities. On March 3, 2010 the Individual Defendants caused Parker Drilling to state in its Annual Report that the U.S. Department of Justice ("DOJ") and the SEC ("SEC") had "identified issues relating to potential noncompliance with applicable laws and regulations, including the FCPA, with respect to operations in Kazakhstan and Nigeria." The complaint charges that Individual Defendants wrongfully abdicated their fiduciary duties to Parker Drilling, failed to ensure compliance with Parker Drilling's Code of Conduct, the FCPA, and other laws, failed to establish, maintain, and enforce adequate oversight and internal controls over the Company's operations in Kazakhstan and Nigeria, failed to adequately train its employees, representatives, agents, and/or contractors about compliance with the FCPA, and breached their fiduciary duties to Parker Drilling by not directing Parker Drilling to sue the directors and officers for causing and/or allowing it to engage in violations of the FCPA. The Individual Defendants have caused Parker Drilling to acknowledge that the situation in Kazakhstan could negatively impact some of its business operations in that country and have a material adverse impact on the entire company, including its operations, financial condition, and liquidity. The Company's Code of Conduct stated, "Failure by any director, officer, employee or other representative to observe the letter and the spirit of our code of conduct may result in serious damage to our business—including the possibility of legal prosecution, monetary losses and, of great importance, harm to [Parker Drilling's] strong reputation."
In addition to the damage to its goodwill and reputation, the complaint asserts that Parker Drilling has also incurred significant expenses, over $20 million, in investigating such illegal activities.
The complaint divides Parker Drilling's director and officer Defendants into two overlapping groups: (1) "Individual Defendants," comprised of Parker Drilling's directors and officers Robert L. Parker, Jr.,
Individual Defendants owe fiduciary duties of candor, good faith, and loyalty to the Company and to its shareholders. Because of their positions of control and authority, they allegedly exercised control over the wrongful acts described in the complaint. Because of their executive and directorial positions, each Individual Defendant knew or should have know that doing business in countries like Kazakhstan and Nigeria involved a high risk of corruption and that Parker Driller was doing business there without establishing and maintaining a FCPA compliance program designed to detect, deter, and ultimately prevent improper payments to foreign officials and other third parties. The complaint quotes a statement from President and Chief Executive Officer to the Company's directors, officers and other representatives urging integrity (doing "the right thing-in all of our actions"), which "is the foundation supporting the four pillars of our business: safety, training, technology and performance," and meeting the "highest ethical and business standards," which requires more than compliance with the law. The complaint charges Individual Defendants with breaching their duties of loyalty and good faith in failing to maintain adequate internal controls in compliance with FCPA or its underlying directives regarding books, records, and accounting, designed to uncover the type of improper payments made by Parker Drilling.
Individual Defendants because of their positions exercised control over Parker Drilling with regard to the illegal acts, the public statements issued by the Company, and the financial statements it filed with the SEC. They also had access to non-public information about the company's financial condition and operations and its use of customs agencies in Kazakhstan and Nigeria. They failed to establish internal controls and accounting systems adequate to detect or deter improper payments violating the FCPA, which violations they knew about from those controls the Company did have in place.
The Audit Committee Charter indicates that Defendants Plank, Donnelly, Gibson and King are responsible for assisting the Board in overseeing the performance of the Company's internal audit function and the Company's compliance with legal and regulatory requirements, including reviewing the appointment and replacement of the director of internal auditing, reviewing significant reports prepared by the internal auditing department and management responses, and discussing
As noted, the FCPA bars U.S. issuers or anyone acting on their behalf from giving bribes or kickbacks to any foreign official to obtain or retain business. It imposes accounting control requirements that the issuer (a) make and keep books, records and accounts, which in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer; and (b) devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management's general or specific authorization; and (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with Generally Accepted Accounting Principles ("GAAP") or any other criteria applicable to such statements, and to maintain accountability for assets. Under state fiduciary law, the Board, with the assistance of the Audit Committee, is ultimately responsible for establishing and maintaining these FCPA-compliant programs. The complaint claims that Defendants failed to ensure that Parker Drilling complied with the FCPA's requirements.
On May 12, 2008 Individual Defendants caused Parker Drilling to file its Quarterly Report on Form 10-Q for the period ending March 31, 2008 with the SEC. In that 10-Q Parker Drilling summarily stated that the DOJ and the SEC had opened investigations on possible violations of the FCPA by Parker Drilling, including in Kazakhstan and Nigeria. Parker Drilling provided no additional information in the next 20 months, but continued to make similar boilerplate disclosures about the investigations, so that its shareholders were unable to obtain more information about the nature and scope of these investigations. On March 3, 2010, the Individual Defendants caused Parker Drilling to
On May 7, 2010, Individual Defendant caused Parker Drilling to repeat those statements and to warn of serious adverse consequences, including injunctions, disgorgement, fines, penalties, modifications to business practices and compliance programs, deferred prosecution agreements, guilty pleas, retention of a monitor to oversee Parker Drilling's compliance with the FCPA, ending or modifying existing business relationships, and other sanctions, as a result of the discovery of the illegal activities.
An April 2009 news report stated that Kazakhstan's State Agency for the Control of Economic and Corruption Crimes was investigating Parker Drilling for possible criminal tax evasion. The complaint claims that these reports show that Individual Defendants failed to establish and maintain adequate internal controls to ensure compliance with the FCPA, federal securities laws and accounting regulations; to enforce the Company's policies and programs that were designed to prevent violations of existing federal laws, regulations, policies and programs; and to adequately train the Company's employees representatives, agents, and/or contractors to comply with the FCPA, or establish a monitoring program for its foreign agents and distributors to comply with the FCPA. Individual Defendants purportedly "made no effort to enforce the company's own anti-bribery policies and turned a willful and blind eye to the kickbacks and bribes funded and paid by Parker Drilling." These failures caused Parker Drilling to hire Panalpina World Transport (Holding) Ltd. and its subsidiaries (collectively, "Panalpina"). Panalpina recently settled charges of FCPA violations in several countries, including Kazakhstan and Nigeria, by paying more than $11 million in disgorgement and $70 million in criminal fines.
The complaint also asserts that Parker Drilling's employees, representatives, agents, and/or contractors, authorized by Individual Defendants as well as by Parker Drilling's accountants and auditors, paid or offered to pay bribes to foreign officials in Kazakhstan and Nigeria in order to enrich themselves and advance Parker Drilling's business interests. The complaint contends that the bribes were not accurately described in the Company's books and records.
In the Company's March 3, 2010 Form 10-K, signed by Parker, Jr., Mannon, Brassfield, Donnelly, Gibson, Goldman, King, McKee, Plank, and Reinfrank, the Individual Defendants caused the Company to identify "solicitation by government officials for improper payments or other forms of corruption" as one risk of its international operations. The complaint complains of Parker Drilling's ongoing operational issues with Kazakh customs. Freuler identifies as an example, in July 2004, when then Chief Executive Officer Robert L. Parker, Jr. became involved in trying to obtain the release of Parker Drilling's Rig 257 "Sunkar" drilling platform, seized by the Kazakh customs.
Arguing that making a demand upon the Board would be futile, Plaintiff points out that Individual Defendants have refused to take action against those, including themselves, who are responsible for Parker Drilling's business in Kazakhstan and Nigeria and for failing to establish, maintain, and enforce adequate internal controls for compliance with the FCPA. They have not sued themselves or their fellow directors and allies in the top ranks of the Company for the violations of law, people with whom they have professional relationships, who are friends, and with whom they have entangling financial alliances and interests and dependencies.
The complaint maintains that illegal payments made on behalf of Parker Drilling did not appear on the Company's books and records, in violation of the FCPA, thereby demonstrating Individual Defendants' decision to deprive the Company of FCPA-compliant internal controls. The government investigations show that the improper payments occurred over years. The lack of internal controls is highlighted by the fact that Parker Drilling operated in countries with rampant corruption. The
Moreover members of the Board have benefitted and continue to benefit from the alleged wrongdoing and have engaged in such conduct to preserve their positions of control and accompanying perquisites. Thus they are incapable of exercising independent, objective judgment in deciding whether to bring this action. They also receive substantial remuneration from the Company, which is increased by the wrongdoing resulting in economic benefits to Parker Drilling.
Individual Defendants also face substantial liability under the Securities Exchange Act because the improper payments were not properly reflected on the Company's Forms 10-Q and 10-K financial statements, filed with the SEC. Individual Defendants, as control persons under Section 20(a), 15 U.S.C. § 20(a), caused or allowed these materially misleading forms to be filed by failing to disclose the proper characterization, amount, and purpose of the illegal payments.
The complaint also asserts that Individual Defendants (including Brassfield, Mannon, and Parker, Jr.) are also potentially liable for signing the SOX certifications, making them responsible for establishing and maintaining disclosure controls and internal controls over financial reporting, for each of the Forms 10-Q and 10-K from December 31, 2005 through September 10, 2009, making demand futile. Because the certifications were known to the Audit Defendants and the Individual Defendants
Finally the complaint alleges that the Individual Defendants are not disinterested based on the "insured versus insured" exclusion in the directors' and officers' liability insurance, which they caused Parker Drilling to purchase for their protection with corporate funds, i.e., monies belong to its stockholders. Due to changes in the policy's language in the last few years, according to the complaint, in an "insured versus insured exclusion" the policy now eliminates coverage for any action brought directly by Parker Drilling against these Defendants (the "insured versus insured exclusion for actions by the Board against its members"). If a suit is brought derivatively, however, coverage would exist and provide a basis for Parker Drilling to effectuate a recovery.
The complaint alleges five counts, each against all Individual Defendants: (1) Count One for intentional breach or reckless disregard of their fiduciary duties; (2) Count Two for abuse of their abilities to control and influence Parker Drilling; (3) Count Three for Gross Mismanagement of Parker Drilling's business and affairs; (4) Count Four for waste of corporate assets; and (5) Count Five for unjust enrichment as a result of the compensation and director remuneration they received while breaching their fiduciary duties to Parker Drilling.
Defendants, who join the motions and incorporate the motions of each other, make the same basic arguments, although they cite different authority. They contend that because Plaintiff did not make a demand on the Board before filing this derivative action, the focal issue here is whether he has shown exceptional circumstances that excuse him from having to do so. They argue that he fails to make the requisite particularized pleading with respect to each of the thirteen Individual Defendants to show futility. Desimone v. Barrows, 924 A.2d 908, 943 (Del.Ch.2007) ("Delaware law does not permit the wholesale imputation of one director's knowledge to every other for demand excusal purposes. Rather, a derivative complaint must plead facts specific to each director, demonstrating that at least half of them could not have exercised disinterested business judgment in responding to the demand."); Khanna v. McMinn, No. 20545-NC, 2006 WL 1388744, *14 (Del.Ch. May 9, 2006) (demand futility analysis "is fact-intensive and proceeds director-by-director and transaction-by-transaction"); In re Emerging Communications, Inc. Shareholders Litig., No. Civ. A. 16415, 2004 WL 1305745, *38 (Del.Ch. May 3, 2004) ("The liability of the directors must be determined on an individual basis because the nature of their breach of duty (if any), and whether they are exculpated from liability for that breach, can vary for each director."). Furthermore the analysis must be for each claim asserted. See, e.g., Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 833 A.2d 961, 977 n. 48 (Del.Ch.2003) ("Demand futility analysis is conducted on a claim-by-claim basis"), aff'd, 845 A.2d 1040 (Del.2004).
Nominal Defendant maintains that Plaintiff fails to plead particularized facts creating a reasonable doubt that a majority of the current directors are disinterested and independent for his claim excusing demand based on the directors' oversight duties. Rales, 634 A.2d at 934. As noted by this Court, Delaware law requires a plaintiff pleading director oversight liability to provide facts creating a "substantial likelihood of liability" and make a showing that the directors had actual knowledge that they were not discharging their fiduciary duties. Stone, 911 A.2d at 370 (for director oversight liability plaintiff must show that (1) directors failed to implement any reporting or information system or controls, or if they did, they consciously failed to monitor or oversee its operations; plaintiff must show that the directors knew they were not discharging their fiduciary obligations). Here Plaintiff assumes that because a FCPA investigation of potential non-compliance is ongoing, Parker Drilling must be culpable, but no conclusions of wrongdoing have been reached. Even where wrongdoing can be shown, it must still be known to and ignored by the directors before an oversight claim is actionable. Midwestern Teamsters Pension Trust Fund, Inc. v. Baker Hughes, Inc., Civ. A. No. H-08-1809, 2009 WL 6799492, *6, 8 (S.D.Tex. May 7, 2009), adopted, 2010 WL 3359560 (S.D.Tex. May 26, 2010); Desimone, 924 A.2d at 940. Instead Plaintiff's pleadings in essence are based on a legally improper inference—problems occurred, therefore they were known, and they were not addressed. Baker Hughes, 2009 WL 6799492, *6 ("Delaware courts routinely reject the conclusory allegation that because illegal behavior occurred, internal controls must have been deficient, and the board must have known so."), quoting Desimone, 924 A.2d at 940. Furthermore, "[n]o rationally designed system of . . . reporting will remove the possibility that the corporation will violate laws or regulations." Id.
Nominal Defendant discusses two Delaware cases with more specificity in pleading than that in the instant action, but which were still dismissed by Delaware courts for insufficient particularized pleading in order to show that courts, applying Delaware law, view oversight liability very narrowly.
In Guttman v. Huang, 823 A.2d 492, 493 (Del.Ch.2003), a shareholders derivative suit against all directors alleging they were liable for insider trading for personal advantage (identifying how much stock each sold on what date for what amount) while in possession of material, non-public information and/or failure to prevent accounting irregularities that led to a restatement of its financial statements for the period when the stock sales occurred, the plaintiff alleged that the directors faced a substantial likelihood of liability. Of the seven-member board, the court found at most that allegations against only two provided facts that might show compromised independence and a substantial likelihood of liability. "[T]he mere fact that two of the directors sold large portions of their stock does not . . . support the conclusion that those two directors
In the second case, Baker Hughes, 2009 WL 6799492, adopted, 2010 WL 3359560 (S.D.Tex. May 26, 2010), the shareholders complain of a failure of oversight by directors that led to a $44 million fine and a guilty plea by a subsidiary of the company. They pointed out that previously Baker Hughes had admitted to FCPA problems. The United States Magistrate Judge refused to find these allegations sufficient to show that the board knew of, but failed to address, FCPA compliance concerns; she recommended dismissal of the complaint, explaining that "Plaintiff's conclusory allegations leave one free to imagine that either Baker Hughes had the most comprehensive compliance program in the industry, or the most deficient." Id. at *8. The district court adopted her recommendation and dismissed the complaint. 2010 WL 3359560 (S.D.Tex. May 26, 2010).
Nominal Defendant insists that in the case sub judice, Plaintiff lacks even the bare facts alleged in Guttman and Baker Hughes. For example, it fails to identify the reports allegedly prepared by the internal auditing department and independent accountants and reviewed by the Audit Committee, how each Individual Defendant knew the Company was violating internal controls it had in place for compliance with the FCPA and how and why they were inadequate, what controls were violated, when, how and by whom, how the Directors gained this knowledge,
Plaintiff further pleads that demand should be excused because of the Board's potential liability for various vague and unclear affirmative actions such as allowing the Company to operate and use custom agents in Kazakhstan and Nigeria without first establishing adequate and effective controls and account systems. If Plaintiff is challenging an improper act of the Board, he must satisfy the Aronson test, but has not. Regarding the first prong, requiring specific facts to create a reasonable doubt that directors could impartially evaluate a demand, "directors are entitled to a presumption that they were faithful to their fiduciary duties," In the context of presuit demand, the burden is upon the plaintiff in a derivative suit to overcome that presumption. Beam ex rel. Martha Stewart Living Omnimedia, 845 A.2d at 1048-49; see also Levine v. Smith, 591 A.2d 194, 207 (Del.1991) ("When the challenged transaction is approved by [the] board, the majority of whom are outside, non-management directors, `a heavy burden falls on [plaintiffs] to avoid presuit demand.'"), quoting Grobow v. Perot, 539 A.2d 180, 190 (Del.1988), overruled on other grounds, Brehm v. Eisner, 746 A.2d 244 (Del.2000). Plaintiff has not overcome such a presumption.
The complaint states very little about the Board's purported improper actions. Asserting corporate waste, it says nothing about what a majority of directors did that constituted waste, what they actually knew about the action, or how they damaged the company. The claim for unjust enrichment is similarly conclusory, with only a vague reference to compensation and director remuneration. There is no specific allegation as to what they each did that abused their control, what misrepresentations they each made to shareholders nor why the misrepresentations were material nor how they misled shareholders nor what they should have disclosed nor how they knew the statements were misleading.
Last of all the insured v. insured clause exclusion argument has been regularly rejected by courts. See, e.g., Caruana v. Saligman, Civ. A. No. 11135, 1990 WL 212304, *4 (Del.Ch. Dec.21, 1990); Stoner v. Walsh, 772 F.Supp. 790, 805 (S.D.N.Y.
Nominal Defendant closes its brief by stating that Plaintiff, if he believes his suit has merit, should present his claim to the Board for action. Because he has not done so, his complaint should be dismissed with prejudice.
Noting that the enhanced pleading requirements for excuse from making a demand on the board of directors in a shareholder derivative action under Federal Rule of Civil Procedure 23.1 and Delaware law have long been established, as is apparent from this Court's summary of the applicable law and the allegations in Plaintiff's amended complaint, the Court fully agrees with Defendants that Plaintiff has clearly not satisfied them here. Moreover he has asserted claims against Individual Defendants collectively and fails to distinguish their individual roles with respect to all claims.
Accordingly the Court
ORDERS that Defendants' motions to dismiss (#17, 18, 19, 20, and 22) the amended complaint are GRANTED WITHOUT PREJUDICE. Because the Court finds no "undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party, and futility of amendment" under Federal Rule of Civil Procedure 15(a) here, Plaintiff is GRANTED LEAVE to file an amended complaint within twenty days of entry of this order if he can meet the pleading requirements set out in this opinion or he shall inform the Court that he does not wish to pursue this suit. If an amended pleading is filed, Defendants shall file a timely response.
Judge Lake held that "[t]hese conclusory allegations are insufficient to raise an inference that a majority of Cornell's directors face a substantial likelihood of liability for breach of fiduciary duty." 2005 WL 2121554 at *9. Quoting Caremark, he opined that
Id. at *10, citing Caremark, 698 A.2d at 971. Judge Lake pointed out that plaintiff failed to allege any facts demonstrating that the defendants knew that management had misrepresented the company's financial condition or that the directors faced a substantial likelihood of liability for breaching their fiduciary duty of due care. Id. at *10.