in violation of SEC rules, GAAP, and Sagent's publicly-filed Audit Committee Charter. Plaintiffs also assert that the individual defendants were aware that Sagent had improperly recognized revenue, and that they caused Sagent to publicly disseminate inaccurate information regarding the company's financial condition, so that the company's common stock would trade at inflated prices.
Finally, plaintiffs allege that during the period between late October 1999 and late February 2000, Bahles, Zicker, Shapero, Lounibos, and Walker ("the selling defendants") used nonpublic information regarding Sagent's true financial condition to profit from the sale of large amounts of Sagent stock, and that the individual defendants aided and abetted the selling defendants' use of this nonpublic information to sell their personal holdings of Sagent stock at inflated prices.*fn4
Plaintiffs assert five causes of action.*fn5 Against the selling defendants, plaintiffs allege a claim of insider trading, in violation of California Corporations Code § 25402, and a common law claim of breach of fiduciary duty for insider trading. Against all the individual defendants, plaintiffs allege a claim of breach of fiduciary duty for disseminating misleading information to the public; a claim of breach of fiduciary duty for failure to maintain accounting controls; and a claim of waste of corporate assets.
Defendants now seek an order dismissing all causes of action for failure to state a claim. Alternatively, they seek an order staying the case pending resolution of a shareholder derivative suit based on allegations similar to the allegations in this case, and which is presently pending in the Superior Court of California, County of Santa Clara.
A. Legal Standard
A court should dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim only where it appears beyond doubt that the plaintiff can prove no set of facts in support of the claim which would entitle the plaintiff to relief. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); Pillsbury, Madison & Sutro v. Lerner, 31 F.3d 924, 928 (9th Cir. 1994). Review is limited to the contents of the complaint. Allarcom Pay Television, Ltd. v. Gen. Instrument Corp., 69 F.3d 381, 385 (9th Cir. 1995). All allegations of material fact are taken as true and construed in the light most favorable to the nonmoving party. Smith v. Jackson, 84 F.3d 1213, 1217 (9th Cir. 1996). Conclusory allegations of law and unwarranted inferences, however, are insufficient to defeat a motion to dismiss. Associated Gen. Contractors v. Metro. Water Dist. of So. Cal., 159 F.3d 1178, 1181 (9th Cir. 1998). In dismissing for failure to state a claim, "a district court should grant leave to amend even if no request to amend the pleadings was made, unless it determines that the pleading could not possibly be cured by the allegation of other facts." Doe v. United States, 58 F.3d 494, 497 (9th Cir. 1995) (citations omitted).
B. Shareholder Derivative Suits
A shareholder does not have standing to sue in an individual capacity for injury to the corporation. William Meade Fletcher, et al., 13 Fletchter Cyclopedia of the Law of Private Corporations, § 5939 (perm.rev. ed. 2002). Such an action must be brought as a derivative action — "an equitable remedy in which a shareholder asserts on behalf of a corporation a claim not belonging to the shareholder, but to the corporation." Id. Once the action, if filed in federal court, has been characterized as direct or derivative, the applicable procedural rules are determined by federal law. Sax v. World Wide Press, Inc., 809 F.2d 610, 613 (9th Cir. 1987).
Federal Rule of Civil Procedure 23.1 governs derivative actions to "enforce a right of a corporation" when the corporation itself has failed to enforce a right which could properly be asserted by it in court. Id. (citation and quotation omitted). Rule 23.1 requires that a shareholder seeking to file a derivative action allege that he or she made a pre-suit demand on the corporation's board of directors, or allege facts showing why such a demand would have been futile. The complaint must "allege with particularity" the efforts made by the plaintiff to obtain the action the plaintiff desires from the directors or comparable authority, or the reasons for the plaintiff's failure to obtain the action or for not making the effort. Fed.R.Civ.P. 23.1.
C. Defendants' Motions to Dismiss
Sagent moves to dismiss the complaint on the ground that plaintiffs did not make a demand on Sagent's board of directors, as required by Delaware law, and that they fail to plead particularized facts excusing the demand, as required under Rule 23.1. The individual defendants move to dismiss on the ground that plaintiffs fail to allege facts sufficient to state a claim for insider trading, for breach of fiduciary duty, or for waste of corporate assets.
1. Futility of demand
Plaintiffs concede that they did not demand that Sagent's board of directors institute this action against the individual defendants, but they contend that the demand would have been futile because three of the six members of the board were incapable of making an independent and disinterested decision.
Under Erie, a federal court sitting in diversity jurisdiction must follow state substantive law. Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78, 58 S.Ct. 817, 82 L.Ed. 1188 (1938); see also Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941) (district court must follow substantive law, including choice-of-law rules, of forum state). Rule 23.1 is procedural only, and does not supply the substance of the demand requirement. Kamen v. Kemper Fin. Servs., 500 U.S. 90, 96, 111 S.Ct. 1711, 114 L.Ed.2d 152 (1991) (Rule 23.1 "clearly contemplates both the demand requirement and the possibility that demand may be excused," but "does not create a demand requirement of any particular dimension"). Because the function of the demand requirement in delimiting the respective powers of the shareholders and the directors to control corporate litigation "is a matter of `substance,' not `procedure,'" id. at 96-97, 111 S.Ct. 1711, the court must apply the law of the forum state — here, California.
Under the "internal affairs" doctrine, which is followed in most states, the law of the state of incorporation governs liabilities of officers or directors to the corporation and its shareholders. Shaffer v. Heitner, 433 U.S. 186, 215 n. 44, 97 S.Ct. 2569, 53 L.Ed.2d 683 (1977); see also CTS Corp. v. Dynamics Corp. of America, 481 U.S. 69, 89, 107 S.Ct. 1637, 95 L.Ed.2d 67 (1987); First Nat'l City Bank v. Banco Para El Comercio Exterior de Cuba, 462 U.S. 611, 621, 103 S.Ct. 2591, 77 L.Ed.2d 46 (1983); Rest. (Second) of Conflict of Laws § 309 and comment (a). Internal corporate affairs involve those matters that are peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders. Edgar v. MITE Corp., 457 U.S. 624, 645, 102 S.Ct. 2629, 73 L.Ed.2d 269 (1982); see Rest. (Second) of Conflict of Laws § 313, comment (a).
In general, courts in California follow this rule and apply the law of the state of incorporation in considering claims relating to internal corporate affairs. See Cal. Corp. Code § 2116 (directors of foreign corporation transacting intrastate business are liable to corporation for making of unauthorized dividends, purchase of shares or distribution of assets of false certificates, reports or public notices or other violation of official duty according to applicable laws of state of incorporation);*fn6 see also Batchelder v. Kawamoto, 147 F.3d 915, 920 (9th Cir. 1998); Davis & Cox v. Summa Corp., 751 F.2d 1507, 1527 (9th Cir. 1985). Accordingly, in considering the contours of the demand requirement — when it is required and when it is excused — this court must look to the law of Delaware, the place where Sagent is incorporated. In re Silicon Graphics, 183 F.3d at 989-90.
Under Delaware law,
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