The opinion of the court was delivered by: Edward J. Davila United States District Judge
ORDER GRANTING MOTIONS TO DISMISS; DENYING MOTION TO STRIKE (Re: Docket Nos. 68, 71, 72, 74, 89)
Pending before the court are Defendants' four motions to dismiss Plaintiff A.J. Copeland's ("Copeland") First Amended Complaint ("FAC"), as well as a related motion to strike. For the 19 reasons discussed below, the motions to dismiss are GRANTED with leave to amend and the 20 motion to strike is DENIED. 21
On December 2, 2011, Copeland filed the FAC alleging that Defendants violated Section 14(a) of the Exchange Act, and breached their fiduciary duty and wasted corporate assets. The FAC alleges the following facts. 25
Plaintiff A.J. Copeland ("Copeland") owns and has continuously owned common stock in Nominal Defendant Hewlett-Packard Company ("HP") throughout all of period of the alleged 27 wrongdoing. FAC ¶ 12. Defendant Raymond J. Lane ("Lane") has been HP's Executive Chairman 28 since September 2011 and previously served as HP's non-executive Chairman from November 2010 to September 2011. Id. ¶ 15. Defendant Leo Apotheker ("Apotheker") was HP's President 2 and Chief Executive Officer ("CEO") from November 1, 2010 to September 22, 2011. Id. ¶ 16. 3 "Board") in 2006. Id. ¶ 19. Defendant Gary M. Reiner ("Reiner") became a member of the Board 5 on January 20, 2012. Id. ¶ 20. Defendants Joel Z. Hyatt ("Hyatt"), John Joyce ("Joyce"), Lucille 6 2011. Id. ¶ 21. Defendant Meg Whitman became HP's President and CEO on September 22, 2011 8 and was elected to the Board in January 2011. Id. ¶ 22. Defendants Shumeet Banerji ("Banerji"), 9 Sari M. Baldauf ("Baldauf"), Rajiv L. Gupta ("Gupta"), Lawrence T. Babbio ("Babbio"), and John 11
Defendant G. Kennedy Thompson ("Thompson") was elected to the Board of Directors (the 4
Salhany ("Salhany"), and Robert Ryan ("Ryan") were directors of HP and resigned on January 20, 7
Patricia Russo ("Russo"), Dominique Sequier ("Sequier"), Marc L. Andreessen ("Andreessen"), 10 H. Hammergren ("Hammergren") are directors of HP who have been directors during all of the 12 wrongful conducted alleged in this action. Id. ¶ 23. Defendant Mark V. Hurd ("Hurd") was 13
16 when the 2010 and 2011 Proxy Statements were issued to HP shareholders. Id. ¶ 150. These Proxy 17
Statements solicited the votes of Copeland and the other shareholders for the election and re-18 election of the Board and the retention of Ernst & Young LLP as HP's auditor ("EY"). Id. The 19
Statements failed to disclose the extent to which the Board was responsible for wrongdoing that 21 caused HP to be exposed to fines, restitution, and other damages including amounts paid to Hurd, 22 the losses HP will sustain as a result of acquiring 3PAR for more than $2.3 billion. Id. ¶ 153. 23
24 individually-named Defendants. Id. ¶ 156. Plaintiff alleges that the Defendants violated their 25 corporate responsibilities in at least the following ways: (1) declining to stop HP's illegal payment 26 of bribes after receiving reports of that illegal activity and red flags indicating that widespread 27 illegality, or consciously disregarding such reports and activity; (2) failing to pursue claims against 28 those who victimized HP in their anti-competitive behaviour in violation of antitrust laws; (3)
United States District Court
President and CEO of HP and was fired from or voluntarily resigned his positions on August 6, 14
The Section 14(a) claim is asserted against the Defendants who were members of the Board
Proxy Statements contained false statements and omitted material facts. Id. In particular, the Proxy 20
The breach of fiduciary duty and waste of corporate assets claim is asserted against all permitting Hurd to act as he did in the Hurd-Fisher Scandal; (4) wasting assets by authorizing 2 management to engage in bidding for the acquisition of 3PAR for more than $2.3 billion; and (5) 3 failing to implement a CEO succession plan, and recklessly hiring and firing CEOs resulting in 4 waste of assets in severance payments. Id. ¶ 157.
4, 2010 and then on November 16, 2010 by HP's Deputy General Counsel, John F. Schultz 8
On August 23 and 28, 2010, Copeland made pre-suit demands on the Board as required by Fed. R. Civ. P. 23.1. Id. ¶ 101; see Exs. A and B. Copeland's counsel was informed on November 7
("Schultz") that the Board was investigating the allegations in Copeland's Demands. The Board 9 concurrently was interviewing individuals who might comprise a new committee to take over the 10 investigation that the Board had falsely claimed was already underway. Id. ¶ 103. Schultz did not disclose that the Board had already appointed the Ryan-Salhany "Special Committee" which was acting independently of the Board. Id. ¶ 103. Additional Board members were selected based on 13 these interviews. Id. ¶¶ 33, 103, 105. This expanded Board appointed an "Independent Committee" 14 of directors, with Andrew J. Levander and his law firm, Dechert LLP (collectively "Levander"), 15 serving as its counsel. Id. ¶105. The Independent Committee purported to take over the 16 investigation of Plaintiff's claims, but, in reality, the Board had taken no action at all. Id. ¶ 32. 17
The members of the Committee decided at the outset to delegate their own fact-gathering and analysis responsibilities to Levander. Id. ¶ 107. Levander conducted interviews of selected 19 individuals, not under oath, and without a recording or transcript. This strategy cloaked all or much 20 of the factual investigation, and all communications between counsel and members of the 21
On February 10, 2011, Levander sent a letter to Copeland's counsel stating that the Board had appointed the Independent Committee. Id. ¶¶ 30, 109. With minimal advance notice and no 24 necessary information, Levander also invited Copeland's counsel to meet with one or more 25 members of the Independent Committee. Id. ¶ 110. Copeland's counsel requested fundamental 26 information and documents regarding the legitimacy of the investigation, including how the 27 members of the Independent Committee had been selected and how it came about that Levander
Independent Committee and witnesses, behind claims of work product and privilege. Id. ¶ 108. would be the investigator. But Levander refused to provide any of the requested information to Copland's counsel and ended all discourse. Id. ¶¶ 111, 116. 3
4 constructively and wrongfully rejected his demands. On April 6, 2011, HP moved to dismiss that 5 complaint on the ground that it was filed prematurely. See Docket No. 10. After completing its 6 investigation, the Independent Committee issued a report formally recommending that the Board 7 reject Copeland's Demands, and the Board did so. FAC ¶ 118. On November 9, 2011, the parties 8 informed the court that, in light of the Board's rejection of Copeland's Demands, Copeland 9 intended to amend his complaint. HP withdrew its then-pending motion to dismiss. Docket No. 52.
On March 7, 2011, Plaintiff commenced this action alleging that the Board had
On December 2, 2011, Copeland filed the FAC. On February 8, 2012, Defendants filed their motions to dismiss the FAC and their Requests for Judicial Notice ("RJNs"). On March 27, 2012, Copeland filed a motion to strike certain exhibits submitted in support of the motions to 13 dismiss and all references thereto. On May 8, 2012, the motions were taken under submission 14 without oral argument. See Civ. L.R. 7-1(b).
state a claim upon which relief can be granted. "To survive a motion to dismiss, a complaint must 19 contain sufficient factual matter, accepted as true, 'to state a claim to relief that is plausible on its 20 face.'" Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009) (internal citations omitted). "A claim has 21 facial plausibility when the plaintiff pleads factual content that allows the court to draw the 22 reasonable inference that the defendant is liable for the misconduct alleged." Id. Recitals of the 23 elements of a cause of action and conclusory allegations are insufficient. Id. 24
25 specificity to "give the defendant fair notice of what the . . . claim is and the grounds upon which it 26 rests." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (internal quotations omitted). 27
Moreover, the factual allegations "must be enough to raise a right to relief above the speculative 28 level" such that the claim "is plausible on its face." Id. at 555, 570. In considering the sufficiency
Under Federal Rule of Civil Procedure 12(b)(6), a complaint may be dismissed if it fails to Federal Rule of Civil Procedure 8(a) requires a plaintiff to plead each claim with sufficient of a claim, the court must accept as true all of the factual allegations contained in the complaint. Id. 2 at 555--56. However, the court is not required to accept as true legal conclusions cast in the form of 3 factual allegations. Id. at 555. 4 5 pleading could not possibly be cured by the allegation of other facts. Lopez v. Smith, 203 F.3d 6
1122, 1130 (9th Cir. 2000). If amendment would be futile, however, a dismissal may be ordered 7 with prejudice. Dumas v. Kipp, 90 F.3d 386, 393 (9th Cir. 1996) (internal quotations omitted). 8
10 on behalf of a corporation a claim belonging not to the shareholder, but to the corporation. Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984) (overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000)). Pursuant to Federal Rule of Civil Procedure 23.1, which governs derivative 13 actions, a shareholder's complaint must state with particularity "any effort by the plaintiff to obtain 14 the desired action from the directors" and "the reasons for not obtaining the action or not making 15 the effort." Fed. R. Civ. P. 23.1. 16
Rule 23.1 imposes a higher standard of pleading than Rule 8(a). The Ninth Circuit recently 17 held in a demand refused case that "Rule 23.1 and applicable Delaware law require a shareholder 18 bringing a derivative lawsuit to plead with particularitythat the shareholder made a pre-suit 19 demand on the corporation and that the corporation wrongly refused to act." Lucas v. Lewis, 428 F. 20 (B); Grimes v. Donald, 673 A.2d 1207, 1220 (Del. 1996)). 22
24 determine the controlling substantive law. Patton v. Cox, 276 F.3d 493, 495 (9th Cir. 2002). Here, 25 because HP has its corporate headquarters and main place of business in Palo Alto, California, the 26 court applies California state law. 27
If dismissal is granted under Rule 12(b)(6), leave to amend should be allowed unless the
A shareholder derivative suit is a uniquely equitable remedy in which a shareholder asserts
App'x 694, 695-96 (9th Cir. Apr. 15, 2011) (emphasis added) (citing Fed. R. Civ. P. 23.1(b)(A) & 21
When a federal court sits in diversity, it looks to the forum state's choice of law rules to
Pursuant to the "internal affairs" doctrine, which is generally followed by courts in 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, 2 1086 (N.D. Cal. 2003); see Cal. Corp. Code § 2116. Additionally, the demand requirements for a 3 shareholder derivative suit are determined by the law of the state of incorporation. Kamen v. 4
Kemper Financial Services, Inc., 500 U.S. 90, 96 (1991) ("the function of the demand doctrine . . . 5 is a matter 'substance' not 'procedure'. . . . [Courts] must apply the demand futility exception as it 6 is defined by the law of the state of incorporation"); Potter v. Hughes, 546 F.3d 1051, 1054 n. 1 7 (9th Cir. 2008) ("the substantive demand requirement is an issue of state law"). Accordingly, 8 because HP is incorporated in Delaware, the court applies Delaware law to determine whether the 9 demand was wrongly refused.
In moving to dismiss, Defendants assert that the Board's refusal of the claims raised in Copeland's Demand is protected by the business judgment rule. Defendants contend that Copeland 13 failed to plead any particularized facts to raise a reasonable doubt that the Board acted 14 independently, in an informed manner and with due care or that it conducted a reasonable 15 investigation. Defendants also argue that Copeland's lack of good faith allegations are conclusory 16 and insufficient. 17
In order to demonstrate standing to pursue a derivative claim, a plaintiff must show that he has met the demand requirement. If a demand is made and rejected, the board rejecting the demand 19 is entitled to the presumption of the business judgment rule unless the stockholder can allege facts 20 with particularity creating a reasonable doubt that the board is not entitled to the benefit of the 21 presumption. See Grimes, 673 A.2d at 1220; see also Levine v. Smith, 591 A.2d 194, 212 (Del. 22
1991), overruled on other grounds by Brehm, 746 A.2d 244, (the board's refusal of the demand to 23 pursue the action is subject to judicial review according to the traditional business judgment rule). 24
25 board, and the board's decision will be upheld unless it cannot be attributed to any rational business 26 purpose. SeeIn re Walt Disney Co. Derivative Litig., 906 A.2d 27, 74 (Del. 2006) (en banc); 27
Levine, 591 A.2d at 207. A board of directors' decision will be respected by the courts unless the 28 directors are interested or lack independence relative to the decision, do not act in good faith, act in Under the business judgment rule, a court will not substitute its judgment for that of the a manner that cannot be attributed to a rational business purpose, or reach their decision by a 2 grossly negligent process that includes the failure to consider all material facts reasonably 3 available. Brehm, 746 A.2d at 264 n.66. "A shareholder who makes a demand concedes the 4 disinterestedness and independence of a majority of the board to respond to the demand and waives 5 any claim that demand is excused." See Furman v. Walton, No. C 06-3532 SBA, 2007 WL 6 634 A.2d 927, 935 n.12 (Del. 1993)).
only issue for a trial court to determine is the application of the business judgment rule to the 10 board's refusal of the shareholder's demand. See Levine, 591 A.2d at 212-13 (Del. 1991). The only relevant question is whether the directors acted in an informed manner and with due care, and in a good faith belief that their action was in the best interest of the corporation. See id. at 198.
15 and independence of a majority of the board to respond to the demand." Furman, 2007 WL 16
1455904, at *4. Plaintiff argues that the Demands did not concede "independence conclusively and 17 in futuro for all purposes." Scattered Corp. v. Chi. Stock Exch., Inc., 701 A.2d 70, 74-75 (Del. 18
"a board that appears independent ex ante may not necessarily act independently ex post in 20 rejecting a demand. Failure of an otherwise independent-appearing board or committee to act 21 independently is a failure to carry out its fiduciary duties in good faith or to conduct a reasonable 22 investigation. Such failure could constitute wrongful refusal." Scattered, 701 A.2d at 75 (emphasis 23 in original). Thus, a plaintiff may show that demand was wrongfully refused by pointing to events 24 occurring after the demandwhich demonstrate a lack of independence, but not events occurring 25 before the demand. 26
27 events after receiving the Demands. Copeland instead alleges that a majority of the Board is 28 personally implicated in the alleged wrongdoing-conduct that necessarily occurred prior to the
1455904, at *4 (N.D. Cal. May 16, 2007) (citing Grimes, 673 A.2d at 1219-20; ...