Tindall v. Ahearn et al

Filing 82

ORDER granting 70 Motion to Dismiss. Insider trading and unjust enrichment claims are dismissed with prejudice. Fiduciary duty claim is dismissed without prejudice. Plaintiffs shall file an amended complaint on or before 9/16/2016. Defendants' request for judicial notice 72 is granted as to exhibits A through C, but otherwise found to be moot. Signed by Judge David G Campbell on 6/30/2016.(DGC, nvo)

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1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8 In re First Solar Derivative Litigation 9 No. CV-12-00769-PHX-DGC ORDER 10 11 12 Nominal Defendant First Solar, Inc. has filed a motion to dismiss this derivative 13 action for failure to make a pre-suit litigation demand. Doc. 70. First Solar has also filed 14 a motion for judicial notice. Doc. 72. The motions are fully briefed (Docs. 75, 76, 77, 15 78), and the Court heard oral argument on June 21, 2016. For the reasons set forth 16 below, the Court will grant the motion to dismiss. 17 I. Background.1 18 First Solar is one of the world’s largest producers of photovoltaic solar panels. Its 19 stock is publicly traded on the NASDAQ Global Market. After going public in 2006, the 20 company experienced explosive growth. Between 2008 and the beginning of 2012, 21 however, the value of the company’s stock fell from nearly $300 per share to less than 22 $50 per share. This dramatic decline was due in part to the discovery of two serious 23 manufacturing defects which caused the company to incur nearly $254 million in 24 warranty and related charges. Doc. 67, ¶ 6. 25 The first of these defects – the Low Power Modules or LPM defect – caused 26 1 27 28 This section draws upon the background section in Smilovits v. First Solar Inc., 119 F. Supp. 3d 978 (D. Ariz. 2015), and reflects Plaintiffs’ allegations. Citations are to page numbers attached to the top of each page by the Court’s CM/ECF system, not the original page numbers at the bottom of the page. 1 certain panels to experience power loss within months of installation that was greater 2 than warranted by the company. First Solar learned of this issue in March 2009 upon 3 receiving a complaint from one of its German customers. A task force organized to 4 investigate the issue determined that the defect was caused by a manufacturing process 5 implemented in June 2008. 6 remediate affected panels. The company did not publicly disclose the LPM defect or the 7 associated remediation costs until July 2010. The company discontinued the process and agreed to 8 The second defect – the hot climate defect – caused certain panels to experience 9 premature degradation in hot climates. The board of directors learned of this issue in 10 April 2011 when the Vice President of Technology, David Eaglesham, gave a report 11 showing that the panels were degrading at a rate of 11% in hot climates. The company 12 did not disclose the defect or its financial impact until February 2012. The company 13 ultimately spent $37.8 million to resolve this issue. 14 On March 15, 2012, a group of shareholders who purchased First Solar stock 15 between April 2008 and February 2012 brought a class action against the company and 16 several of its officers, asserting that the company’s failure to disclose the LPM and hot 17 climate defects constituted securities fraud in violation of Section 10(b) of the Securities 18 Exchange Act of 1934 and Securities Exchange Commission (“SEC”) Rule 10b-5. See 19 Smilovits v. First Solar Inc., No. 12-CV-00555-PHX-DGC. Less than one month later, 20 Plaintiffs filed this derivative action without making a litigation demand on the First 21 Solar Board of Directors. Doc. 1. The Court stayed this action pending resolution of the 22 securities fraud case. Doc. 45. 23 On August 11, 2015, the Court entered an order in the securities fraud litigation 24 granting in part and denying in part First Solar’s motion for summary judgment. 25 Smilovits, 119 F. Supp. 3d 978. The Court held that the plaintiffs had presented a triable 26 issue as to whether defendants made material misrepresentations of fact with scienter. Id. 27 at 1009. The Court explained: 28 Plaintiffs have . . . presented sufficient evidence for a reasonable jury to -2- 1 2 3 conclude that Defendants (1) had a duty to disclose the LPM defect to investors and failed to do so in order to mislead investors, (2) concealed the scope of the LPM defect with the intent to mislead investors, (3) had a duty to disclose the hot climate degradation to investors and failed to do so in order to mislead investors, and (4) engaged in accounting fraud with respect to both defects with intent to mislead investors. 4 5 Id. On the question of whether plaintiffs in the securities fraud case could establish loss 6 causation, the Court found two irreconcilable lines of cases in the Ninth Circuit. Because 7 the Court found that the plaintiffs could establish loss causation under one line of cases 8 but not the other, the Court certified the question for immediate interlocutory appeal. Id. 9 at 1000. The Ninth Circuit accepted the appeal, and it is now pending. 10 Due to this unexpected delay in concluding the securities fraud litigation, the 11 Court lifted the stay in this case so that Plaintiffs could amend their complaint and 12 Defendants could file a motion to dismiss. 13 amended complaint on March 11, 2016. Doc. 67. The complaint asserts claims for 14 breach of fiduciary duty, insider trading and misappropriation of information, and unjust 15 enrichment. ¶¶ 316-31. Doc. 65. Plaintiffs filed their second 16 The fiduciary duty claim is brought against eight individuals who were directors 17 between April 30, 2008 and February 29, 2012 – Michael Ahearn, Craig Kennedy, James 18 Nolan, William Post, J. Thomas Presby, Paul Stebbins, Michael Sweeney, and Jose 19 Villarreal. Ahearn was First Solar’s CEO during part of the relevant period and is a 20 defendant in the securities fraud litigation. The other seven directors, who will be 21 referred to in this order as “outside directors,” are not employees of First Solar and have 22 not been sued in the securities fraud case. The fiduciary duty claim is also brought 23 against five individuals who were officers during the same period – Robert J. Gillette, 24 Mark R. Widmar, James Zhu, Bruce Sohn, and David Eaglesham, all of whom are 25 defendants in the securities fraud litigation. ¶¶ 316-21. Plaintiffs allege that these 13 26 Defendants breached their fiduciary duties by “knowingly, recklessly, or negligently 27 sign[ing] or approv[ing] the issuance of false annual and quarterly financial statements 28 that misrepresented and failed to disclose the full impact of the [LPM defect] on the -3- 1 Company’s earnings and the premature degradation of modules in hot climates.” ¶ 320. 2 In other words, the fiduciary duty claim is premised on the same wrong alleged in the 3 securities fraud case – failure to disclose the LPM defect and hot climate problem in First 4 Solar’s financial reports. 5 characterize this as a breach of Defendants’ fiduciary duty of candor. Doc. 75 at 10. In their opposition to the motion to dismiss, Plaintiffs The insider trading claim is brought against Directors Ahearn, Nolan, Sweeney, 6 7 and Presby, and Officers Meyerhoff, Sohn, and Eaglesham. Doc. 67 ¶¶ 322-26. 8 Plaintiffs allege that these Defendants sold First Solar common stock on the basis of 9 proprietary, non-public information concerning the manufacturing defects and their likely 10 effect on the company’s financial condition. Id. The unjust enrichment claim names the 11 same defendants and alleges that they “were unjustly enriched as a result of the insider 12 trading profits they received while breaching their fiduciary duties owed to First Solar.” 13 ¶ 329. 14 II. Legal Standard. 15 A. Rule 23.1. 16 Plaintiff shareholders purport to bring this action on behalf of First Solar. Usually, 17 the decision to initiate litigation on behalf of a corporation is entrusted to the board of 18 directors. See Rosenbloom v. Pyott, 765 F.3d 1137, 1147-48 (9th Cir. 2014) (citing 19 Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 95 (1991)). But in cases where the 20 board cannot be trusted to represent the corporation’s interests faithfully, individual 21 shareholders may bring derivative claims on the corporation’s behalf. Fed. R. Civ. P. 22 23.1(a); see Rosenbloom, 765 F.3d at 1147-48. 23 Because the board is presumptively entitled to make the decision to bring suit, 24 shareholders seeking to bring such an action must plead with particularity whether they 25 demanded that the directors bring the action, and, if not, why it would have been futile to 26 make such a demand. Fed. R. Civ. P. 23.1(b)(3). This requirement allows the court to 27 determine, at the outset of the litigation, whether the board is capable of representing the 28 interests of the corporation faithfully, or whether a majority of the directors has a conflict -4- 1 of interest that justifies the plaintiff shareholders’ bypassing of the board. See Kamen, 2 500 U.S. at 102. In determining whether plaintiffs have satisfied Rule 23.1’s pleading 3 requirement, courts accept the allegations of the complaint as true, draw all reasonable 4 inferences in the plaintiffs’ favor, and consider the allegations in combination. See 5 Rosenbloom, 765 F.3d at 1155-56; In re Pfizer Inc. S’holder Derivative Litig., 722 F. 6 Supp. 2d 453, 458 (S.D.N.Y. 2010). 7 B. Delaware Law of Demand Futility. 8 “Although Rule 23.1 supplies the pleading standard for assessing allegations of 9 demand futility, the substantive law which determines whether demand is, in fact, futile is 10 provided by the state of incorporation of the entity on whose behalf the plaintiff is 11 seeking relief.” Rosenbloom, 765 F.3d at 1148 (citation and internal quotation marks 12 omitted). 13 applies. Because First Solar is a Delaware corporation, Delaware substantive law 14 Delaware courts have articulated two standards for evaluating demand futility. 15 The Aronson test applies to derivative claims that challenge a specific board decision – 16 “where it is alleged that the directors made a conscious business decision in breach of 17 their fiduciary duties.” Wood v. Baum, 953 A.2d 136, 140 (Del. 2008). To establish 18 demand futility under Aronson, the plaintiff must show either (1) a reason to doubt that 19 the directors are disinterested and independent, or (2) a reason to doubt that the 20 challenged transaction was the product of a valid exercise of business judgment. Id. 21 (citing Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984)). The Rales test applies when a 22 specific business decision is not challenged, but where plaintiffs allege a violation of the 23 board’s oversight duties. Id. To establish demand futility under Rales, the plaintiff must 24 show a reason to doubt that the board of directors could have properly exercised its 25 independent and disinterested business judgment in responding to a demand. Id. (citing 26 Rales v. Blasband, 634 A.2d 927, 934 (Del. 1993)). 27 The line between Aronson and Rales blurs when a derivative claim alleges 28 wrongdoing by a majority of the board but does not challenge a specific board decision. -5- 1 See Rosenbloom, 765 F.3d at 1150 (collecting cases). For such hybrid claims, courts 2 excuse demand if “Plaintiffs’ particularized allegations create a reasonable doubt as to 3 whether a majority of the board . . . faces a substantial likelihood of personal liability.” 4 Id.; see also In re Citigroup Inc. S’holder Derivative Litig., 964 A.2d 106, 121 (Del. Ch. 5 2009) (“Demand is not excused solely because the directors would be deciding to sue 6 themselves. . . . Rather, demand will be excused based on a possibility of personal 7 director liability only in the rare case when . . . ‘a substantial likelihood of director 8 liability . . . exists.’”) (quoting Aronson, 473 A.2d at 815); In re Pfizer, 722 F. Supp. 2d at 9 460 (Rales and Aronson tests both met “by the Complaint’s particularized allegations that 10 a majority of the directors face a substantial threat of personal liability arising from their 11 alleged breach of their non-exculpated fiduciary duties”). It is “a rare case where the 12 circumstances are so egregious that there is a substantial likelihood of liability.” In re 13 Baxter Int’l, Inc. Shareholders Litig., 654 A.2d 1268, 1271 (Del. Ch. 1995) (citing 14 Aronson, 473 A.2d at 815). 15 Delaware law recognizes a presumption that directors act “on an informed basis, 16 in good faith and in the honest belief that the action taken was in the best interests of the 17 company.” Citigroup, 964 A.2d at 124 (citing Aronson, 473 A.2d at 812). “The burden 18 is on plaintiffs, the party challenging the directors’ decision, to rebut this presumption.” 19 Id. “Additionally, directors of Delaware corporations are fully protected in relying in 20 good faith on the reports of officers and experts.” Id. at 133 (citing 8 Del. Code 21 § 141(e)). 22 “Where directors are contractually or otherwise exculpated from liability for 23 certain conduct, then a serious threat of liability may only be found to exist if the plaintiff 24 pleads a non-exculpated claim based on particularized facts.” Wood, 953 A.2d at 141. 25 First Solar’s Certificate of Incorporation provides that the Company’s directors shall be 26 exculpated to the maximum extent permitted by Delaware law. Doc. 71-3 at 6.2 27 2 28 Defendants have asked the Court to take judicial notice of this provision of the Certificate of Incorporation (Doc. 72 at 2), and Plaintiffs do not object (Doc. 76 at 2). -6- 1 Delaware law recognizes the validity of “[a] provision eliminating or limiting the 2 personal liability of a director to the corporation . . . for monetary damages for breach of 3 fiduciary duty as a director, provided that such provision shall not eliminate or limit the 4 liability of a director: (i) For any breach of the director’s duty of loyalty to the 5 corporation or its stockholders; (ii) for acts or omissions not in good faith or which 6 involve intentional misconduct or a knowing violation of law; . . . or (iv) for any 7 transaction from which the director derived an improper personal benefit.” Del. Code 8 § 102(b)(7). Thus, in a nondisclosure case such as this one, “plaintiffs must plead 9 particularized factual allegations that support the inference that the disclosure violation 10 was made in bad faith, knowingly or intentionally.” 11 (quotation marks and citation omitted).3 12 III. Citigroup, 964 A.2d at 132 Against Which Board is Demand Futility Tested? 13 The board of directors sitting when Plaintiffs filed their most recent amendment in 14 March 2016 consists of 11 individuals, four of whom were not on the board when 15 Plaintiffs filed their original complaint in April 2012. 16 (Defendant Villarreal) has left the board since April 2012. Compare Doc. 71-1 at 13 with 17 Doc. 71-2 at 15.4 Thus, as a preliminary matter, the Court must determine whether 18 demand futility is tested against the April 2012 board or the March 2016 board. In addition, one individual 19 The parties agree that Braddock v. Zimmerman, 906 A.2d 776 (Del. 2006), 20 provides the framework for deciding this issue. In Braddock, the Delaware Supreme 21 3 22 23 24 25 26 27 28 Citigroup should not be read to suggest that demand will be excused based only on evidence that a majority of the board knowingly failed to disclose facts that happened to be material. As Del. Code § 102(b)(7)(ii) makes clear, a shareholder plaintiff must allege that a majority of the board “knowing[ly] violat[ed]” the law. At minimum, then, the shareholder plaintiff must allege that a majority of the board knew certain facts, knew they were material, and knew they should be disclosed, but nonetheless failed to disclose them. Cf. Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 370 (Del. 2006) (directors violate non-exculpable duty of loyalty where they “fail to act in the face of a known duty to act, thereby demonstrating a conscious disregard for their responsibilities”) (emphasis added). 4 Defendants have asked the Court to take judicial notice of the change in composition of First Solar’s board between April 2012 and March 2016 (Doc. 72 at 2-3), and Plaintiffs do not object (Doc. 76 at 2). -7- 1 Court explained that “when an amended derivative complaint is filed, the existence of a 2 new independent board of directors is relevant to a Rule 23.1 demand inquiry only as to 3 derivative claims in the amended complaint that are not already validly in litigation.” Id. 4 at 786. A claim is “validly in litigation” if (1) “the original complaint was well pleaded 5 as a derivative action,” (2) “the original complaint satisfied the legal test for demand 6 excusal,” and (3) “the act or transaction complained of in the amendment is essentially 7 the same as the act or transaction challenged in the original complaint.” Id. A claim is 8 not validly in litigation unless it “can or has survived a motion to dismiss.” Id. at 779. 9 Defendants argue that none of Plaintiffs’ claims were validly in litigation prior to 10 the filing of the second amended complaint in March 2016 because neither the original 11 complaint nor the first amended complaint adequately pleaded demand futility. Doc. 70 12 at 14. Perhaps because they view the choice of board as largely “a moot point,” Plaintiffs 13 offer only a half-hearted response. Doc. 75 at 23. 14 First, Plaintiffs argue that they are excused from establishing demand futility 15 against the current board because the original complaint was not dismissed. But that fact 16 does not mean that the original complaint “satisfied the legal test for demand excusal.” 17 Braddock, 906 A.2d at 778. “[T]he filing of an amended complaint may trigger a new 18 requirement to make demand if the earlier complaint could not have survived a motion to 19 dismiss, even if it had not actually been dismissed.” In re NYFIX, Inc., 567 F. Supp. 2d 20 306, 311 (D. Conn. 2008) (citing Braddock, 906 A.2d at 778). 21 Second, Plaintiffs argue that the original complaint adequately pleaded demand 22 futility. Doc. 75 at 24. But it is their burden to show as much, In re Affiliated Computer 23 Servs., Inc. S’holders Litig., No. CIV.A. 2821-VCL, 2009 WL 296078, at *8 (Del. Ch. 24 Feb. 6, 2009), and they have not carried it. Plaintiffs fail to cite even a single allegation 25 from the original complaint that they believe satisfies Rule 23.1(b). See Doc. 75 at 24. 26 Because Plaintiffs have failed to show that their claims were validly in litigation before 27 March 2016, demand futility must be tested against the current board. 28 As already noted, the current board includes four individuals who joined after the -8- 1 events at issue in this case. These individuals are considered disinterested as a matter of 2 law. See Sandys v. Pincus, No. CV 9512-CB, 2016 WL 769999, at *15 (Del. Ch. Feb. 3 29, 2016) (“Siminoff and Doerr are disinterested because they joined the board after the 4 alleged Caremark violations occurred.”). As a result, Plaintiffs must show that demand is 5 excused as to six of the seven remaining directors.5 Because each of these remaining 6 directors was on the board when the alleged wrongdoing occurred, and continue on the 7 board today, the Court will refer to them in this order as the “continuing directors.” 8 In their briefs, Plaintiffs acknowledged that they cannot establish demand futility 9 against the current board for the insider trading claim because it concerns only four of the 10 11 directors. Doc. 75 at 24. At oral argument, Plaintiffs argued that more than four 11 directors are affected by this claim because proof of the insider trading claim would 12 necessarily establish that the entire board had material, non-public information – which 13 would support a non-disclosure claim against the rest of the continuing directors. 14 Plaintiffs cite no case where non-defendant directors were deemed unable to make an 15 impartial board decision based on evidence that might be presented against defendant 16 directors if a lawsuit were authorized. Nor have Plaintiffs shown that the evidence that 17 might be presented in an insider trading claim would create a substantial likelihood of 18 personal liability for the non-defendant directors. 19 Plaintiffs’ novel theory, explained for the first time during oral argument and not 20 supported by specific evidence or legal authority, rebuts the presumption that the non- 21 defendant directors would act in the company’s best interests in responding to the insider 22 trading claim. See Citigroup, 964 A.2d at 124 (recognizing this presumption). The Court cannot conclude that 23 Because Plaintiffs have not shown that more than four directors face a substantial 24 likelihood of personal liability on the insider trading claim, the Court will dismiss the 25 26 27 28 5 With 11 members on the current board, Plaintiffs must show that demand would have been futile with respect to a majority – at least six. Because Plaintiffs cannot make this showing with respect to the four new directors, they must show that six of the remaining seven face a substantial likelihood of personal liability on non-exculpated claims. -9- 1 claim. The unjust enrichment claim derives from the insider trading claim and must also 2 be dismissed. See Staehr v. Mack, No. 07 CIV. 10368 DAB, 2011 WL 1330856, at *10 3 (S.D.N.Y. Mar. 31, 2011) (“Demand futility for an unjust enrichment claim based on 4 insider trading allegations will rise and fall with the insider trading claims.”). 5 IV. Is Demand Excused as to Plaintiffs’ Fiduciary Duty Claim? 6 Plaintiffs contend that demand is excused against the continuing directors, which 7 constitute a majority of the current board, with respect to their fiduciary duty claim. 8 Plaintiffs allege that these Defendants breached their fiduciary duties by misrepresenting 9 and failing to disclose the LPM defect and the hot climate defect. 10 A. 11 In the securities fraud litigation, the Court found evidence that First Solar learned 12 about the LPM defect in March 2009, but failed to disclose it publicly until July 2010. 13 See Smilovits, 119 F. Supp. 3d at 982-83. The Court explained: Plaintiffs have presented evidence that First Solar knew the LPM defect was a serious problem that would concern investors well before it was disclosed. First Solar executives were careful not to release information about the LPM defect to the public, even deciding to delay informing customers until the customers discovered the problem themselves. 14 15 16 LPM Defect. 17 Id. at 1003. The Court found a triable issue of fact on whether the LPM defect was 18 deliberately concealed and whether First Solar’s conduct in concealing it constituted 19 securities fraud. Id. 20 In this case, Plaintiffs allege that Defendants violated their fiduciary duty of 21 candor by failing to disclose the LPM defect. To show that the Director Defendants face 22 a substantial likelihood of liability on this claim, Plaintiffs “must plead particularized 23 factual allegations that support the inference that the disclosure violation was made in 24 bad faith, knowingly or intentionally.” Citigroup, 964 A.2d at 132; see also id. (directors 25 are liable for breach of fiduciary duty where they “deliberately misinform[] shareholders 26 about the business of the corporation, either directly or by a public statement”).6 27 6 28 These claims are non-exculpable because they involve “acts or omissions not [taken] in good faith or which involve intentional misconduct.” 8 Del. Code § 102(c)(7). - 10 - 1 The Court has already found evidence to suggest that Defendant Ahearn – the 2 erstwhile CEO and one of the seven continuing directors – knew of the LPM defect and 3 intentionally failed to disclose it. Smilovits, 119 F. Supp. 3d at 1001-03. Demand is 4 therefore excused as to him. But Plaintiffs do not allege facts showing that the other 5 continuing directors – the outside directors – knew of the LPM defect, participated in a 6 decision not to disclose it, or did so in bad faith, knowingly, or intentionally. Indeed, 7 Plaintiffs do not allege a single fact showing that any of the continuing outside directors 8 knew of the defect and acted to conceal it with wrongful intent. Instead, Plaintiffs argue 9 that the Court may infer their knowledge, participation, and bad faith from (1) First 10 Solar’s corporate governance structure, (2) the fact that the LPM defect affected First 11 Solar’s core product, and (3) the clear falsity of First Solar’s disclosures. Alternatively, 12 Plaintiffs argue that even if the continuing outside directors did not knowingly acquiesce 13 in securities fraud, demand is excused under Aronson’s second prong because their 14 approval of financial statements was not a valid exercise of business judgment. 15 1. Corporate Governance Structure. 16 Plaintiffs argue that several aspects of First Solar’s governance structure support 17 the inference that the continuing outside directors learned about the LPM defect long 18 before it was disclosed in July 2010. 19 a. Committee Membership. 20 Plaintiffs note that three of the continuing outside directors (Kennedy, Presby, and 21 Stebbins) were members of the Audit Committee during the relevant period, and that 22 these three and a fourth (Post) were members of the Project Development Risk 23 Committee (“Risk Committee”) between 2010 and 2011. 24 Plaintiffs allege that the Audit Committee was required by its charter “to review with 25 management the financial information to be included in any” SEC filing, and to 26 “oversee[] financial risks . . . legal and compliance risks, and other risk management 27 functions.” ¶ 60. Plaintiffs allege that the Risk Committee was charged with overseeing 28 the Company’s project development and related project finance activities. - 11 - Doc. 67, ¶¶ 55, 60, 71. ¶ 309. 1 Plaintiffs surmise that the Audit Committee must have discussed the LPM defect during 2 its meetings between March 2009 and July 2010, and that the Risk Committee must have 3 discussed the defect during its meeting in 2010, but they make no factual allegations 4 regarding matters addressed in those meetings. 5 Delaware courts have rejected this method of showing demand futility: 6 7 8 9 10 11 12 13 14 15 16 17 18 [P]erhaps most importantly, the Complaint does not sufficiently allege that the director defendants had knowledge that any disclosures or omissions were false or misleading or that the director defendants acted in bad faith in not adequately informing themselves. Plaintiffs have not alleged particular facts showing that the director defendants were even aware of any misstatements or omissions. Instead, plaintiffs conclusorily assert that the members of the [Audit and Risk Management] Committee, as financial experts, knew the relevant accounting standards, knew or should have known the extent of the Company’s exposure to the subprime mortgage market, and are therefore responsible for alleged false statements or omissions in Citigroup’s financial statements. Instead of providing factual allegations regarding the knowledge or bad faith of the individual director defendants, the Complaint makes broad group allegations about the director defendants or the members of the [Audit and Risk Management] Committee. A determination of whether the alleged misleading statements or omissions were made with knowledge or in bad faith requires an analysis of the state of mind of the individual director defendants, and plaintiffs have not made specific factual allegations that would allow for such an inquiry. 19 20 Citigroup, 964 A.2d at 134 (footnotes omitted). 21 The same is true here. Plaintiffs plead no facts with particularity to show that any 22 of the continuing outside directors knew of the LPM defect or its severity, participated in 23 decisions not to disclose it, or did so in bad faith. “Mere membership on a committee or 24 board, without specific allegations as to defendants’ roles and conduct, is insufficient to 25 support a finding that directors were conflicted.” In re CNET Networks, Inc., 483 F. 26 Supp. 2d 947, 963 (N.D. Cal. 2007) (citation omitted); see also Montini v. Lawler, No. 27 CIV.A. 12-11296-DJC, 2014 WL 1271696, at *8 (D. Mass. Mar. 26, 2014) (“pleading 28 directorial responsibilities is insufficient to establish a substantial likelihood of liability - 12 - 1 even where the Company issued multiple years of incorrect financial statements”). To 2 satisfy Rule 23.1(b), allegations of committee membership must be supplemented by 3 allegations that identify “how the [] Committee learned of [the problem], who presented 4 it with the information, when, or how the committee members’ response or lack thereof 5 rendered them active participants in [the concealment].” Jones ex rel. CSK Auto Corp. v. 6 Jenkins, 503 F. Supp. 2d 1325, 1334 (D. Ariz. 2007). The complaint is entirely devoid of 7 the specific allegations that would allow the Court to reasonably infer that the continuing 8 outside directors were apprised of the LPM defect prior to its disclosure. 9 b. Reporting Relationships. 10 Plaintiffs allege that Defendant Ahearn had a duty to advise other directors of the 11 LPM defect, and that it is reasonable to infer that he did. Doc. 67, ¶¶ 56-57. But 12 “Delaware law does not permit the wholesale imputation of one director’s knowledge to 13 every other for demand excusal purposes,” Desimone v. Barrows, 924 A.2d 908, 943 14 (Del. Ch. 2007), and Plaintiffs fail to allege any specific facts that Ahearn communicated 15 to the rest of the board. 16 Plaintiffs cite Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust 17 Fund IBEW, 95 A.3d 1264 (Del. 2014), to bolster their argument that Ahearn’s 18 knowledge can be imputed to other directors, but Wal-Mart only illustrates what is 19 missing from the complaint. It held that a plaintiff could “establish director knowledge 20 . . . by establishing that [the company’s] officers were in a ‘reporting relationship’ to [its] 21 directors, that those officers did in fact report to specific directors, and that those officers 22 received key information regarding” the relevant issue. Id. at 1273 (emphasis added). 23 Plaintiffs allege that Ahearn had a duty to report material facts about the company to the 24 board (Doc. 67, ¶ 59), but they do not allege facts showing that he actually did so. 25 c. Internal Reporting System. 26 Plaintiffs allege that First Solar had a functioning internal reporting system that 27 should have brought material information regarding the LPM defect to the board’s 28 attention long before it was disclosed. Doc. 67, ¶¶ 307-08. They cite a proxy statement - 13 - 1 2 filed by First Solar in April 2012 (after the events at issue in this case): 6 The Company has a comprehensive risk management process in which management is responsible for identifying and managing the Company’s risks and the board and its committees provide oversight in connection with these efforts. Risks are identified, assessed and managed on an ongoing basis and communicated to management during periodic management meetings or otherwise as appropriate. Existing and potential material risks are addressed during periodic senior management meetings, resulting in both board and committee discussions and public disclosures, as appropriate. 7 ¶ 307. Citing In re Pfizer Inc. Shareholder Derivative Litigation, 722 F. Supp. 2d 453, 8 and In re Abbott Labs Derivative Shareholders Litigation, 325 F.3d 795 (7th Cir. 2003), 9 Plaintiffs argue that the Court should presume that the process described in the 3 4 5 10 11 12 company’s proxy statement was followed. The Court does not agree. The complaint in Pfizer included considerably more detail than the complaint in this case: 13 14 15 16 17 18 19 20 [T]he Complaint details at great length a large number of reports made to members of the board from which it may reasonably be inferred that they all knew of Pfizer’s continued misconduct and chose to disregard it. These include, for example, the reports to the board of the Neurontin and Genotropin settlements, a large number of FDA violation notices and warning letters, several reports to Pfizer’s compliance personnel and senior executives of continuing kickbacks and off-label marketing, and the allegations of the qui tam lawsuits. Many of these disturbing reports were received during the same time that the board was obligated by the 2002 and 2004 [corporate integrity agreements with the FDA] to pay special attention to these very problems. 21 22 Pfizer, 722 F. Supp. 2d at 460-61 (record citations omitted). Plaintiffs in this case have 23 provided no comparable allegations of actual reports to the board or special agreements 24 with a government agency to monitor the very kinds of wrongdoing addressed in the 25 reports and alleged in the complaint. 26 The complaint in Abbott was also more detailed. It alleged that the FDA wrote 27 two warning letters regarding illegal activities to the chairman of the board, wrote a third 28 warning letter to the CEO and a member of the board, and entered into a Voluntary - 14 - 1 Compliance Plan with Abbott that it later terminated due to continuing violations. The 2 complaint also alleged that these problems were reported in the Wall Street Journal and 3 Bloomberg News, as well as SEC disclosures filed by Abbott, and that board members on 4 the audit committee knew of them. 325 F.3d at 799-801, 806. With such detailed 5 allegations, little inference was required to conclude that the board members knew of the 6 non-compliance problems. Although Abbott stated that “[w]here a corporation has a 7 corporate governance structure in place,” it is reasonable to “assume the corporate 8 governance procedures were followed,” id. at 806, the case included many factual 9 allegations in addition to the corporate governance structure. This case does not. The 10 Court cannot conclude that the existence of internal risk management procedures allows 11 the Court to infer that the continuing outside directors each knowingly chose not to 12 disclose the LPM defect.7 2. 13 Core Products Doctrine. 14 “In demand futility cases, courts have repeatedly emphasized that it is especially 15 plausible to infer board interest in and knowledge of developments related to a product 16 that is critical to a company’s success or is otherwise of special importance to it.” 17 Rosenbloom, 765 F.3d at 1154 (collecting cases). This inference is entertained because 18 “[i]t is absurd to suggest that the Board of Directors would not discuss” critical issues 19 pertaining to the company’s core product. No. 84 Employer-Teamster Joint Council 20 Pension Trust Fund v. Am. W. Holding Corp., 320 F.3d 920, 943 n.21 (9th Cir. 2003). 21 Plaintiffs argue that the continuing outside directors must have known about the 22 LPM defect before it was disclosed because it was a serious problem affecting First 23 Solar’s core product. Doc. 75 at 16-17. Defendants argue that the core products doctrine 24 25 26 27 28 7 At oral argument, Plaintiffs pointed to meetings held by First Solar executives on the hot climate defect in March and April 2011 as evidence that the internal reporting system was functioning. But even if the internal system was delivering information to the officers, Plaintiffs have provided no factual evidence that the system was reliably conveying this information to directors. Plaintiffs offer absolutely no direct evidence that information about the LPM defect was conveyed to the directors during the relevant period. - 15 - 1 does not apply in derivative cases because it conflicts with Rule 23.1(b)’s particularity 2 requirement. Doc. 70 at 16. 3 Defendants are correct that many courts, including this one, have found the core 4 products doctrine inapplicable to derivative cases. See In re Yahoo! Inc. S’holder 5 Derivative Litig., No. 11-CV-3269-CRB, 2015 WL 9319307, at *9 (N.D. Cal. Dec. 23, 6 2015) (“this doctrine has no application in derivative litigation”); CSK Auto Corp., 503 F. 7 Supp. 2d at (“‘allegations of knowledge explained solely by the directors’ service as 8 directors, without more, are insufficient as a matter of law – even where, as here, the 9 plaintiff alleges that the matters in suit relate to the corporation’s core business’”) 10 (quoting Ferre v. McGrath, No. 06 CIV.1684 CM, 2007 WL 1180650, at *6 (S.D.N.Y. 11 Feb. 16, 2007); alterations incorporated). But the Ninth Circuit’s most recent statement is 12 to the contrary. Rosenbloom makes clear that courts may rely on the importance of a 13 particular product to the company as one factor in determining whether the directors 14 knew about developments related to that product. Rosenbloom, 765 F.3d at 1154. 15 In the absence of any factual allegations that the outside continuing directors were 16 informed of the LPM problem, however, the Court cannot rely on the core products 17 doctrine to find sufficient knowledge. Such bare reliance would eviscerate Rule 23.1(b)’s 18 requirement that demand futility be pleaded with particularity. In addition, as a Delaware 19 court has said, “[u]nder our law, to establish liability for misstatements . . . shareholder 20 plaintiffs must show that the misstatement was made knowingly or in bad faith.” 21 Citigroup, 964 A.2d at 135. The core products doctrine does not make that showing. 22 At oral argument, Plaintiffs asserted that First Solar made significant corporate 23 decisions during the relevant time, discontinuing the faulty manufacturing process and 24 offering to remediate panels affected by the LPM defect. Plaintiffs contend that such 25 significant corporate decisions would not have been made without input from the board. 26 The Court finds this no more persuasive than a stand-alone core products doctrine. 27 Plaintiffs point to no direct evidence that the continuing outside directors were involved 28 in these decisions. Nor do they cite anything in the company bylaws requiring directorial - 16 - 1 approval of these decisions, or evidence that the directors were previously involved in 2 similar decisions. At bottom, Plaintiffs’ argument is an invitation for the Court to intuit 3 how a corporation like First Solar would conduct its decisionmaking. Delaware law 4 requires more. Cf. Citigroup, 964 A.2d 134 (faulting shareholder plaintiffs for failing to 5 allege “particularized facts showing that the director defendants were . . . aware of 6 misstatements or omissions”). 7 3. Oxford Health. 8 In In re Oxford Health Plans, Inc., 192 F.R.D. 111 (S.D.N.Y. 2000), the plaintiffs 9 alleged that the company’s directors breached their fiduciary duties by making material 10 misstatements on financial statements, and argued that “[k]nowledgeable or reckless 11 conduct may be inferred from contrasting the actual facts with the public statements 12 claimed to be misleading.” Id. at 117. The court in effect employed a res ipsa loquitur 13 analysis to conclude that only bad faith conduct could explain the misstatements. 14 Plaintiffs ask the Court to follow Oxford Health and hold that bad faith on the part 15 of the continuing directors can be inferred from their approval of financial statements that 16 were extremely inaccurate. Doc. 75 at 18. But even a significant disparity between a 17 company’s statements and its actual financial position will not support an inference of 18 director bad faith absent some indication that the directors were aware of the disparity. 19 See Montini, 2014 WL 1271696, at *8 (refusing to excuse demand under Oxford Health 20 because plaintiffs “allege[d] no facts demonstrating the majority of the Board’s 21 contemporaneous knowledge” that statement was false); Impax Labs, 2015 WL 5168777, 22 at *8 (“‘The existence of false and misleading financial statements, by itself, is 23 insufficient to establish a substantial likelihood of liability for a non-exculpated claim on 24 the part of outside directors.’”) (quoting Kococinski v. Collins, 935 F. Supp. 2d 909, 920 25 (D. Minn. 2013); alterations incorporated). 26 27 Nor does the fact that the directors signed financial disclosures satisfy this requirement. As the court explained in Citigroup: 28 - 17 - 1 2 3 4 5 6 7 8 [T]he Complaint does not contain specific factual allegations that reasonably suggest sufficient board involvement in the preparation of the disclosures that would allow me to reasonably conclude that the director defendants face a substantial likelihood of personal liability. Plaintiffs do not allege facts suggesting that the director defendants prepared the financial statements or that they were directly responsible for the misstatements or omissions. The Complaint merely alleges that Citigroup’s financial statements contained false statements and material omissions and that the director defendants reviewed the financial statements pursuant to their responsibilities under the [Audit and Risk Management] Committee charter. Thus, I am unable to reasonably conclude that the director defendants face a substantial likelihood of liability. 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Id. at 134. 4. Aronson’s Second Prong. Plaintiffs argue that demand futility can be established by showing that the board was grossly negligent in approving the false financial statements. Doc. 75 at 21; see Doc. 67, ¶ 310. Defendants disagree, arguing that gross negligence cannot give rise to a substantial likelihood of personal liability because First Solar has exculpated its directors from negligence claims pursuant to 8 Del. Code § 102(b)(7). Plaintiffs rely on McPadden v. Sidhu, 964 A.2d 1262 (Del. Ch. 2008). McPadden did find demand excused under Aroson’s second prong, even though the corporation had a provision adopting an exculpatory provision. But there was no question in that case that Aronson applied, because the plaintiffs were challenging a specific board decision: the sale of a subsidiary to a former officer of the corporation. Plaintiffs in this case do not challenge a specific board decision. They allege instead that Defendants violated their fiduciary duty of candor when they failed to disclose the LPM defect. Doc. 75 at 10. Thus, Rales, not Aronson, supplies the standard for pleading demand futility. As explained in Citigroup: Where, however, plaintiffs complain of board inaction and do not challenge a specific decision of the board, there is no ‘challenged transaction,’ and the ordinary Aronson analysis does not apply. Instead, to show demand futility where the subject of the derivative suit is not a business decision of the board, a plaintiff must allege particularized facts that ‘create a reasonable - 18 - 1 2 3 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 the demand.” 964 A.2d at 120 (citing Rales, 634 A.2d at 933-34). 4 Plaintiffs cite no case holding that an allegation of gross negligence against a 5 director, without more, renders that director incapable of exercising independent and 6 disinterested business judgment in responding to a demand, particularly when the director 7 is exculpated from liability for gross negligence.8 Rather, the presumption of director 8 independence is overcome only where it appears that the director may face “a substantial 9 likelihood of director liability.” Rosenbloom, 765 F.3d at 1150; Citigroup, 964 A.2d at 10 121. Where, as here, a company has adopted an exculpatory provision, allegations of 11 gross negligence are insufficient to establish a substantial likelihood of director liability. 12 See Wood, 953 A.2d at 141 (“Where directors are contractually or otherwise exculpated 13 from liability for certain conduct, then a serious threat of liability may only be found to 14 exist if the plaintiff pleads a non-exculpated claim against the directors based on 15 particularized facts.”) (citation and quotation marks omitted); Citigroup, 964 A.2d at 132 16 (in light of company’s exculpatory provision, “plaintiffs must plead particularized factual 17 allegations that support the inference that the disclosure violation was made in bad faith, 18 knowingly or intentionally”) (citation and quotation marks omitted). 19 assuming that Plaintiffs had alleged gross negligence with sufficient particularity to 20 satisfy Rule 23.1(b) – an assumption the Court doubts given the pleading deficiencies 21 identified above – the Court could not find demand excusal on the basis of these 22 allegations. Thus, even 23 24 8 25 26 27 All of Plaintiffs’ cases involve challenges to a particular transaction approved by the board. See Bakerman v. Sidney Frank Importing Co., C.A. No. 1844-N, 2006 Del. Ch. LEXIS 180, at *1 (Del. Ch. Oct. 10, 2006) (sale of substantially all of corporation’s assets); Kahn v. Portnoy, C.A. No. 3515-CC, 2008 Del. Ch. LEXIS 184, at *1 (Del. Ch. Dec. 11, 2008) (transaction with real estate investment trust); Aronson, 473 A.2d at 812 (transaction with subsidiary). 28 - 19 - 1 2. 2 Plaintiffs’ allegations regarding the hot climate defect track their LPM allegations, 3 with one exception. Plaintiffs allege that Eaglesham informed the board on April 27, 4 2011, that the hot climate issued existed. The Court found evidence of this fact in the 5 securities fraud case: 6 7 8 9 10 Hot Climate Defect. On April 27, 2011, Eaglesham informed . . . the Board of Directors that modules were degrading at a rate of 11% in hot climates. Mitigation options, including de-rating, were presented, and Eaglesham informed the Board that the impact of de-rating would be $30-$60 million in 2011. Ultimately, the defect and its financial impact ($37.8 million) were not disclosed until the 4Q11 release and a conference call in February 2012, nearly a year after Eaglesham’s presentation. Smilovits, 119 F. Supp. 3d at 1007. 11 The Court cannot conclude, however, that this single factual allegation establishes 12 demand futility where the LPM allegations did not. True, this allegation suggests that the 13 board was aware of the hot climate defect some 10 months before it was disclosed, but it 14 does not establish that the board members knew that the company would incur significant 15 costs in addressing this defect. In fact, evidence in the securities fraud case indicates that, 16 around the time of the Eaglesham presentation, First Solar’s Director of Global Quality, 17 Michael Koralewksi, concluded that First Solar’s existing warranty accrual was sufficient 18 to cover the projected warranty claims from the hot climate defect. Smilovits, 119 F. 19 Supp. 3d at 984. The board would have been entitled to rely on this conclusion. See 20 Citigroup, 964 A.2d at 132 (“directors of Delaware corporations are fully protected in 21 relying in good faith on the reports of officers and experts”) (citing 8 Del. Code 22 § 141(e)). 23 Nor can the Court infer that the continuing directors acted in bad faith in failing to 24 disclose the hot climate defect between April 2011 and February 2012. As already noted, 25 Delaware law recognizes a presumption that directors act “on an informed basis, in good 26 faith and in the honest belief that the action taken was in the best interests of the 27 company,” and “[t]he burden is on plaintiffs, the party challenging the directors’ 28 decision, to rebut this presumption.” Citigroup, 964 A.2d at 132. Plaintiffs have not - 20 - 1 alleged particularized facts to overcome this presumption. 2 3. 3 As explained, the Court must draw all reasonable inferences in Plaintiffs’ favor 4 and consider Plaintiffs’ allegations in combination. Rosenbloom, 765 F.3d at 1155-56. 5 The Court must be cognizant, too, that a shareholder plaintiff can establish demand 6 futility without providing “a smoking gun of Board knowledge.” Id. As the Ninth 7 Circuit explained, “precedent holds that plaintiffs can show demand futility by alleging 8 particular facts that support an inference” of wrongdoing. Id. (emphasis in original). 9 Summary and Rosenbloom. Bearing all of this in mind, the Court cannot conclude Plaintiffs are entitled to 10 demand excusal. Plaintiffs have not alleged a single fact showing that any of the 11 continuing outside directors knew of the LPM defect or participated in a decision not to 12 disclose it. The various allegations about the corporate governance structure suggest, at 13 most, that the directors should have learned about the LPM defect if everything at First 14 Solar was functioning correctly. But these allegations do not suggest that the directors 15 actually learned about the defect, much less that they failed to disclose this information as 16 the result of bad faith, rather than simple negligence. 17 The hot-climate-related allegations about the Eaglesham presentation do not 18 produce a different result. These allegations show only that the board was aware of the 19 hot climate defect about 10 months before publicly disclosing it. But, critically, the 20 allegations provide no basis for inferring that the board knew that the hot climate defect 21 would have a material financial impact on the company. As explained, First Solar’s 22 Director of Global Quality indicated that existing warranty accruals would cover the 23 defect. Under Delaware law, the board was entitled to rely on this representation. Thus, 24 these allegations provide no basis for inferring that the directors acted in bad faith in 25 failing to disclose the financial impact of the hot climate defect earlier. 26 Even when all of Plaintiffs allegations are considered in combination, as 27 Rosenbloom instructs, they do not show that the continuing outside directors face a 28 substantial likelihood of personal liability. The reality remains that Plaintiffs have failed - 21 - 1 to allege a single specific fact showing that the outside directors knew of the LPM defect, 2 and have failed to allege facts from which it can reasonably be inferred that the outside 3 directors knew that the hot climate defect described by Eaglesham would exceed 4 corporate warranty accruals. 5 particularity, and Plaintiffs simply have failed to do so. 6 Rule 23.1(b) requires that such facts be alleged with This case contrasts sharply to Rosenbloom, upon which Plaintiffs rely most 7 heavily. 8 allegations that strongly support[ed] an inference . . . that the Board knew of and did 9 nothing about illegal activity.” 765 F.3d at 1152. For example, Plaintiffs presented 10 evidence that (1) the board closely and regularly monitored off-label sales of Botox; 11 (2) the board received data directly linking the company’s sales to fluctuations in off- 12 label sales; (3) the board received repeated warnings from the FDA about illegal 13 promotion of Botox; (4) the illegal conduct involved one of the company’s most 14 important products; and (5) the company’s illegal conduct “persisted for over a decade, 15 involved several divisions at [the company], and constituted nearly a dozen separate 16 programs.” 17 concluded: 18 19 20 21 22 In Rosenbloom, “Plaintiffs offer[ed] a battery of particularized factual Id. at 1152-54. After surveying these allegations, the Ninth Circuit It would be surprising, to say the least, if such significant, continuing, and diverse breaches of FDA regulations in relation to a star product at Allergen passed unnoticed by the Board for so long, even as the Board carefully monitored off-label sales, repeatedly discussed and authorized a number of the allegedly illegal programs, and built strategic plans around off-label Botox sales. Id. at 1154. 23 This case differs from Rosenbloom in at least two significant ways. 24 Plaintiffs have not alleged that there was enduring and pervasive misconduct at First 25 Solar. They allege that there were two manufacturing defects that caused the company to 26 suffer significant economic loss. Each defect was discrete, and dealt with relatively 27 quickly. Just over a year passed between March 2009, when First Solar became aware of 28 the LPM defect, and July 2010, when it disclosed the defect. An even shorter time – 10 - 22 - First, 1 months – passed between the time when First Solar first learned of the hot climate defect 2 and its disclosure of that defect. Second, Plaintiffs have not alleged that the board was 3 warned by government agencies about the alleged misconduct. With one exception – the 4 Eaglesham report – Plaintiffs have not alleged that the board was informed of the critical 5 facts by anyone. In light of these crucial distinctions, the Court cannot accept Plaintiffs’ 6 argument that they are entitled to demand excusal under Rosenbloom. 7 VI. Leave to Amend and Attorneys’ Fees. 8 Plaintiffs request leave to amend in the event any of their claims are dismissed. 9 “Leave to amend should be granted if it appears at all possible that the plaintiff can 10 correct the defect.” Lopez v. Smith, 203 F.3d 1122, 1130 (9th Cir. 2000). But “[a] 11 district court may dismiss a complaint without leave to amend if amendment would be 12 futile.” Airs Aromatics, LLC v. Opinion Victoria’s Secret Stores Brand Mgmt., Inc., 744 13 F.3d 595, 600 (9th Cir. 2014) (citation and quotation marks omitted). 14 Plaintiffs cannot establish demand futility for their insider trading and unjust 15 enrichment claims by pleading additional facts, as these claims implicate only four of 11 16 directors. These claims are dismissed without leave to amend. 17 Plaintiffs’ fiduciary duty claim could be cured by pleading “particularized factual 18 allegations that support the inference that the disclosure violation was made in bad faith, 19 knowingly or intentionally.” Citigroup, 964 A.2d at 132. Plaintiffs may be able to 20 discover facts to support these allegations by conducting a books-and-records inspection. 21 See 8 Del. Code § 220; In re Verifone Holdings, Inc., No. C 07-06347 MHP, 2009 U.S. 22 Dist. LEXIS 44138, at *36-37 (N.D. Cal. May 26, 2009) (dismissing shareholder 23 derivative case with leave to amend because “Plaintiffs may . . . engage in further 24 investigation to assert additional particularized facts” by conducting a books-and-records 25 inspection); King v. VeriFone Holdings, Inc., 12 A.3d 1140, 1150 (Del. 2011) 26 (shareholder was entitled to inspect books and records “to aid him in pleading demand 27 28 - 23 - 1 futility in a to-be-amended derivative complaint”).9 Because Plaintiffs could possibly 2 cure their fiduciary duty claim by pleading additional facts, the Court will allow Plaintiffs 3 leave to amend this claim. 4 Plaintiffs also ask the Court – in the event it dismisses the second amended 5 complaint – to unseal (or at least permit them to access) evidence from the related 6 securities fraud action. The Court declines to do so. In lifting the stay in this case, the 7 Court explained that “discovery should not be permitted to supplement allegations of 8 demand futility – allegations that should reflect facts known to Plaintiffs when they 9 elected not to make a demand on First Solar’s board.” Doc. 65 at 5; see In re Merck & 10 Co., Inc. Sec., Derivative & ERISA Litig., 493 F.3d 393, 400 (3d Cir. 2007) (“As we have 11 stated, derivative plaintiffs are required to establish that demand would have been futile 12 at the time they commenced litigation. A corollary of this rule is that discovery generally 13 may not be used to supplement allegations of demand futility.”); Rales, 634 A.2d at 934 14 n.10 (“derivative plaintiffs . . . are not entitled to discovery to assist their compliance with 15 Rule 23.1”). Allowing Plaintiffs access to sealed records – obtained after significant 16 discovery – would be tantamount to permitting Plaintiffs to conduct discovery in aid of 17 their demand futility argument. As before, the Court will exercise its discretion to deny 18 Plaintiffs discovery. See Halebian v. Berv, 644 F.3d 122, 133 (2d. Cir. 2011) (discovery 19 is with the discretion of the district court); Fagin v. Gilmartin, 432 F.3d 276, 285 (3d Cir. 20 2005) (same).10 21 22 23 24 25 26 27 28 9 Citing In re Silicon Graphics Inc. Securities Litigation, 183 F.3d 970, 991 (9th Cir. 1999), Defendants argue that leave to amend should be denied unless Plaintiffs identify specific facts that they plan to add to their complaint. But since the shareholders in Silicon Graphics did not ask for the opportunity to conduct a books-and-records investigation, that case is distinguishable. In any event, the Ninth Circuit has more recently explained that leave to amend should be granted where, as here, “it appears at all possible that the plaintiff can correct the defect.” Lopez, 203 F.3d at 1130. 10 In addition, any request to unseal portions of the record in the Smilovits case should be made in that case, where all parties may be heard. Plaintiffs have not sought to intervene in Smilovits for purposes of seeking to unseal the record despite the fact that summary judgment briefing in that case – which Plaintiffs seek to unseal – was filed more than one year ago. - 24 - 1 If leave to amend is granted, Defendants argue that it should be “‘conditioned on 2 the plaintiff paying the defendants’ attorneys’ fees incurred on the initial motion to 3 dismiss.’” Doc. 70 at 22 (quoting King, 12 A.3d at 1151-52). Plaintiffs do not argue to 4 the contrary. See Doc. 75 at 24. Given that Plaintiffs are seeking leave to file their fourth 5 complaint, the Court agrees that such leave should be contingent on Plaintiffs’ payment 6 of the attorneys’ fees Defendants incurred in litigating this motion. If Plaintiffs elect to 7 file an amendment, Defendants may move for attorneys’ fees pursuant to Rule 54(d)(2). 8 IT IS ORDERED: 9 1. Defendants’ motion to dismiss (Doc. 70) is granted. The insider trading 10 and unjust enrichment claims are dismissed with prejudice. The fiduciary 11 duty claim is dismissed without prejudice. Plaintiffs shall file an amended 12 complaint by September 16, 2016. 13 14 15 2. Defendants’ request for judicial notice (Doc. 72) is granted as to Exhibits A through C, and otherwise denied as moot. Dated this 30th day of June, 2016. 16 17 18 19 20 21 22 23 24 25 26 27 28 - 25 -

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