Nichols Karant v. Larry Hsu et al

Filing 53

ORDER by Judge Haywood S. Gilliam, Jr. denying as moot 26 Motion to Strike; denying as moot 26 Motion to Dismiss; granting 25 Motion to Dismiss. (hsglc2S, COURT STAFF) (Filed on 6/25/2015)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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NICHOLAS KARANT,

Case No. 14-cv-04313-HSG

Plaintiff,
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v.
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LARRY HSU, et al.,
Defendants.

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ORDER GRANTING NOMINAL
DEFENDANT'S MOTION TO DISMISS
AND DENYING AS MOOT
INDIVIDUAL DEFENDANTS' MOTION
TO DISMISS AND MOTION TO
STRIKE

United States District Court
Northern District of California

Re: Dkt. Nos. 25, 26
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Plaintiff Nicholas Karant brings this shareholder derivative action against Defendants

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Larry Hsu, Arthur A. Koch, Bryan M. Reasons, Robert L. Burr, Leslie Z. Benet, Allen Chao,

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Nigel Ten Fleming, Michael Markbreiter, and Peter R. Terreri (collectively, the “Individual

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Defendants”), and against nominal Defendant Impax Laboratories, Inc. (“Impax”). Pending

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before the Court are 1) Individual Defendants’ motion to strike portions of the complaint; 2)

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Individual Defendants’ motion to dismiss the complaint; and 3) Impax’s motion to dismiss the

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complaint. For the reasons stated below, the Court GRANTS Impax’s motion to dismiss and

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DENIES the remaining motions as moot.

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I.

BACKGROUND
Defendant Impax is a pharmaceutical company that “develops, manufactures, and markets

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bio-equivalent pharmaceutical products.” Verified Shareholder Derivative Complaint (“Complt.”)

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¶ 2. Impax maintains a manufacturing facility in Hayward, California. Id ¶ 3. All of Plaintiff’s

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claims arise from Impax’s response to various FDA notices and warnings regarding problems with

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the manufacturing and quality control processes at the Hayward manufacturing facility. In a

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nutshell, Plaintiffs allege that Defendants failed to disclose the true nature of the problems present

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in the facility and misrepresented the scope, nature, and efficacy of the remediation efforts made

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in response to the FDA warnings.
Plaintiff’s Demand

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A.

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On March 13, 2013, Plaintiff sent a demand letter to the Impax Board of Directors. Id.

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¶ 12. Specifically, Plaintiff demanded “that the Board: (i) undertake (or cause to be undertaken)

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an independent internal investigation into Management’s violations of Delaware law and/or

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federal law; and (ii) commence a civil action against each member of Management to recover for

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the benefit of the Company the amount of damages sustained by the Company as a result of their

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breaches of fiduciary duties alleged herein.” Id. Ex. A.

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On April 1, 2013, in its written response to the Demand, Impax’s counsel requested that
Plaintiff provide “documentation of [his] ownership of Impax stock.” Id. Ex. B. On April 30,

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United States District Court
Northern District of California

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2013, Plaintiff provided documentation that he owned 2,000 shares of Impax as of April 26, 2013.

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Id. Ex. C. On June 5, 2013, Impax’s counsel again wrote Plaintiff to request that Plaintiff

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supplement his documentation with information regarding “when [Plaintiff] purchased his 2,000

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shares of Impax so that we may ascertain whether [Plaintiff] was an Impax shareholder at the time

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of the alleged wrongdoing.” Id.

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Plaintiff does not allege that he ever sent any additional stock ownership information in

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response to Impax’s June 5 request. However, in his complaint, Plaintiff alleges that he has

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owned shares of Impax since 2006. Id. ¶ 24.

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B.

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Concluding that the Board had “functional[ly] refus[ed]” his Demand, Plaintiff filed this

This Litigation

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shareholder derivative action on September 24, 2014. Id. ¶ 18. In his complaint, Plaintiff claims

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that Defendants breached their fiduciary duties of care, loyalty, and good faith by 1) causing

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Impax to make false and misleading material statements; 2) willfully ignoring the pervasive

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problems with Impax’s internal controls and practices and failing to correct those problems; 2)

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unjustly enriching themselves at Impax’s expense; 4) abusing their positions of authority by

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allowing Impax to misrepresent material facts to shareholders; and 5) grossly mismanaging Impax.

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II.

DISCUSSION

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A.

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Under Federal Rule of Civil Procedure 12(b)(6), a district court must dismiss a complaint

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if it fails to state a claim upon which relief can be granted. To survive a Rule 12(b)(6) motion to

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dismiss, the plaintiff must allege “enough facts to state a claim to relief that is plausible on its

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face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). This “facial plausibility” standard

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requires the plaintiff to allege facts that add up to “more than a sheer possibility that a defendant

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has acted unlawfully.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). A plaintiff must provide

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“more than labels and conclusions, and a formulaic recitation of the elements of a cause of action

Legal Standard

will not do.” Twombly, 550 U.S. at 555. On a motion to dismiss, the court accepts as true a

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United States District Court
Northern District of California

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plaintiff’s well-pleaded factual allegations and construes all factual inferences in the light most

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favorable to the plaintiff. Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th

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Cir. 2008). But the plaintiff must allege facts sufficient to “raise a right to relief above the

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speculative level.” Twombly, 550 U.S. at 555.

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Federal Rule of Civil Procedure 23.1 governs derivative actions to “enforce a right of a

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corporation” when the corporation itself has failed to enforce a right that could properly be

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asserted in court. Sax v. World Wide Press, Inc., 809 F.2d 610, 613 (9th Cir. 1987). “Because a

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derivative suit is premised on the idea that the cause of action belongs to the corporation, any

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shareholder must make a demand on the board (or allege that such demand would have been

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futile) before filing suit.” Wang v. Page, No. 12-cv-1785-PJH, 2012 WL 3278717, at *1 (N.D.

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Cal. Aug. 10, 2012). Rule 23.1’s requirement that an individual seeking to sue derivatively be “a

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shareholder or member at the time of the transaction being complained of” also applies when that

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individual makes his demand on a board. Potter v. Hughes, 546 F.3d 1051, 1056 (9th Cir. 2008);

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Wang, 2012 WL 3278717, at *2; Richelson v. Yost, 738 F. Supp. 2d 589, 598-99 (E.D. Pa. 2010)

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(citing Potter).
Impax’s Motion to Dismiss

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B.

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Impax argues that Plaintiff’s Demand was defective because Plaintiff did not provide any

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documentation regarding the timing of his purchase of Impax stock to demonstrate that Plaintiff
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was a shareholder at the time of the alleged wrongdoing, even after Impax specifically requested

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that information. Plaintiff does not dispute this point, but argues that he was not required to

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produce such documentation with his Demand.

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The same concerns animating the Potter, Wang, and Richelson courts’ dismissal of

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complaints based on inadequate demand are present here. The Impax Board was “justified in

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seeking information as to [P]laintiff’s stock holdings before providing a substantive response” to

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his Demand because such information goes directly to Plaintiff’s ability to bring a shareholder

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derivative action. Wang, 2012 WL 3278717, at *2. Plaintiff was obligated to confirm his

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ownership of Impax shares during the time of the alleged wrongdoing; the Board “should not be
expected or forced to investigate allegations from one who is neither (1) entitled to make the

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United States District Court
Northern District of California

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demand; nor (2) file a derivative suit.” Richelson, 738 F. Supp. 2d at 599. Indeed, the “Board was

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entitled to receive a valid demand and was not required to piece together by inference the disparate

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events that, if taken together, might have been sufficient to require corporate action.” Potter, 546

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F.3d at 1058.

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Plaintiff attempts to distinguish this case from Potter, Wang, and Richelson by arguing that

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the information sought in those cases—information regarding the shareholder’s identity and

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current ownership of stock—was provided here. While this appears to be true, Plaintiff’s refusal

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to provide information regarding his ownership of Impax stock during the time of the alleged

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wrongdoing raises the same concerns about the Board’s ability to determine whether Plaintiff

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could properly file a derivative suit. Without such information, the Board cannot make an

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informed decision regarding how the Demand should be acted upon.

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The Court finds that Plaintiff’s failure to provide information regarding the timing of his

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ownership of Impax stock in response to Impax’s specific request for that information renders the

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Demand defective. Accordingly, the Court dismisses the complaint without prejudice. However,

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because Plaintiff alleges in his complaint that he has owned shares of Impax since 2006, see

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Complt. ¶ 24, Impax now has the information it requested in its June 5, 2013 letter. As a result,

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Plaintiff’s Demand is complete, and Impax is obligated to investigate that Demand to decide how,

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if at all, to address the alleged wrongdoing. The Court directs Impax to respond to Plaintiff’s
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Demand within two months of the date of this Order. See Wang, 2012 WL 3278717, at *2. If

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Impax does not respond to the Demand, or if Plaintiff believes that Impax’s response is legally

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inadequate, Plaintiff may re-file a shareholder derivative lawsuit.

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III.

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CONCLUSION
For the foregoing reasons, Impax’s motion to dismiss Plaintiff’s complaint is GRANTED

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without prejudice. Individual Defendants’ motion to dismiss and motion to strike are DENIED

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AS MOOT. The Clerk shall close the file.

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United States District Court
Northern District of California

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IT IS SO ORDERED.
Dated: June 25, 2015
______________________________________
HAYWOOD S. GILLIAM, JR.
United States District Judge

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