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In Re Hp Derivative Litigtion

September 25, 2012


The opinion of the court was delivered by: Edward J. Davila United States District Judge

ORDER GRANTING MOTIONS TO DISMISS (Re: Docket Nos. 99, 102, 103)

Presently before the court are three motions filed by Defendants to dismiss Plaintiffs Louis Levine, Teamster Union Local # 142 Pension Trust, Key West Police & Fire Pension Fund, and 19 Louisiana Municipal Police Employees Retirement System's (collectively, "Plaintiffs") complaint. 20 Defendants are Marc L. Andreessen, Lawrence T. Babbio ("Babbio"), Sari M. Bauldauf 21 ("Bauldauf"), Rajiv L. Gupta ("Gupta"), John H. Hammergren ("Hammergren"), Mark V. Hurd 22 ("Hurd"), Joel Z. Hyatt ("Hyatt"), John R. Joyce ("Joyce"), Robert L. Ryan ("Ryan"), Lucille S. 23 Salhany ("Salhany"), G. Kennedy Thompson ("Thompson"), and Nominal Defendant Hewlett-24 Packard Company ("HP"). 25 For the reasons discussed below, Defendants' motions to dismiss will be granted with leave 26 to amend. 27 28 "Board" or the "Directors"). See Consolidated Verified Shareholder Derivative Complaint 5 ("Consolidated Complaint"), Docket No. 60. According to the Consolidated Complaint, Plaintiffs 6 are shareholders of HP and were shareholders at the time of the alleged wrongdoing. Id. ¶¶ 8-11. 7


This is a shareholders' derivative action suit brought for the benefit of HP against Hurd, HP's former Chief Executive Officr ("CEO"), and the members of HP's Board of Directors (the 4 HP is a Delaware corporation, headquartered in Palo Alto, California, which provides technology 8 solutions to consumers, businesses, and institutions globally. Id. ¶ 12. Hurd, a citizen of California, 9 served as HP's Chairman of the Board and CEO until his resignation on August 6, 2010. Id. ¶ 13. 10 Complaint alleges the following facts:

Hurd and the other members of the Board, particularly the members of the HR and Compensation Committee (Babbio, Gupta, Hammergren, Hyatt, and Salhany) knew that Hurd's 14 ¶ 39. Nevertheless, on January 27, 2010, the Board filed with the SEC and disseminated to HP 16 shareholders the 2010 Proxy Statement, which falsely represented several times that Hurd's Employment Agreement was still valid and in effect. Id. ¶ 39-40. These misstatements were 18 material to shareholders' votes on, among other things, the election of Hurd for another term as 19 HP's director and the approval of the Stock Incentive Plan, pursuant to which the Board sought and 20 received authority to issue additional shares of stock for use in compensating HP's officers, 21 directors, and employees, including Hurd. Id. ¶ 41. 22

The ten individually named defendants are directors of HP. Id. ¶¶ 14--23. The Consolidated Employment Agreement had expired on March 29, 2009 and had not been renewed or extended. Id. 15 In May 2010, HP received allegations that Hurd engaged in misconduct. Id. ¶ 48. Jodie Fisher, a former independent contractor at HP, claimed through her attorney that Hurd had sexually 24 harassed her and which exposed Hurd and HP to liability. Id. ¶ 48. HP's Board initiated and 25 oversaw a formal investigation upon learning of the charges. Id. ¶ 49. The investigation concluded 26 that Hurd had violated HP's Standards of Business Conduct. Id. ¶ 51. Specifically, the investigation 27 found that Hurd had a close personal relationship with Ms. Fisher; that Hurd failed to disclose that 28 relationship to the Board of Directors; and that there were numerous instances where Hurd submitted inaccurate expense reports that were intended to conceal or had the effect of concealing 2

Hurd's personal relationship with Ms. Fisher. Id. ¶ 50. 3

(the "Separation Agreement"). Id. ¶ 54; Decl. of Brian Danitz Ex. H, Docket No. 100-8. Under the 6 terms of the Separation Agreement, Hurd was entitled to receive a cash severance payment and 7 non-severance elements consisting of certain limited rights to previously granted equity awards. 8

Consol Compl. ¶ 54.The Separation Agreement granted Hurd: 9

On August 6, 2010, HP announced that Hurd had resigned his positions as HP's Chairman, CEO, and President, and that Hurd and HP had entered into a Separation Agreement and Release 5

* a "Separation Amount" of $12,224,693 in cash; 10

* the right to exercise each of the outstanding stock options to acquire Company common stock that is vested and exercisable by Hurd during the Company's next open trading window, tentatively scheduled to commence August 23, 2010 and end September 7, 2010, in accordance with the terms of the Company's 2004 Stock Incentive Plan;

* the right to pro-rata vesting and settlement, at the same time and on the same terms as other 13 HP employees, of 330,177 performance-based restricted stock units granted to Hurd on January 17, 2008 based on actual HP performance during the three-year performance period ending on October 31, 2010;

* the right to settlement on December 11, 2010 of 15,853 time-based restricted stock units granted to Hurd on December 11, 2009 at a price equal to the lesser of (a) the closing price of HP's common stock on August 6, 2010 or (b) the per share closing trading price of HP common stock on December 11, 2010;

* Hurd's unpaid base salary accrued up to the Separation Date; and 18

* vested amounts payable to Hurd under the Company's 401K plan. 19

Id. ¶ 54; Danitz Decl. Ex. H, Docket No. 100-8. 20

21 to be named to Oracle's Board of Directors. Consol. Compl. ¶ 58. On September 7, 2010, HP filed 22 an action against Hurd asserting claims for breach of contract and threatened misappropriation of 23 trade secrets in connection with Hurd's employment at Oracle. Id. ¶ 61. On September 20, 2010, HP 24 announced that it had resolved the HP/Hurd Action. As part of that resolution, Hurd agreed to 25 forfeit his right to the 346,030 shares of HP stock that were included in the separation package. Id. 26 27 approving the Separation Agreement. Count I alleges that the Directors wasted corporate assets by 28

On September 6, 2010, Oracle announced that Hurd had joined Oracle as President and was Plaintiffs allege that the Board had committed waste or otherwise breached its duties to HP by approving the Separation Agreement. Id. ¶¶ 80-82. Count II alleges that the Directors "breached 2 their fiduciary duties of loyalty and good faith by awarding [Hurd] excessive and unwarranted 3 severance payments and benefits, and by knowingly failing to inform themselves regarding all 4 material information in making that decision." Id. ¶¶ 83-86. Count III asserts an unjust enrichment 5 claim against Hurd. Id. ¶¶ 87-89. Count IV alleges that all defendants breached their fiduciary 6 duties of loyalty and good faith by filing false and misleading statements regarding Hurd's 7

Employment Agreement in HP's 2010 Proxy Statement. Id. ¶¶ 90-93. Count V alleges a similar 8 claim under Section 14(a) of the Securities Exchange Act. Id. ¶¶ 94-98. 9


A. Motion To Dismiss

Under Federal Rule of Civil Procedure 12(b)(6), a complaint may be dismissed if it fails to state a claim upon which relief can be granted. "To survive a motion to dismiss, a complaint must 13 contain sufficient factual matter, accepted as true, 'to state a claim to relief that is plausible on its 14 face.'" Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009) (internal citations omitted). "A claim has 15 facial plausibility when the plaintiff pleads factual content that allows the court to draw the 16 reasonable inference that the defendant is liable for the misconduct alleged." Id. Recitals of the elements of a cause of action and conclusory allegations are insufficient. Id. 18

Federal Rule of Civil Procedure 8(a) requires a plaintiff to plead each claim with sufficient 19 specificity to "give the defendant fair notice of what the . . . claim is and the grounds upon which it 20 rests." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (internal quotations omitted). 21

Moreover, the factual allegations "must be enough to raise a right to relief above the speculative 22 level" such that the claim "is plausible on its face." Id. at 555, 570. In considering the sufficiency 23 of a claim, the court must accept as true all of the factual allegations contained in the complaint. Id. 24 at 555--56. However, the court is not required to accept as true legal conclusions cast in the form of 25 factual allegations. Id. at 555. 26

27 pleading could not possibly be cured by the allegation of other facts. Lopez v. Smith, 203 F.3d 28

If dismissal is granted under Rule 12(b)(6), leave to amend should be allowed unless the 1122, 1130 (9th Cir. 2000). If amendment would be futile, however, a dismissal may be ordered 2 with prejudice. Dumas v. Kipp, 90 F.3d 386, 393 (9th Cir. 1996) (internal quotations omitted). 3

4 on behalf of a corporation a claim belonging not to the shareholder, but to the corporation. Aronson 5 A.2d 244 (Del.2000)). Pursuant to Federal Rule of Civil Procedure 23.1, which governs derivative 7 actions, a shareholder's complaint must state with particularity "any effort by the plaintiff to obtain 8 the desired action from the directors" and "the reasons for not obtaining the action or not making 9 the effort." Fed. R. Civ. P. 23.1. Rule 23.1 imposes a higher standard of pleading than Rule 8(a). 10

When a federal court sits in diversity, it looks to the forum state's choice of law rules to

12 determine the controlling substantive law. Patton v. Cox, 276 F.3d 493, 495 (9th Cir. 2002). Here, 13 because HP has its corporate headquarters and main place of business in Palo Alto, California, the 14 court applies California state law. 15

California, "the law of the state of incorporation governs liabilities of officers or directors to the

corporation or its shareholders." In re Sagent Tech., Inc., Derivative Litig., 278 F. Supp. 2d 1079, 18

A shareholder derivative suit is a uniquely equitable remedy in which a shareholder asserts

v. Lewis, 473 A.2d 805, 811 (Del. 1984) (overruled on other grounds by Brehm v. Eisner, 746 6

B. Choice of Law 11

Pursuant to the "internal affairs" doctrine, which is generally followed by courts in

1086 (N.D. Cal. 2003); see Cal. Corp. Code § 2116. Additionally, the demand requirements for a 19 shareholder derivative suit are determined by the law of the state of incorporation. Kamen v. 20

Kemper Financial Services, Inc., 500 U.S. 90, 96 (1991) ("the function of the demand doctrine . . . 21 is a matter of 'substance' not 'procedure'. . . . [Courts] must apply the demand futility exception as 22 it is defined by the law of the state of incorporation"); Potter v. Hughes, 546 F.3d 1051, 1054 n. 1 23

(9th Cir. 2008) ("the substantive demand requirement is an issue of state law"). Accordingly, 24 because HP is incorporated in Delaware, the court applies Delaware law to determine whether 25 demand is excused. 26

28 business and affairs of the corporation, and accordingly, the directors are responsible for deciding

For the

C. Demand Futility

Under Delaware law, "directors of a corporation and not its shareholders manage the whether to engage in derivative litigation." Levine v. Smith, 591 A.2d 194, 200 (Del. Ch. 1991) 2

(internal citation omitted) (overruled on other grounds by Brehm, 746 A.2d 244). Because directors 3 are empowered to manage or direct the business affairs of the corporation, a shareholder seeking to 4 bring a derivative action must first make a demand on that corporation's board of directors, giving 5 the board an opportunity to examine the alleged grievance to determine whether pursuing the 6 action is in the best interest of the corporation. Aronson, 473 A.2d at 812. The right of a 7 shareholder to prosecute a derivative suit is limited to situations where the shareholder has 8 demanded that the directors pursue the claim and they have wrongfully refused to do so or where 9 demand is excused because the directors are incapable of making impartial decisions regarding 10 such litigation. Rales v. Blasband, 634 A.2d 927, 932 (Del. 1993) (quoting Levine, 591 A.2d at 11

13 why such demand would have been futile. Fed. R. Civ. P. 23.1. In general, Delaware law provides 14 two demand-futility tests, as set forth in Aronson, 473 A.2d 805, and Rales, 634 A.2d 927. When 15 the alleged wrong is the result of a business decision by the whole board of directors, a court 16 should employ the Aronson test, which evaluates whether, under the particularized facts alleged, a


To prove that demand is excused, a shareholder must plead with particularity the reasons

For the

reasonable doubt is created (1) that the directors are disinterested and independent, or (2) that the 18 challenged transaction was otherwise the product of a valid exercise of business judgment. 19

Aronson, 473 A.2d at 812. When, however, the board members who approved the challenged act 20 have since changed, or when the challenged act does not constitute a business decision by the 21 board, a court should employ the Rales test, which determines whether the particularized factual 22 allegations create a reasonable doubt that, as of the time the complaint was filed, a majority of the 23 board as constituted at that time could have properly exercised its independent and disinterested 24 business judgment in responding to a demand. See Rales, 634 A.2d at 934. 25


A. Waste Of Corporate Assets Based On the Separation Agreement (Count I)

Count I alleges that the Directors committed waste of corporate assets by approving the Separation Agreement because the amount given to Hurd was excessive and one-sided. Id. ¶¶ 81- 82. Where a plaintiff challenges an affirmative board decision, demand is excused only if the 2 plaintiff pleads particularized facts (1) creating a reasonable doubt that at least half the directors are 3 disinterested and independent, or (2) creating a reasonable doubt that the transaction was the 4 product of a valid exercise of business judgment. Aronson, 473 A.2d at 814. 5

Plaintiffs allege that each Director is "incapable of independently and disinterestedly

7 considering a demand to commence and vigorously prosecute this action because he wasted 8 corporate assets by approving the terms of the Separation Agreement, a transaction which was so 9 one-sided that no business person of ordinary, sound judgment could conclude that the Company 10 received adequate ...

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