Saraceni v. Miller et al

Filing 69

ORDER by Judge Samuel Conti granting in part and denying in part Defendants' motions to dismiss 48 , 51 and granting leave to amend. Plaintiffs shall file an amended complaint within thirty (30) days. (sclc2, COURT STAFF) (Filed on 1/13/2015)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

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IN RE: POLYCOM, INC. DERIVATIVE
LITIGATION

United States District Court

For the Northern District of California

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This Order Relates To:

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ALL ACTIONS

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Case No. 13-CV-03880 SC
ORDER GRANTING IN PART AND
DENYING IN PART MOTIONS TO
DISMISS

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I.

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INTRODUCTION
Now before the Court are motions to dismiss Plaintiffs'

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Verified Consolidated First Amended Shareholder Derivative

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Complaint, ECF No. 47 ("Compl.").

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Polycom, Inc. and five members of its Board of Directors, Betsy S.

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Atkins, John A. Kelley, D. Scott Mercer, William A. Owens, and

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Kevin T. Parker,1 (collectively, "Polycom").

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Mot.").

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The first motion was filed by

ECF No. 48 ("Polycom

The second motion was filed by Polycom's former CEO and

The Court will refer to the Board Members collectively as simply
"the Board" or "the Board Members." In addition to serving on the
board, three individual defendants, Kelley, Mercer, and Parker
served on Polycom's Audit Committee. The Court will refer to these
individuals specifically as the "Audit Committee."

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Defendant Andrew Miller.

ECF No. 51 ("Miller Mot.").

The motions

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are fully briefed,2 and appropriate for disposition without oral

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argument under Civil Local Rule 7-1(b).

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below, the motions are GRANTED IN PART and DENIED IN PART.

For the reasons set forth

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II.

BACKGROUND
This is a shareholder derivative suit against Polycom, a San

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Jose-based provider of video and telecommunication systems,

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arising out of allegations of misconduct by Polycom's CEO, Andrew

United States District Court

For the Northern District of California

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Miller.

Miller resigned after an investigation by Polycom's Audit

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Committee, made up of Kelley, Mercer, and Parker, found problems

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with Miller's expense reimbursements.
During Miller's tenure as CEO, he allegedly claimed

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reimbursements for numerous inappropriate personal expenses.

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According to a confidential witness for Plaintiffs, this behavior

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was well-known within Polycom, although the parties disagree about

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the extent and import of any such knowledge.

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an investigation, Miller and Polycom entered into a separation

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agreement.

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resign, release compensation and employment-related claims against

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Polycom, and provide continued assistance through a transition

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period in exchange for a severance package.

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resignation, Polycom stated in a press release that "[t]he amounts

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[of the inappropriate personal expenses] did not have a material

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impact on the Company's current or previously reported financial

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statements for any period, nor did they involve any other

In any event, after

Under the separation agreement, Miller agreed to

Following Miller's

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ECF Nos. 59 ("Opp'n"), 60 ("Polycom Reply"), 61 ("Miller Reply").

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employees."

ECF No. 50 ("Rucker Decl.") Ex. A ("Form 8-K").3

Shortly thereafter, Plaintiffs filed derivative complaints

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alleging breaches of fiduciary duty, unjust enrichment, and

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corporate waste against Miller and the Director Defendants.

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Plaintiffs' view, the Board made false statements (or allowed such

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statements to be made by others) about the adequacy of internal

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controls on expense reimbursement, failed to implement and apply

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Polycom's expense reimbursement policies, unjustifiably gave Miller

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a 'golden parachute' without adequately assessing his conduct,

In

United States District Court

For the Northern District of California

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granted Miller a "unique position of power over the Company," in

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which the directors were "beholden" to him, and repurchased stock

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at prices artificially inflated by misleading statements about

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internal controls and compliance.

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127, 142-51, 169.

See Compl. ¶¶ 31, 107-08, 112,

Prior to filing suit, Plaintiffs did not demand Polycom's

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Board pursue these claims directly on Polycom's behalf, arguing

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that doing so would have been futile.

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complaint was filed, Polycom's Board had five members, the Board

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Members.

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always been outside directors.

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CEO after Miller's resignation.

At the time the initial

Four of those, Atkins, Kelley, Mercer, and Owens, have
The fifth, Parker, became interim-

Now Defendants move to dismiss, arguing that Plaintiffs'

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failure to make a presuit demand on the Board cannot be excused.

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In the alternative, they suggest that the complaint should be

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This document and other SEC filings are the subject of Requests
for Judicial Notice, ECF Nos. 49, 52. Courts often take judicial
notice of such filings. See In re Netflix, Inc., Sec. Litig., 923
F. Supp. 2d 1214, 1218 n.1 (N.D. Cal. 2013). Because these
documents "can be accurately and readily determined from sources
whose accuracy cannot reasonably be questioned," Fed. R. Evid.
201(b), the requests are GRANTED.

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dismissed under Federal Rule of Civil Procedure 12(b)(6).

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Plaintiffs oppose.

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III. LEGAL STANDARD

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A.

Derivative Suits Generally

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Generally speaking, a corporation, not its shareholders, has

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the sole right to pursue litigation for injuries suffered by the

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corporation.

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2008).

See Potter v. Hughes, 546 F.3d 1051, 1058 (9th Cir.

A shareholder derivative suit is one of the exceptions to

United States District Court

For the Northern District of California

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this general rule.

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individual shareholder to bring 'suit to enforce a corporate cause

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of action against officers, directors, and third parties.'"

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v. Kemper Fin. Servs., Inc., 500 U.S. 90, 95 (1991) (quoting Ross

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v. Bernhard, 396 U.S. 531, 534 (1970)) (emphasis in original).

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"The derivative form of action permits an

Kamen

"The theory in a derivative suit is that a corporation's board

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has been so faithless to investors' interests that investors must

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be allowed to pursue a claim in the corporation's name."

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Booth Tr. v. Crowley, 687 F.3d 314, 316-17 (7th Cir. 2012).

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is a serious remedy, and as a result, courts require a shareholder

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'demand' the corporation bring the claim directly or show that

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demand should be excused because the board is biased or demand is

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otherwise futile.

Robert F.
This

Kamen, 500 U.S. at 96.

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B.

Pleading Standard Under Rule 23.1

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Federal law requires that a shareholder derivative complaint

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describe "with particularity" "any effort by the plaintiff to

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obtain the desired action from the directors and . . . the reasons

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for not obtaining the action or not making the effort."

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Civ. P. 23.1(b)(3)(A)-(B).

Fed. R.

On a motion to dismiss under Rule 23.1

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the Court must accept as true well-pleaded factual allegations in

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the complaint.

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F.R.D. 117, 127 (D.N.J. 1999).

In re Cendent Corp. Deriv. Action Litig., 189

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C.

Demand Futility Under Delaware Law

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Because Polycom is incorporated in Delaware, Delaware law

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supplies the standard for assessing whether the failure to make

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demand on the board can be excused.

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also In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 989-90

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(9th Cir. 1999), abrogated on other grounds, S. Ferry LP, No. 2 v.

Kamen, 500 U.S. at 108-09; see

United States District Court

For the Northern District of California

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Killinger, 542 F.3d 776, 784 (9th Cir. 2008).

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requirement is "designed to give a corporation the opportunity to

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rectify an alleged wrong without litigation, and to control any

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litigation which does arise."

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(Del. 1984), overruled in part on other grounds, Brehm v. Eisner,

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746 A.2d 244 (Del. 2000).

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The demand

Aronson v. Lewis, 473 A.2d 805, 809

In order to demonstrate that demand would have been futile,

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there are two relevant tests.

The first, the Aronson test, applies

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when plaintiffs challenge a board decision.

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Inc. S'holder Derivative Litig., 503 F. Supp. 2d 1341, 1345 (N.D.

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Cal. 2007).

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"under the particularized facts alleged, a reasonable doubt is

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created that: (1) the directors are disinterested and

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independent [, or] (2) the challenged transaction was otherwise the

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product of valid exercise of business judgment."

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at 814.

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plaintiff can demonstrate a reasonable doubt as to the first or

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second prong of the Aronson test, then he has demonstrated that

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demand would have been futile."

In re Openwave Sys.

To satisfy the Aronson test, plaintiffs must show

Aronson, 473 A.2d

The Aronson test is disjunctive, so "[i]f a derivative

Seminaris v. Landa, 662 A.2d 1350,

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1354 (Del. Ch. 1995).
The second test, the Rales test, applies "where the board that

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would be considering the demand did not make a business decision

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which is being challenged . . . ."

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927, 933 (Del. 1993).

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of Aronson is inapplicable, and the plaintiff must plead

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particularized facts that there is a reasonable doubt that a board

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majority could exercise independent and disinterested business

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judgment in responding to a demand.

United States District Court

For the Northern District of California

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Rales v. Blasband, 634 A.2d

Under those circumstances, the second prong

See Rales v. Blasband, 634

A.2d 927, 934 (Del. 1993).
Under both these tests, reasonable doubt is "akin to the

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concept that the stockholder has a 'reasonable belief' that the

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board lacks independence."

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n.17 (Del. 1996), overruled on other grounds, Brehm, 746 A.2d 244.

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The business judgment rule is the "presumption that directors

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making a business decision, not involving self-interest, act on an

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informed basis, in good faith, and in the honest belief that their

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actions are in the corporation's best interest."

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539 A.2d 180, 187 (Del. 1988), overruled in part on other grounds,

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Brehm, 746 A.2d 244.

Grimes v. Donald, 673 A.2d 1207, 1217

Grobow v. Perot,

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III. DISCUSSION
Plaintiffs make four claims.

First, Plaintiffs claim that the

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board failed to adequately oversee Polycom's auditing and

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accounting controls.

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false and misleading financial statements.

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believe the separation agreement the board executed with Miller

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constitutes corporate waste and accorded excessive benefits.

Second, Plaintiffs argue that Polycom issued

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Third, Plaintiffs

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Finally, Plaintiffs challenge Polycom's stock repurchases.

While

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"no single factor . . . may itself be dispositive in any particular

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case," the Court must determine "whether the accumulation of all

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factors creates the reasonable doubt" that the board was

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independent and exercised independent and disinterested business

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judgment.

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Plaintiffs' oversight and false and misleading statement

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claims are governed by the Rales test, while Plaintiffs' challenges

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to the separation agreement are governed by the Aronson test.

United States District Court

For the Northern District of California

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Compare In re Accuray, Inc. S'holder Derivative Litig., 757 F.

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Supp. 2d 919, 926-30 (N.D. Cal. 2010) (applying the Rales test to

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oversight claims), with Zucker v. Andreessen, No. 6014-VCP, 2012 WL

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2366448, at *6 (Del. Ch. June 21, 2012) (reviewing a severance

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agreement under the Aronson test).

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to each claim, the Court examines each claim in isolation while

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remaining mindful of the requirement that the Court "determine

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whether the totality of Plaintiffs' allegations demonstrate a

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reasonable doubt about the Board's impartiality."

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Inc. Derivative Litig., 773 F. Supp. 2d 844, 860 (C.D. Cal. 2011)

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(citing Harris v. Carter, 582 A.2d 222, 229 (Del. Ch. 1990)).

Because different tests apply

In re Bidz.com,

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Under Polycom's certification of incorporation, Polycom limits

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director liability for breaches of fiduciary duty "[t]o the fullest

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extent permitted by the Delaware General Corporation Law . . . ."

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Rucker Decl. Ex. D, Art. IX.

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clause is authorized by Section 102(b)(7) of the Delaware General

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Corporation Law, and, contrary to Plaintiffs' assertions, is

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appropriately considered at the pleading stage in assessing demand

This type of so-called exculpatory

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futility.4

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exculpatory clause at the pleading stage in assessing demand

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futility).

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"substantial likelihood that [the Board Members'] conduct falls

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outside the exemption."

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654 A.2d 1268, 1270 (Del. Ch. 1995).

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disclosure violation that falls outside the exculpatory clause,

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"plaintiffs must plead particularized factual allegations that

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'support the inference that the disclosure violation was made in

See Citigroup, 964 A.2d at 133 (considering an

As a result, Plaintiffs must plead with particularity

In re Baxter Int'l, Inc. S'holders Litig.,
For example, to plead a

United States District Court

For the Northern District of California

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bad faith, knowingly, or intentionally.'"

Citigroup, 964 A.2d at

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132 (quoting O'Reilly v. Transworld Healthcare, Inc., 745 A.2d 902,

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915 (Del. Ch. Aug. 20, 1999)).
Plaintiffs argue that the Board faces a substantial likelihood

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of personal liability for violations of the duties of loyalty and

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good faith5 because the Board Members: (1) failed to oversee and

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Plaintiffs are mistaken about whether the Court can consider the
exculpatory clause on the motion to dismiss, because, as other
courts have found, "the considerations informing an evaluation of
demand futility are not necessarily the same as the appropriate
considerations in evaluating whether a plaintiff has stated a
claim." Compare In re Maxwell Techs., Inc. Derivative Litig., No.
13-CV-966-BEN RBB, 2014 WL 2212155, at *8 (S.D. Cal. May 27, 2014),
with In re Tower Air, Inc., 416 F.3d 229, 242 (3d Cir. 2005), and
In re Brown Sch., 368 B.R. 394, 401 (Bankr. D. Del. 2007). As a
result, the Court takes judicial notice of Polycom's certificate of
incorporation. See Brown v. Moll, No. C 09-05881 SI, 2010 WL
2898324, at *1 n.1, *4 (N.D. Cal. July 21, 2010) (taking judicial
notice of a certificate of incorporation in assessing a motion to
dismiss a derivative suit).
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Perhaps recognizing that their claims for breaches of the duty of
care are likely barred by the exculpatory clause, Plaintiffs appear
not to press these claims in their opposition. Compare Compl. ¶¶
127, 157-58, with Opp'n at 17 ("Director Defendants each breached
their duties of loyalty and good faith and wasted Company
assets . . . ."), Rucker Decl. Ex. D, Art. IX (providing that "no
director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty"), and Guttman, 823 A.2d at 501.

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ensure the effectiveness of Polycom's auditing and accounting

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controls, (2) made or caused to be made financial statements that

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were false and misleading in light of Miller's conduct and the

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alleged lack of adequate internal controls, and (3) approved

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Miller's separation agreement without adequately investigating

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Miller's misconduct.6

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A.

The Oversight Claim

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Plaintiffs allege that demand is excused on their oversight

United States District Court

claim because the board faces a substantial likelihood of personal

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For the Northern District of California

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liability for failing to adequately oversee Polycom's auditing and

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accounting controls.

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principally on a confidential witness ("CW") who was responsible

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for reviewing Miller's expense receipts and preparing his expense

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reports.

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Merken, Polycom's Vice President for Global Sales before allegedly

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being terminated for refusing to submit Miller's expense reports

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for including personal expenses.

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improper expenses were "common knowledge," most of Polycom's

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In support of this theory, Plaintiffs rely

During the CW's time at Polycom, he7 reported to Jill

The CW stated that Miller's

Plaintiffs' complaint also makes claims based on stock
repurchases made at allegedly artificially inflated prices. In
their motions to dismiss Defendants argue, among other things, that
because there were no particularized facts demonstrating the
Board's knowledge that the stock price was artificially inflated
and the repurchases were protected by the business judgment rule,
it is not substantially likely the Board would face personal
liability on these claims. See Citigroup, 964 A.2d at 137; Silicon
Graphics, 183 F.3d at 990. In any event, while Plaintiffs mention
the existence of these claims, they make no attempt to respond.
"[I]n most circumstances, failure to respond in an opposition brief
to an argument put forward in an opening brief constitutes waiver
or abandonment in regard to the uncontested issue." Stichting
Pensioenfonds ABP v. Countrywide Fin. Corp., 802 F. Supp. 2d 1125,
1132 (C.D. Cal. 2011) (quotation omitted). As a result, the Court
need not address these allegations.
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For obvious reasons, the CW's gender is not clear. For
simplicity the Court will refer to the CW using male pronouns.

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"'executive assistants knew' and that multiple senior members of

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the accounting department" were aware as well.

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Further, according to the Complaint, "[t]his knowledge reached the

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highest levels of senior management," and the CW "once had a

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conversation with Laura Durr, who served as Polycom's

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Controller . . . and who was appointed Interim Chief Financial

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Officer by the Director Defendants [in] . . . 2014, about . . .

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what Durr called Miller's 'unusual expense reports'"

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Compl. at ¶ 48.

Id. at ¶ 49.

The chief problem with this allegation is Plaintiffs' failure

United States District Court

For the Northern District of California

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to show that it is likely, let alone substantially likely, that the

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board would face liability on such a claim.

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have made clear, oversight claims are extremely difficult to prove.

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See In re Caremark Int'l Inc. Derivative Litig., 698 A.2d 959, 967

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(Del. Ch. 1996) (stating that an oversight claim is "possibly the

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most difficult theory in corporate law upon which a plaintiff might

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hope to win a judgment").

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oversight claim unless "(a) the directors utterly failed to

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implement any reporting or information system or controls; or (b)

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having implemented such a system or controls, consciously failed to

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monitor or oversee its operations thus disabling themselves from

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being informed of risks or problems requiring their attention."

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Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006) (emphasis in

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original).

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As Delaware courts

Directors cannot be held liable on an

Plaintiffs admit that throughout the relevant period Polycom

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had internal controls in place.

The Complaint lays out the

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existence of Polycom's Audit Committee, the Committee's duties, and

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Polycom's Code of Business Ethics and Conduct, which provides that

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"Polycom funds must be used only for Polycom business

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for any personal purpose."

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21.

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heavily in support of this claim stated that "Polycom had a

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tightly-monitored expense report approval process that easily would

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have uncovered Miller's . . . conduct."

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Plaintiffs argue at times that the Board "fail[ed] to exercise due

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care and diligence in the management and administration of the

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affairs of Polycom by failing to take reasonable steps to ensure

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United States District Court

purposes . . . Polycom employees . . . must not use Polycom funds

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For the Northern District of California

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that the Audit Committee implemented and assured compliance with

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adequate expense reimbursement policies and procedures . . . ."

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Opp'n at 17.

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Compl. ¶¶ 52-54; see also id. ¶¶ 117-

Indeed, the confidential witness on whom Plaintiffs rely

Id. ¶ 43.

Despite this,

The problem with this allegation is it turns the Caremark

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inquiry on its head.

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showing that the Board failed to implement or monitor Polycom's

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internal controls and that, as a result, the Company suffered some

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loss, Plaintiffs' complaint relies solely on the loss as proof that

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the internal controls or oversight were inadequate.

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Compl. ¶ 144 (stating that the Board faces a substantial likelihood

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of liability for "unreasonably failing to prevent or expeditiously

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discover and stop the payment of improper expense reimbursements to

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Miller . . .").

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allow Plaintiffs to simply presume "that employee wrongdoing would

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not occur if the directors performed their duty properly."

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Baxter Int'l, Inc. S'holder Litig., 654 A.2d 1268, 1271 (Del. Ch.

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1995).

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28

Rather than plead particularized facts

See, e.g.,

This is insufficient because Delaware law does not

Furthermore, because internal controls were in place
throughout the relevant period, Plaintiffs must plead

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In re

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particularized facts demonstrating that "the directors knew they

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were not discharging their fiduciary obligations or that the

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directors demonstrated a conscious disregard for their

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responsibilities such as by failing to act in the face of a known

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duty to act."

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This is a "scienter-based standard . . . ."

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924 A.2d 908, 935 (Del. Ch. 2007).

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9

Citigroup, 964 A.2d at 123 (emphasis in original).
Desimone v. Barrows,

Plaintiffs have not adequately pleaded that the Board knew of
problems with Polycom's auditing and accounting controls or

United States District Court

For the Northern District of California

10

consciously disregarded its responsibilities.

For instance, while

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the CW's statements suggest that Polycom employees (and some

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management) were aware of the problems with Miller's expense

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reports, the CW does not say that he ever informed Miller or any of

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the Board Members of those issues.

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Plaintiffs' pleadings connect the awareness of some employees and

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management at Polycom to what the Board should have known.

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Instead, Plaintiffs simply argue that red flags existed for the

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board to see "had they not turned a blind eye to their duties to

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ensure the Company had basic internal controls in place."

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22-23.

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internal controls were disregarded or red flags were ignored.

22

Instead, Plaintiffs' complaint merely shows that some individuals

23

within the company were aware of issues with Miller's expense

24

reports, without providing any basis aside from speculation for

25

determining the board knew or should have known that violations of

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the law were occurring.

27

Techs., Inc. Derivative Litig., No. C-06-06699, 2008 WL 3823726, at

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*6 (N.D. Cal. Aug. 13, 2008) (rejecting the statement that "members

Nor do the CW's statements or

Opp'n at

But Plaintiffs do not identify a single instance where

This is insufficient.

12

See In re MIPS

1

of [board committees] were very aware of what [a company Vice

2

President] was doing . . ." as "hopelessly vague [and] general")

3

(internal quotation marks omitted) (emphasis omitted).

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directors' duty to be informed does not "require directors to

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possess detailed information about all aspects of the operation of

6

the enterprise," the Court cannot simply infer the board knew or

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should have known of the problems with Miller's expense reports.

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Caremark, 698 A.2d at 971.

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United States District Court

For the Northern District of California

10

Because a

As a result, the demand requirement cannot be excused for
Plaintiffs' oversight claims.

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B.

False Financial Statement Claims

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Plaintiffs also allege that various public financial

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statements were materially false and misleading because (1) Miller

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submitted false expense reports, (2) those false reports caused

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Polycom to report false and misleading expenses and financial

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results, (3) Miller violated Polycom's Code of Business Ethics and

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Conduct and therefore could have been dismissed, and (4) the

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company lacked effective internal controls.

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demand is excused on these claims because the board faces a

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substantial likelihood of liability for making these statements.

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Plaintiffs argue that

These allegations suffer from similar defects as Plaintiffs'

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oversight claims.

Most importantly, Plaintiffs have again failed

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to adequately plead the Directors' state of mind.

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substantial likelihood of liability" for false and misleading

25

statements "that would excuse demand, plaintiffs must plead

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particularized factual allegations that 'support the inference that

27

the disclosure violation was made in bad faith, knowingly or

28

intentionally.'"

"[T]o show a

Citigroup, 964 A.2d at 132 (quoting O'Reilly v.

13

1

Transworld Healthcare, Inc., 745 A.2d 902, 915 (Del. Ch. Aug. 20,

2

1999)).

3

Here, Plaintiffs have not pleaded any particularized facts

4

supporting a finding of bad faith, knowledge, or intent to deceive

5

on the part of any of the Directors.

6

made any specific allegations about the Director Defendants' state

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of mind at all, which is necessary to determine whether any

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allegedly misleading statements were made with knowledge or bad

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faith.

In fact, Plaintiffs have not

Maxwell, 2014 WL 2212155, at *12 ("Plaintiffs must allege

United States District Court

For the Northern District of California

10

specific factual allegations to allow a court to analyze the state

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of mind of individual director defendants, and cannot rely on broad

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group allegations.") (citing Citigroup, 964 A.2d at 134).

13

Plaintiffs ask the Court to infer that because the Director

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Defendants and members of the Audit Committee had a duty to review

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Polycom's internal controls, auditing, and financial statements,

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and signed various statements averring that they did so, they

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either must have known of the falsity of aspects of those financial

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statements or turned a blind eye to their duties.

19

have rejected this theory, and the Court agrees.

20

Accuray, 757 F. Supp. 2d at 928; Maxwell, 2014 WL 2212155, at *11;

21

Wood v. Baum, 953 A.2d 136, 142 (Del. 2008); Citigroup, 964 A.2d at

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126-27.

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Directors knew, when they knew it, or anything more than "general

24

allegation[s] that the Board participated" in making or causing

25

false or misleading statements to be made, the Court cannot infer

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that the board acted in bad faith, knowingly, or with intent to

27

deceive.

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rest[ing] on a general allegation that the Board participated in

Instead,

Other courts
See, e.g.,

Without any particularized allegations explaining what the

Silicon Graphics, 183 F.3d at 990 (finding that "claims

14

1

[a] fraudulent scheme" are insufficient standing alone); see also

2

Citigroup, 964 A.2d at 132-34.

3

Finally, Plaintiffs allege that the Board caused Polycom to

Miller's expense reports was "complete," and failed to promptly

6

inform the public that the SEC began an investigation into the

7

Audit Committee's review of Miller's expenses and subsequent

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resignation.

9

in a Form 8-K filed with the SEC on July 23, 2013, and stated that

10

United States District Court

falsely or misleadingly suggest that the Company's investigation of

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For the Northern District of California

4

"the Audit Committee of the Board completed a review of certain of

11

Mr. Miller's expense submissions.

12

certain irregularities in these submissions.

13

the review, Mr. Miller accepted responsibility" and resigned.

14

Compl. ¶ 111.

15

misleading because it suggests that the inquiry into Miller's

16

expenses was complete "when in fact such a review was ongoing and

17

wouldn't be completed for many months . . . ."

18

The problem with this view is that the statement says that the

19

Audit Committee had completed a review of "certain of Mr. Miller's"

20

expense reports -- not that the Audit Committee had reviewed all of

21

Miller's reports or that no further review of any other reports was

22

ongoing.

23

whether the Board acted in bad faith or with intent to deceive in

24

using the word "completed" in reference to the Audit Committee's

25

review or in failing to disclose the existence of the SEC

26

investigation sooner.

27
28

The allegedly false or misleading statement appeared

The Audit Committee found
At the conclusion of

In Plaintiffs' view, this statement is false or

Opp'n at 17-18.

Similarly, Plaintiffs again fail to plead any facts about

As a result, the demand requirement cannot be excused for
Plaintiffs' claims arising out of allegedly false or misleading

15

1

statements.

2

C.

Miller's Separation Agreement and Release

3

Finally, Plaintiffs allege several issues related to the

4

separation agreement between Polycom and Miller.

First, Plaintiffs

5

believe the separation agreement afforded Miller excessive benefits

6

and constituted corporate waste.

7

Board acted hastily, approving the separation agreement before

8

determining the full scope and impact of Miller's improper expense

9

submissions.

Second, Plaintiffs argue that the

Because Plaintiffs challenge "a discrete

United States District Court

For the Northern District of California

10

transaction," the Court reviews demand futility under the two-prong

11

Aronson test.

12

at *6 (Del. Ch. June 21, 2012).

13
14

Zucker v. Andreessen, No. 6014-VCP, 2012 WL 2366448,

1.

First Prong of the Aronson Test

While Plaintiffs largely confine their challenge to the

15

separation agreement to the second prong of Aronson, Plaintiffs'

16

complaint also alleges that the Board was not disinterested and

17

independent in evaluating Miller's separation agreement.

18

Compl. ¶¶ 151-52 (arguing that the board did not act independently

19

in negotiating and authorizing Miller's separation from Polycom).

20

Defendants challenge these allegations, and Plaintiffs appear to

21

have abandoned this theory, instead arguing that the separation

22

agreement is not protected by the business judgment rule.

23

See

Nevertheless, in the interest of completeness, the Court finds

24

that Plaintiffs have failed to raise a reasonable doubt as to the

25

Board's independence.

26

decisions are "based on the corporate merits of the subject before

27

the board rather than extraneous considerations or influences."

28

Aronson, 473 A.2d at 816.

Directors are independent when their

"When alleging lack of independence in

16

1

the demand futility context, 'a plaintiff charging domination and

2

control of one or more directors must allege particularized facts

3

manifesting a direction of corporate conduct in such a way as to

4

comport with the wishes or interests of the [person] doing the

5

controlling.'"

6

473 A.2d at 816).

Bidz.com, 773 F. Supp. 2d at 853 (quoting Aronson,

Here it strains credulity to conclude that the Board was

7
8

simultaneously so beholden to Miller that it could not

9

independently negotiate his departure from the company and

United States District Court

For the Northern District of California

10

sufficiently independent to initiate an internal investigation,

11

confirm Miller's wrongdoing, and obtain his departure from the

12

Company.

13

allegations of a lack of independence were unavailing under

14

circumstances like these, and the Court concurs.

15

Snyder, No. 05 CV 01563 EWN BNB, 2006 WL 22226189, at *9 (D. Colo.

16

Aug. 3, 2006) ("It is difficult to conceive that a majority of the

17

Board was so 'beholden' to Defendant [Miller], yet they were able

18

to initiate an internal investigation and force Defendant

19

[Miller's] [departure].").

Id. at ¶ 152.

2.

20

Another court has found that similar

Andropolis v.

Second Prong of the Aronson Test

21

To show demand futility under Aronson's second prong,

22

Plaintiffs must plead particularized facts raising a reasonable

23

doubt that the transaction is protected by the business judgment

24

rule.

25

a business decision the directors of a corporation acted on an

26

informed basis, in good faith and in the honest belief that the

27

action taken was in the best interest of the company."

28

473 A.2d at 812.

The business judgment rule is "a presumption that in making

Aronson,

To rebut this presumption, "plaintiffs must plead

17

1

particularized facts sufficient to raise (1) a reason to doubt that

2

the action was taken honestly and in good faith or (2) a reason to

3

doubt that the board was adequately informed in making the

4

decision."

5

286 (Del. Ch. 2003).

6

In re Walt Disney Co. Derivative Litig., 825 A.2d 275,

Plaintiffs argue they have raised a reasonable doubt as to

7

whether the approval of the separation agreement was a valid

8

exercise of business judgment because the agreement constituted

9

corporate waste.

Waste requires a "showing that the board's

United States District Court

For the Northern District of California

10

decision was so egregious or irrational that it could not have been

11

based on a valid assessment of the corporation's best interests."

12

White v. Panic, 783 A.2d 543, 554 n.36 (Del. 2001).

13

the corporation has received 'any substantial consideration' and

14

where the board has made 'a good faith judgment that in the

15

circumstances the transaction was worthwhile' a finding of waste is

16

inappropriate, even if hindsight proves that the transaction may

17

have been ill-advised."

18

1580969, at *9 (Del. Ch. Mar. 30, 2012) (quoting Lewis v.

19

Vogelstein, 699 A.2d 327, 336 (Del. Ch. 1997)).

"Where . . .

Protas v. Cavanagh, No. 6555-VCG, 2012 WL

20

Plaintiffs cannot satisfy this test for two reasons.

First,

21

Polycom received substantial consideration under the agreement.

22

Under the terms of the agreement, Miller received $500,000 cash,

23

continued bonus eligibility for the first half of 2013 (the

24

agreement was entered into on July 22, 2013 and his bonus

25

eventually amounted to $320,625), reimbursement for COBRA expenses,

26

and was allowed to keep his company computer and other mobile

27

electronic equipment.

28

salary through August 15, 2013, and was able to collect previously

Miller also continued to receive his base

18

1

unvested stock awards.

2

Polycom received a release of Miller's employment-related claims,

3

an agreement to assist Polycom during its leadership transition,

4

Miller's voluntary resignation from the board (without requiring a

5

shareholder vote), and various other contractual protections like

6

non-disparagement and anti-solicitation provisions.

7

court recently found while assessing a similar separation

8

agreement, these provisions "clearly provide benefits to

9

[Polycom]."

United States District Court

As another

Maxwell, 2014 WL 2212155, at *16.

Second, because "Plaintiffs do not raise any reasonable doubt

10
For the Northern District of California

In exchange for those benefits to Miller,

11

that this decision fell outside the outer limits of the Board's

12

broad discretion to determine how to compensate [Miller]," the

13

question of whether the benefits to Polycom justify the costs in

14

benefits to Miller remains "a business decision for the Board."

15

Id.

16

that while the separation agreement may, in isolation, appear to

17

confer excessive benefits on Miller, Plaintiffs ignore that Miller

18

was already entitled to compensation by virtue of his preexisting

19

contractual relationship with Polycom and do not allege that he

20

received more than he would have received had the Board terminated

21

him for cause.

22

Members repeatedly point out, the separation agreement does not

23

release Polycom's potential claims against Miller.

24

the separation agreement protected Polycom from potential future

25

litigation by Miller, while still preserving the Board's

26

prerogative to bring suit against Miller if the Board later

27

discovered grounds for doing so.

28

Two points support this conclusion.

First, Defendants note

Second, and even more importantly, as the Board

As a result,

Nevertheless, Plaintiffs argue that even if there is no reason

19

1

to doubt the Board's honesty and good faith, the Board is still not

2

entitled to business judgment protection because it was not

3

adequately informed prior to entering into the separation

4

agreement.

5

re Walt Disney Co. Derivative Litigation, 825 A.2d 275 (Del. Ch.

6

2003), which they argue demonstrates the Board's bad faith and

7

failure to exercise its business judgment "on facts similar to, but

8

even less damaging than this case."

9

court found that the plaintiffs' allegations demonstrated that

In support of these arguments, Plaintiffs relies on In

Opp'n at 18.

In Disney, the

United States District Court

For the Northern District of California

10

Disney's directors failed to exercise "any business judgment and

11

failed to make any good faith attempt to fulfill their fiduciary

12

duties" because the board abdicated all responsibility regarding an

13

executive's termination agreement.

14

original).

15

it had not been informed; (2) failed to inquire about the

16

conditions and terms of the agreement; and (3) failed even to

17

attempt to stop or delay the termination until more information

18

could be collected."

19

recognized that "[i]f the board had taken the time or effort to

20

review these or other options, perhaps with the assistance of

21

expert legal advisors, the business judgment rule might well

22

protect its decision."

23

825 A.2d at 278 (emphasis in

Specifically, the Disney board "(1) failed to ask why

Id. at 289.

Nonetheless, the Disney court

Id.

Defendants rightly argue that was the case here.

Unlike the

24

board's "ostrich-like approach" in Disney, the Board here did not

25

abdicate its responsibilities to be informed entirely or allow

26

conflicts of interest to infect the process.

27

Board was aware of the issues with Miller's expense reports at the

28

time it entered into the separation agreement, had conducted an

20

On the contrary, the

1

internal investigation into certain of Miller's expense reports,

2

and was represented by independent legal counsel in an arms-length

3

negotiation.

4

did not understand the terms of Miller's separation agreement.

5

Plaintiffs' only complaint is that the Board did not gather more

6

information before acting.

7

only requires the board to reasonably inform itself; it does not

8

require perfection or the consideration of every conceivable

9

alternative."

Furthermore, Plaintiffs do not allege that the Board

But "[t]he business judgment rule . . .

In re Goldman Sachs Grp. Inc. S'holder Litig., Civ.

United States District Court

For the Northern District of California

10

A. No. 5215-VCG, 2011 WL 4826104, at *16 (Del. Ch. Oct. 12, 2011)

11

(emphasis in original).

12

circumstances the Board was reasonably informed at the time the

13

separation agreement was negotiated and approved, and as a result

14

their actions are protected by the business judgment rule.

15
16

The Court is persuaded under these

As a result, the demand requirement cannot be excused for
Plaintiffs' claims arising out of the separation agreement.

17

D.

Demand Futility as to the Audit Committee

18

Finally, Plaintiffs argue that even if they have inadequately

19

pleaded demand futility to Atkins and Owens, the Court should still

20

find demand futile because the members of the Audit Committee,

21

Kelley, Mercer, and Parker, faced a substantial likelihood of

22

liability for inadequate oversight and for the allegedly false and

23

misleading financial statements.

24

this argument is the charter for Polycom's Audit Committee, which

25

lays out the Committee's responsibilities, and various reports and

26

financial statements in which the Audit Committee members

27

reiterated their duties to review Polycom's "internal controls

28

processes, audit processes, and financial statements," and

Plaintiffs' chief support for

21

1

acknowledged that they had done so.

2

Because the Audit Committee was responsible for and repeatedly

3

averred that it had reviewed Polycom's internal controls, auditing,

4

and finances, Plaintiffs conclude the Audit Committee "expressly

5

acknowledged having contemporaneous and direct access to specific,

6

material facts that contradicted and demonstrated the misleading

7

nature of the . . . challenged statements, and to facts

8

demonstrating Polycom's inadequate internal controls."

9

146; Opp'n at 23.

United States District Court

Compl. ¶

The problem with this argument is that it is "contrary to

10
For the Northern District of California

Opp'n at 23; Compl. ¶¶ 145-50.

11

well-settled Delaware law" to infer a culpable state of mind based

12

solely on membership on the Audit Committee.

13

142.

14

WL 22284323 (Del. Ch. Apr. 7, 2003), Vice Chancellor Noble

15

addressed a similar demand futility theory specifically targeting

16

the members of a corporation's audit committee.

17

here, the complaint "sets forth vast tracts of quoted materials

18

from public sources detailing wrongdoing in the form of alleged

19

misstatements" and alleged a failure of oversight in ignoring a red

20

flag.

21

to plead demand futility as to audit committee members because

22

plaintiffs failed to plead "any . . . particularized facts

23

regarding . . . the actions and practices of [the company's] audit

24

committee."

25

can snare from the Amended Complaint is that there exists a body of

26

rules regarding the accuracy of recording and reporting financial

27

information which may have been violated."

28

result, "[t]he most I can safely admit knowledge of is that

Wood, 953 A.2d at

So, for example, in Rattner v. Bidzos, No. Civ.A. 19700, 2003

In Rattner, as

But, as the Court found, these allegations were insufficient

Id. at *12-13.

Instead, "[t]he only information one

22

Id. at *13.

As a

1

[Kelley], [Mercer], and [Parker] were members of the Audit

2

Committee during the Relevant Period and, thus, that [Polycom] had

3

an Audit Committee."

4

Id.

Stripping away Plaintiffs' conclusory and rhetorical use of

5

phrases like "blind eye," "consciously or recklessly," and "knew or

6

recklessly disregarded," it is clear that Plaintiffs' sole basis

7

for determining the Audit Committee's state of mind is the access

8

to information their position on the Audit Committee conferred.

9

That sharply distinguishes this case from the three cases on which

United States District Court

For the Northern District of California

10

Plaintiffs rely in support of this argument.

11

Veeco Instruments, Inc. Securities Litigation, 434 F. Supp. 2d 267

12

(S.D.N.Y. 2006), plaintiffs' complaint detailed the company and,

13

specifically, the audit committee's failure over 27 separate

14

meetings to respond to two whistleblower reports, an internal audit

15

that found multiple violations of law, and reduction of its

16

accounting staff to only two people.

17

the Complaint here includes no allegations that the Polycom was

18

aware (or informed by the CW or other whistleblower) of Miller's

19

violations of the expense reimbursement policy, failed to heed

20

those warnings, reduced or eliminated internal auditing or

21

controls, or that the Audit Committee repeatedly ignored those

22

issues.

23

there is no allegation the issues with Miller's expense reports

24

were brought to the Audit Committee's attention, and the fact that

25

they "should have examined the financial statements does not

26

establish that they should have known there were problems in the

27

documents."

28

For example, in In re

Id. at 277-78.

Unlike Veeco,

Instead, as in another case rejecting a similar theory,

Maxwell, 2014 WL 2212155, at *14.

As a result, the demand requirement cannot be excused based on

23

1

potential liability for the Audit Committee.
E.

2

Does the Weight of the Evidence Raise a Reasonable Doubt
as to the Board's Impartiality?

3

Having assessed each of Plaintiffs' allegations standing

4
5

alone, Delaware law requires the Court to determine "whether the

6

totality of Plaintiffs' allegations demonstrates a reasonable doubt

7

about the Board's impartiality."

8

The Court finds that Plaintiffs' allegations, whether considered

9

standing alone or in their totality, do not demonstrate that demand

United States District Court

For the Northern District of California

10

Bidz.com, 773 F. Supp. 2d at 861.

would have been futile.

11
12
13

V.

CONCLUSION
For the reasons set forth above, Plaintiffs have failed to

14

allege demand futility with particularity.

Accordingly, the motion

15

to dismiss is GRANTED.

16

dismiss for failure to state a claim under Rule 12(b)(6).

17

the Court grants dismissal on other grounds, that motion is DENIED

18

without prejudice as moot.

19

the Ninth Circuit's liberal policy favoring granting leave to

20

amend.

21

Court GRANTS leave to amend within thirty (30) days of the

22

signature date of this order to address the issues identified

23

above.

Defendants also moved in the alternative
Because

Nevertheless, the Court is mindful of

As a result, the dismissal is without prejudice and the

24
25

IT IS SO ORDERED.

26
27
28

Dated: January 13, 2015
UNITED STATES DISTRICT JUDGE

24