Copeland v. Lane et al

Filing 113

ORDER granting 68 ; 71 ; 72 ; 74 Motions to Dismiss; finding as moot 89 Motion to Strike. Any amended complaint shall be filed no later than 11/1/2012. The court schedules this case for a Case Management Conference on 11/30/2012 at 10:00 a.m. The parties shall file a Joint Case Management Conference Statement on or before 11/21/2012. Signed by Judge Edward J. Davila on 10/10/2012. (ejdlc1, COURT STAFF) (Filed on 10/10/2012)

1
2
3
4
5
6
7
UNITED STATES DISTRICT COURT

8

NORTHERN DISTRICT OF CALIFORNIA

9

SAN JOSE DIVISION

United States District Court
For the Northern District of California

10
11

A.J. COPELAND,
Plaintiff,

12
13
14
15

v.
RAYMOND J. LANE, et. al.,
Defendants.

16
17

)
)
)
)
)
)
)
)
)
)
)

Case No.: 5:11-cv-01058 EJD
ORDER GRANTING MOTIONS TO
DISMISS; DENYING MOTION TO
STRIKE
(Re: Docket Nos. 68, 71, 72, 74, 89)

Pending before the court are Defendants’ four motions to dismiss Plaintiff A.J. Copeland’s

18

(“Copeland”) First Amended Complaint (“FAC”), as well as a related motion to strike. For the

19

reasons discussed below, the motions to dismiss are GRANTED with leave to amend and the

20

motion to strike is DENIED.

21
22

I. BACKGROUND
On December 2, 2011, Copeland filed the FAC alleging that Defendants violated Section

23

14(a) of the Exchange Act, and breached their fiduciary duty and wasted corporate assets. The

24

FAC alleges the following facts.

25

Plaintiff A.J. Copeland (“Copeland”) owns and has continuously owned common stock in

26

Nominal Defendant Hewlett-Packard Company (“HP”) throughout all of period of the alleged

27

wrongdoing. FAC ¶ 12. Defendant Raymond J. Lane (“Lane”) has been HP’s Executive Chairman

28

since September 2011 and previously served as HP’s non-executive Chairman from November
1
Case No.: 5:11-CV-1058 EJD
ORDER GRANTING MOTIONS TO DISMISS; DENYING MOTION TO STRIKE

1

2010 to September 2011. Id. ¶ 15. Defendant Leo Apotheker (“Apotheker”) was HP’s President

2

and Chief Executive Officer (“CEO”) from November 1, 2010 to September 22, 2011. Id. ¶ 16.

3

Defendant G. Kennedy Thompson (“Thompson”) was elected to the Board of Directors (the

4

“Board”) in 2006. Id. ¶ 19. Defendant Gary M. Reiner (“Reiner”) became a member of the Board

5

on January 20, 2012. Id. ¶ 20. Defendants Joel Z. Hyatt (“Hyatt”), John Joyce (“Joyce”), Lucille

6

Salhany (“Salhany”), and Robert Ryan (“Ryan”) were directors of HP and resigned on January 20,

7

2011. Id. ¶ 21. Defendant Meg Whitman became HP’s President and CEO on September 22, 2011

8

and was elected to the Board in January 2011. Id. ¶ 22. Defendants Shumeet Banerji (“Banerji”),

9

Patricia Russo (“Russo”), Dominique Sequier (“Sequier”), Marc L. Andreessen (“Andreessen”),

United States District Court
For the Northern District of California

10

Sari M. Baldauf (“Baldauf”), Rajiv L. Gupta (“Gupta”), Lawrence T. Babbio (“Babbio”), and John

11

H. Hammergren (“Hammergren”) are directors of HP who have been directors during all of the

12

wrongful conducted alleged in this action. Id. ¶ 23. Defendant Mark V. Hurd (“Hurd”) was

13

President and CEO of HP and was fired from or voluntarily resigned his positions on August 6,

14

2010. Id. ¶ 24.

15

The Section 14(a) claim is asserted against the Defendants who were members of the Board

16

when the 2010 and 2011 Proxy Statements were issued to HP shareholders. Id. ¶ 150. These Proxy

17

Statements solicited the votes of Copeland and the other shareholders for the election and re-

18

election of the Board and the retention of Ernst & Young LLP as HP’s auditor (“EY”). Id. The

19

Proxy Statements contained false statements and omitted material facts. Id. In particular, the Proxy

20

Statements failed to disclose the extent to which the Board was responsible for wrongdoing that

21

caused HP to be exposed to fines, restitution, and other damages including amounts paid to Hurd,

22

the losses HP will sustain as a result of acquiring 3PAR for more than $2.3 billion. Id. ¶ 153.

23

The breach of fiduciary duty and waste of corporate assets claim is asserted against all

24

individually-named Defendants. Id. ¶ 156. Plaintiff alleges that the Defendants violated their

25

corporate responsibilities in at least the following ways: (1) declining to stop HP’s illegal payment

26

of bribes after receiving reports of that illegal activity and red flags indicating that widespread

27

illegality, or consciously disregarding such reports and activity; (2) failing to pursue claims against

28

those who victimized HP in their anti-competitive behaviour in violation of antitrust laws; (3)
2
Case No.: 5:11-CV-1058 EJD
ORDER GRANTING MOTIONS TO DISMISS; DENYING MOTION TO STRIKE

1

permitting Hurd to act as he did in the Hurd-Fisher Scandal; (4) wasting assets by authorizing

2

management to engage in bidding for the acquisition of 3PAR for more than $2.3 billion; and (5)

3

failing to implement a CEO succession plan, and recklessly hiring and firing CEOs resulting in

4

waste of assets in severance payments. Id. ¶ 157.

5

On August 23 and 28, 2010, Copeland made pre-suit demands on the Board as required by
Fed. R. Civ. P. 23.1. Id. ¶ 101; see Exs. A and B. Copeland’s counsel was informed on November

7

4, 2010 and then on November 16, 2010 by HP’s Deputy General Counsel, John F. Schultz

8

(“Schultz”) that the Board was investigating the allegations in Copeland’s Demands. The Board

9

concurrently was interviewing individuals who might comprise a new committee to take over the

10
United States District Court
For the Northern District of California

6

investigation that the Board had falsely claimed was already underway. Id. ¶ 103. Schultz did not

11

disclose that the Board had already appointed the Ryan-Salhany “Special Committee” which was

12

acting independently of the Board. Id. ¶ 103. Additional Board members were selected based on

13

these interviews. Id. ¶¶ 33, 103, 105. This expanded Board appointed an “Independent Committee”

14

of directors, with Andrew J. Levander and his law firm, Dechert LLP (collectively “Levander”),

15

serving as its counsel. Id. ¶105. The Independent Committee purported to take over the

16

investigation of Plaintiff’s claims, but, in reality, the Board had taken no action at all. Id. ¶ 32.

17

The members of the Committee decided at the outset to delegate their own fact-gathering

18

and analysis responsibilities to Levander. Id. ¶ 107. Levander conducted interviews of selected

19

individuals, not under oath, and without a recording or transcript. This strategy cloaked all or much

20

of the factual investigation, and all communications between counsel and members of the

21

Independent Committee and witnesses, behind claims of work product and privilege. Id. ¶ 108.

22

On February 10, 2011, Levander sent a letter to Copeland’s counsel stating that the Board

23

had appointed the Independent Committee. Id. ¶¶ 30, 109. With minimal advance notice and no

24

necessary information, Levander also invited Copeland’s counsel to meet with one or more

25

members of the Independent Committee. Id. ¶ 110. Copeland’s counsel requested fundamental

26

information and documents regarding the legitimacy of the investigation, including how the

27

members of the Independent Committee had been selected and how it came about that Levander

28
3
Case No.: 5:11-CV-1058 EJD
ORDER GRANTING MOTIONS TO DISMISS; DENYING MOTION TO STRIKE

1

would be the investigator. But Levander refused to provide any of the requested information to

2

Copland’s counsel and ended all discourse. Id. ¶¶ 111, 116.

3

On March 7, 2011, Plaintiff commenced this action alleging that the Board had

4

constructively and wrongfully rejected his demands. On April 6, 2011, HP moved to dismiss that

5

complaint on the ground that it was filed prematurely. See Docket No. 10. After completing its

6

investigation, the Independent Committee issued a report formally recommending that the Board

7

reject Copeland’s Demands, and the Board did so. FAC ¶ 118. On November 9, 2011, the parties

8

informed the court that, in light of the Board’s rejection of Copeland’s Demands, Copeland

9

intended to amend his complaint. HP withdrew its then-pending motion to dismiss. Docket No. 52.

United States District Court
For the Northern District of California

10

On December 2, 2011, Copeland filed the FAC. On February 8, 2012, Defendants filed

11

their motions to dismiss the FAC and their Requests for Judicial Notice (“RJNs”). On March 27,

12

2012, Copeland filed a motion to strike certain exhibits submitted in support of the motions to

13

dismiss and all references thereto. On May 8, 2012, the motions were taken under submission

14

without oral argument. See Civ. L.R. 7-1(b).

15
16

II. LEGAL STANDARD
A. Motion To Dismiss

17

Under Federal Rule of Civil Procedure 12(b)(6), a complaint may be dismissed if it fails to

18

state a claim upon which relief can be granted. “To survive a motion to dismiss, a complaint must

19

contain sufficient factual matter, accepted as true, ‘to state a claim to relief that is plausible on its

20

face.’” Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009) (internal citations omitted). “A claim has

21

facial plausibility when the plaintiff pleads factual content that allows the court to draw the

22

reasonable inference that the defendant is liable for the misconduct alleged.” Id. Recitals of the

23

elements of a cause of action and conclusory allegations are insufficient. Id.

24

Federal Rule of Civil Procedure 8(a) requires a plaintiff to plead each claim with sufficient

25

specificity to “give the defendant fair notice of what the . . . claim is and the grounds upon which it

26

rests.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (internal quotations omitted).

27

Moreover, the factual allegations “must be enough to raise a right to relief above the speculative

28

level” such that the claim “is plausible on its face.” Id. at 555, 570. In considering the sufficiency
4
Case No.: 5:11-CV-1058 EJD
ORDER GRANTING MOTIONS TO DISMISS; DENYING MOTION TO STRIKE

1

of a claim, the court must accept as true all of the factual allegations contained in the complaint. Id.

2

at 555–56. However, the court is not required to accept as true legal conclusions cast in the form of

3

factual allegations. Id. at 555.

4

If dismissal is granted under Rule 12(b)(6), leave to amend should be allowed unless the

5

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

6

1122, 1130 (9th Cir. 2000). If amendment would be futile, however, a dismissal may be ordered

7

with prejudice. Dumas v. Kipp, 90 F.3d 386, 393 (9th Cir. 1996) (internal quotations omitted).

8

B. Demand Refusal

9

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

United States District Court
For the Northern District of California

10

on behalf of a corporation a claim belonging not to the shareholder, but to the corporation. Aronson

11

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

12

A.2d 244 (Del. 2000)). Pursuant to Federal Rule of Civil Procedure 23.1, which governs derivative

13

actions, a shareholder's complaint must state with particularity “any effort by the plaintiff to obtain

14

the desired action from the directors” and “the reasons for not obtaining the action or not making

15

the effort.” Fed. R. Civ. P. 23.1.

16

Rule 23.1 imposes a higher standard of pleading than Rule 8(a). The Ninth Circuit recently

17

held in a demand refused case that “Rule 23.1 and applicable Delaware law require a shareholder

18

bringing a derivative lawsuit to plead with particularity that the shareholder made a pre-suit

19

demand on the corporation and that the corporation wrongly refused to act.” Lucas v. Lewis, 428 F.

20

App’x 694, 695-96 (9th Cir. Apr. 15, 2011) (emphasis added) (citing Fed. R. Civ. P. 23.1(b)(A) &

21

(B); Grimes v. Donald, 673 A.2d 1207, 1220 (Del. 1996)).

22

C. Choice of Law

23

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

24

determine the controlling substantive law. Patton v. Cox, 276 F.3d 493, 495 (9th Cir. 2002). Here,

25

because HP has its corporate headquarters and main place of business in Palo Alto, California, the

26

court applies California state law.

27
28

Pursuant to the “internal affairs” doctrine, which is generally followed by courts in
California, “the law of the state of incorporation governs liabilities of officers or directors to the
5
Case No.: 5:11-CV-1058 EJD
ORDER GRANTING MOTIONS TO DISMISS; DENYING MOTION TO STRIKE

1

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

2

1086 (N.D. Cal. 2003); see Cal. Corp. Code § 2116. Additionally, the demand requirements for a

3

shareholder derivative suit are determined by the law of the state of incorporation. Kamen v.

4

Kemper Financial Services, Inc., 500 U.S. 90, 96 (1991) (“the function of the demand doctrine . . .

5

is a matter ‘substance’ not ‘procedure’. . . . [Courts] must apply the demand futility exception as it

6

is defined by the law of the state of incorporation”); Potter v. Hughes, 546 F.3d 1051, 1054 n. 1

7

(9th Cir. 2008) (“the substantive demand requirement is an issue of state law”). Accordingly,

8

because HP is incorporated in Delaware, the court applies Delaware law to determine whether the

9

demand was wrongly refused.

United States District Court
For the Northern District of California

10
11

III. DISCUSSION
In moving to dismiss, Defendants assert that the Board’s refusal of the claims raised in

12

Copeland’s Demand is protected by the business judgment rule. Defendants contend that Copeland

13

failed to plead any particularized facts to raise a reasonable doubt that the Board acted

14

independently, in an informed manner and with due care or that it conducted a reasonable

15

investigation. Defendants also argue that Copeland’s lack of good faith allegations are conclusory

16

and insufficient.

17

In order to demonstrate standing to pursue a derivative claim, a plaintiff must show that he

18

has met the demand requirement. If a demand is made and rejected, the board rejecting the demand

19

is entitled to the presumption of the business judgment rule unless the stockholder can allege facts

20

with particularity creating a reasonable doubt that the board is not entitled to the benefit of the

21

presumption. See Grimes, 673 A.2d at 1220; see also Levine v. Smith, 591 A.2d 194, 212 (Del.

22

1991), overruled on other grounds by Brehm, 746 A.2d 244, (the board's refusal of the demand to

23

pursue the action is subject to judicial review according to the traditional business judgment rule).

24

Under the business judgment rule, a court will not substitute its judgment for that of the

25

board, and the board's decision will be upheld unless it cannot be attributed to any rational business

26

purpose. See In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 74 (Del. 2006) (en banc);

27

Levine, 591 A.2d at 207. A board of directors' decision will be respected by the courts unless the

28

directors are interested or lack independence relative to the decision, do not act in good faith, act in
6
Case No.: 5:11-CV-1058 EJD
ORDER GRANTING MOTIONS TO DISMISS; DENYING MOTION TO STRIKE

1

a manner that cannot be attributed to a rational business purpose, or reach their decision by a

2

grossly negligent process that includes the failure to consider all material facts reasonably

3

available. Brehm, 746 A.2d at 264 n.66. “A shareholder who makes a demand concedes the

4

disinterestedness and independence of a majority of the board to respond to the demand and waives

5

any claim that demand is excused.” See Furman v. Walton, No. C 06-3532 SBA, 2007 WL

6

1455904, at *4 (N.D. Cal. May 16, 2007) (citing Grimes, 673 A.2d at 1219-20; Rales v. Blasband,

7

634 A.2d 927, 935 n.12 (Del. 1993)).

8
9

Where a shareholder's complaint is predicated on the wrongful refusal of her demand, the
only issue for a trial court to determine is the application of the business judgment rule to the

United States District Court
For the Northern District of California

10

board's refusal of the shareholder's demand. See Levine, 591 A.2d at 212-13 (Del. 1991). The only

11

relevant question is whether the directors acted in an informed manner and with due care, and in a

12

good faith belief that their action was in the best interest of the corporation. See id. at 198.

13

A. Disinterested and Independent

14

As discussed above, a shareholder who has made demand “concedes the disinterestedness

15

and independence of a majority of the board to respond to the demand.” Furman, 2007 WL

16

1455904, at *4. Plaintiff argues that the Demands did not concede “independence conclusively and

17

in futuro for all purposes.” Scattered Corp. v. Chi. Stock Exch., Inc., 701 A.2d 70, 74-75 (Del.

18

1997) overruled on other grounds by Brehm. In Scattered, the Delaware Supreme Court held that

19

“a board that appears independent ex ante may not necessarily act independently ex post in

20

rejecting a demand. Failure of an otherwise independent-appearing board or committee to act

21

independently is a failure to carry out its fiduciary duties in good faith or to conduct a reasonable

22

investigation. Such failure could constitute wrongful refusal.” Scattered, 701 A.2d at 75 (emphasis

23

in original). Thus, a plaintiff may show that demand was wrongfully refused by pointing to events

24

occurring after the demand which demonstrate a lack of independence, but not events occurring

25

before the demand.

26

Here, Copeland has not asserted any facts challenging the Board’s independence based on

27

events after receiving the Demands. Copeland instead alleges that a majority of the Board is

28

personally implicated in the alleged wrongdoing—conduct that necessarily occurred prior to the
7
Case No.: 5:11-CV-1058 EJD
ORDER GRANTING MOTIONS TO DISMISS; DENYING MOTION TO STRIKE

1

Demands being made. Opp’n at 38-41 (a majority of directors has a “vested interest in preventing

2

discovery from revealing their substantial personal liability for their personal wrongdoing

3

including liability under the FCPA or Anti-Kickback Act due to acquiescence in various kickback

4

and bribery schemes”). These allegations challenge the directors’ interest and independence with

5

respect to the conduct underlying the Demands, not their response following receipt of he

6

Demands. These allegations were waived when Copeland made his Demands. Thus, the FAC fails

7

to raise a reasonable doubt that the Board was disinterested and independent.

8

B. Good Faith

9

Copeland alleges that the Board did not act in good faith because: (1) the Board did not

United States District Court
For the Northern District of California

10

include Plaintiff in its investigation; (2) the Board refused to provide Plaintiff with certain

11

information; (3) the Board claimed to be investigating the Demands while it was searching for

12

members to constitute the Independent Committee; (4) the investigation was a “sham” or

13

“whitewash” because the Independent Committee members chosen were predisposed to reject the

14

demands; (5) the Independent Committee did not have ultimate authority to respond to the

15

Demands; and (6) the Committee’s counsel was also predisposed to reject the Demands. The court

16

addresses each of these allegations below.

17

Copeland alleges the board failed to include Copeland in its investigation, took three

18

months before HP contacted Copeland’s counsel about his Demands and another two months to

19

come up with the strategy to create the Independent Committee; did not tell Copeland it was

20

interviewing individuals to serve on the Independent Committee; did not provide Copeland’s

21

counsel with prompt answers to seventeen questions he had posed about the Committee and its

22

investigation; and only offered to meet with Copeland’s counsel on less than two weeks’ notice.

23

FAC ¶¶ 32-33, 103-104, 110-16. There, however, is no requirement that a board keep a plaintiff

24

informed throughout the investigation and review. See FLI Deep Marine LLC v. McKim, No.

25

4138, 2009 WL 1204363, at *4 (Del. Ch. Apr. 21, 2009) (rejecting argument that demand was

26

refused because special committee failed to keep plaintiffs informed of investigation and did not

27

agree to conduct investigation on plaintiffs’ terms); Levine, 591 A.2d at 214 (board’s failure to

28

allow plaintiff to make a presentation did not demonstrate wrongful refusal). Thus, these
8
Case No.: 5:11-CV-1058 EJD
ORDER GRANTING MOTIONS TO DISMISS; DENYING MOTION TO STRIKE

1

allegations about the investigation process are not sufficient to create a reasonable doubt that the

2

Board acted in good faith.

3

Copeland also alleges that HP falsely told him that it was investigating his Demands in an
effort to ‘“buy time’ and come up with a strategy that would have the appearance of credibility.” ¶

5

32. The FAC, however, does not plead facts showing that Schultz’s statement that the Board was

6

“investigating the allegations in [Plaintiff’s] demand[s]” was false. Id. n.6 (alterations in original).

7

Furthermore, the fact that the Board chose to appoint an Independent Committee to conduct the

8

investigation is not inconsistent with the Board’s fiduciary duties. There is “no prescribed

9

procedure a board must follow” when investigating a demand. Levine, 591 A.2d at 214. “To allow

10
United States District Court
For the Northern District of California

4

Plaintiffs the ability to dictate the manner in which the Board, or its special committee, investigates

11

their allegations would ‘be an unwarranted intrusion’ upon the authority our law confers on a board

12

of directors to manage the business and affairs of the corporation.” FLI Deep Marine LLC, 2009

13

WL 1204363, at *4 (footnote omitted). Thus, allegations that the Board claimed to be investigating

14

the Demands while it was searching for members to constitute the Independent Committee are not

15

sufficient to create a reasonable doubt that the Board acted in good faith.

16

The FAC also asserts that the Board’s process was a “sham” and “whitewash” and that the

17

Independent Committee members were “pre-disposed” to reject the Demands. FAC ¶¶ 31, 116-18.

18

Copeland, however, has not alleged facts suggesting that the Independent Committee members

19

were beholden to an interested person or otherwise conflicted by self-interest. As Defendants

20

argue, the mere fact that the Independent Committee recommended that the Board refuse

21

Copeland’s Demands is not enough to show bad faith. See Lerner ex. rel. Citigroup Inc. v. Prince,

22

36 Misc. 3d 297, 307 (N.Y. Sup. 2012) (allegations that Demand Committee was a sham in its

23

inception was conclusory and insufficient); Grimes, 673 A.2d at 1220 (bare allegation that refusal

24

“could not have been the result of an adequate, good faith investigation” insufficient); Levine, 591

25

A.2d at 213 n.7 (affirming dismissal for failure to plead wrongful refusal where complaint alleged,

26

“the Board was predisposed to refuse plaintiff’s demand for action”).

27

In opposition to this motion, Copeland argues that the investigation was a sham because the

28

Independent Committee was not given the ultimate authority to decide how to respond to Plaintiff’s
9
Case No.: 5:11-CV-1058 EJD
ORDER GRANTING MOTIONS TO DISMISS; DENYING MOTION TO STRIKE

1

Demands. See Opp’n at 38, 42. Defendants argue that by making a demand, Plaintiff conceded the

2

full Board’s independence and disinterestedness to consider the Demands, and thus there was no

3

requirement to create a special litigation committee with decision-making authority.

4

The Board created a committee that did not reject or accept the Demands. As the FAC

5

acknowledges, the Independent Committee was formed “‘to investigate, review, and evaluate the

6

facts and circumstances asserted . . . and to make recommendations to the Board whether HP

7

should commence or continue litigation.’” FAC ¶ 15. The Board spoke for the company and made

8

the decision to reject Plaintiff’s Demands. See id. ¶ 118. HP argues, and the court agrees, that

9

procedure is appropriate. See FLI Deep Marine LLC v. McKim, No. 4138, 2009 WL 1204363, at

United States District Court
For the Northern District of California

10

*2 (Del. Ch. Apr. 21, 2009) (“Board formed a special committee to investigate the allegations

11

asserted in the demand letter and to make a recommendation to the Board”); Boeing Co. v.

12

Shrontz, No. 11273, 1994 WL 30542, at *4 (Del. Ch. Jan. 19, 1994) (dismissing for failure to plead

13

wrongful refusal following board’s decision based on “recommendations” of special committee).

14

Copeland has not cited any authority indicating a board is required transfer its decision-making

15

authority to a special litigation committee to evaluate a demand. 1

16

The FAC alleges that Levander was also predisposed to refuse the demands and that

17

relegated the investigation to Levander. FAC at 19 n.5. Additionally, Copeland alleges that the

18

Independent Committee relegated the investigation to Levander, creating a conflict of interest.

19

Opp’n at 6. The FAC, however, makes no allegation that Dechert or Levander ever represented any

20

individual named in the Demands or are beholden to any member of the Board or otherwise

21

impeded by a conflict of interest. Copeland has not alleged what tasks created a conflict for

22

Levander or cited any authority indicating that relegating duties to Levander could create a

23

conflict. Without such allegations, Plaintiff has offered no basis for determining the Committee’s

24
25
26
27
28

1

Copeland’s opposition brief cites Abbey v. Computer & Commc’ns Tech. Corp., 457 A.2d 368,
372-373 (Del. Ch. 1983) for the holding that a properly formed special litigation committee permits
an independent committee, rather than the board of directors, to speak on behalf of the corporation.
The decision in Abbey, however, does not prohibit the procedure used by the Board in this action
and acknowledges that in some situations a board might “merely appoint[] a committee to
investigate the allegations and to report back to the board for whatever action the board might
choose to take on the merits of the charges.” Abbey, 457 A.3d at 374.
10
Case No.: 5:11-CV-1058 EJD
ORDER GRANTING MOTIONS TO DISMISS; DENYING MOTION TO STRIKE

1

work lacked good faith. See Halpert Enterprises, Inc. v. Harrison, No. 07-1144-cv, 2008 WL

2

4585466, at *3 (2nd Cir. Oct. 15, 2008) (allegation that outside counsel lacked independence where

3

“[t]he record contain[ed] no allegations that [outside counsel] had any lingering allegiance to the

4

named defendants regarding those matters, was reluctant to advance arguments disadvantageous to

5

the named defendants, or was impeded by the ethical rules relating to confidentiality.”).

6

C. Informed Manner And Due Care

7

Defendants argue that Copeland has also failed to plead facts that raise a reasonable doubt

8

that the Board acted in an informed manner and with due care. In order to raise a reasonable doubt

9

regarding whether the Board acted with due care, Copeland must plead with particularized facts

United States District Court
For the Northern District of California

10

that the Board reached its “decision by a grossly negligent process that includes the failure to

11

consider all material facts reasonably available.” Furman, 2007 WL 1455904, at *2 (citing Brehm,

12

746 A.2d at 244).

13

The FAC alleges that the Independent Committee and Board spent insufficient time, that

14

witness interviews were too few and not under oath, and that the Independent Committee’s report

15

was privileged. The FAC similarly alleges that the Board devoted insufficient time to Plaintiff’s

16

Demands. The FAC, however, does not assert particularized facts supporting these allegations. For

17

example, Copeland does not allege the amount time the Independent Committee devoted or how

18

that time spent was inadequate. The FAC identifies no individuals who should have been

19

interviewed but were not, how those unidentified individuals had knowledge that was unique and

20

unobtainable without those interviews, and how those interviews if taken would have altered the

21

Board’s decision to refuse demand. See Halpert, 2008 WL 4585466, at *3 (rejecting allegations in

22

absence of these facts); Quantum Technology Partners II, L.P. v. Altman Browning and Company,

23

No. 08-CV-376-BR, 2009 WL 1795574, at *12 (D. Or. June 23, 2009) (similar). The FAC also

24

does not allege any facts indicating that the Board failed to review the Independent Committee’s

25

report or make its own determination as to what was in the best interest of HP. Rather, the FAC

26

merely alleges in a conclusory manner that the Board “rubber-stamped” the Independent

27

Committee’s rejection. Id. ¶ 118.

28
11
Case No.: 5:11-CV-1058 EJD
ORDER GRANTING MOTIONS TO DISMISS; DENYING MOTION TO STRIKE

1

Additionally, the FAC’s allegations that too few interviews were taken and they were not
under oath fail to raise a reasonable doubt that the investigation was conducted with due care

3

because “[a]n investigating board generally is under no obligation to make use of any particular

4

investigative technique.” Halpert, 2008 WL 4585466 at *2. “In any investigation, the choice of

5

people to interview or documents to review is one on which reasonable minds may differ.” Mount

6

Moriah Cemetery on Behalf of Dun & Bradstreet Corp. v. Mortiz, Civ.A. No. 11431, 1991 WL

7

50149, at *4 (Del. Ch. Apr. 4, 1991). Furthermore, Copeland has not cited any authority indicating

8

that there is a requirement that witness interviews be conducted, much less be made under oath.

9

Thus, “there is no rule of general application that a board must interview every possible witness

10
United States District Court
For the Northern District of California

2

who may shed some light on the conduct forming the basis of the litigation.” Halpert, 2008 WL

11

4585466, at *2. “In fact, there is no rule that requires a board to interview anyone.” Quantum, 2009

12

WL 1795574, at *12 (citing Levine v. Smith, 591 A.2d 194, 214 (1991)); Scalisi v. Grills, 501 F.

13

Supp. 2d 356, 365 (E.D.N.Y. 2007) (finding argument to show bad faith that “the Committee here

14

did not place its witnesses under oath during interviews” was insufficient as a matter of law);

15

Strougo ex rel. The Brazil Fund, Inc. v. Padegs, 27 F. Supp. 2d 442, 452 (S.D.N.Y. 1998) (same).

16

Finally, the FAC also alleges that the Independent Committee delegated fact-gathering and

17

analysis to Levander. ¶ 107. As discussed in the previous section, however, Copeland has not

18

pleaded facts or cited authority indicating that delegating parts of the investigation to Levander

19

was inconsistent with the Board’s fiduciary duties. To the contrary, the involvement of outside

20

counsel to assist in conducting the investigation is not uncommon. See, e.g., Spiegel v. Buntrock,

21

571 A.2d 767, 772, 778 (Del. 1990) (board committee retained independent counsel and conducted

22

investigation); Mount Moriah, 1991 WL 50149, at *3-4 (board established committee, which in

23

turn retained counsel to assist with investigation, culminating in 163-page report). Thus, the FAC

24

has not alleged facts raising a reasonable doubt that HP’s Board acted in good faith and in an

25

informed manner.

26

In sum, the FAC fails to allege facts that raise a reasonable doubt about the good faith and

27

due care of the investigation. Thus, the FAC fails to allege facts that rebut the business judgment

28

rule and plead that Copeland’s Demands were wrongfully refused. Accordingly, Defendants’
12
Case No.: 5:11-CV-1058 EJD
ORDER GRANTING MOTIONS TO DISMISS; DENYING MOTION TO STRIKE

1

motions to dismiss the derivative claims brought on behalf of HP in the FAC are GRANTED with

2

leave to amend.

3

D. No Direct Claims

4

Copeland argues that, in addition to his derivative claims, he has also pleaded a direct

5

Section 14(a) claim. FAC ¶ 150. Copeland bases his disclosure claim on false statements and

6

omissions in the 2010 and 2011 Proxy Statements. Specifically, Copeland alleges the 2011 Proxy

7

Statements included the following false statements and omissions (see Opp’n at 15-18):
•

To obtain shareholder votes for the Board's nominees for lucrative directorships, the
Proxy Statement falsely stated that “HP is committed to maintaining the highest
standards of business conduct and corporate governance” and that the Board had six
“standing committees.” Defendants intentionally concealed that the Board actually had
de facto “standing committees” including a “Special Litigation Committee,”
“Independent Committee” and the Ryan Salhany “Special Committee” designed to
investigate (or appear to investigate) repeated acts of director wrongdoing. The
identification of certain “standing committees,” coupled with the omission of reference
to various other “standing committees” violated the sitting directors’ disclosure
obligations under Section 14(a) and Rule 14a-9. FAC ¶¶28-29.

•

The Board falsely represented that HP’s “Board Risk Oversight” process was effective
when, in fact, it was not, as evidenced in connection with the Company’s acquisition of
3PAR and the payment of substantial bribes in the United States and abroad. Id. ¶¶3839.

•

The Board misrepresented the manner in which the Board members were and are
evaluated, including with respect to whether they have the appropriate skills and
characteristics required to effectively oversee the business and sufficient time to fulfill
their obligations to the Company. Id. ¶¶40-42.

•

In seeking the ratification by the stockholders of EY as HP’s independent registered
public accounting firm, the Board failed to disclose that EY was negligent in
performing its audits, did not conduct such audits in accordance with GAAS and that
EY failed to uncover the payment of substantial bribes in the United States and abroad.
Id. ¶44.

•

There was a failure to discuss or present any information regarding the violations of law
and other ongoing and long-term wrongdoing material to a shareholder’s determination
of the qualifications of each nominee to serve or continue to serve as a director of the
Company and for EY to continue to serve as auditor. Id. ¶45.

•

25

The Board misrepresented that there was an established criteria for assessing potential
CEO successors when, in reality, there was no succession plan in place, nor any
meaningful process to evaluate potential candidates. Id. ¶¶46-47.

26

The FAC alleges similar misrepresentations and omissions with respect to the 2010 Proxy

8
9

United States District Court
For the Northern District of California

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24

27

Statement, as well as additional misrepresentations and omissions, including the following:

28
13
Case No.: 5:11-CV-1058 EJD
ORDER GRANTING MOTIONS TO DISMISS; DENYING MOTION TO STRIKE

•

The Board misrepresented that its “HR and Compensation Committee” properly discharged
the Board’s responsibilities relating to the compensation of HP’s executives and directors,
when it really provided little or no substantive oversight of senior management’s
performance and compensation, as demonstrated by Defendant Hurd’s ability to pad his
expense accounts at least in partial view of the “HR and Compensation Committee”
members. Id. ¶¶56-57, 59.

•

The Statement falsely reported the Company’s obligations to Hurd upon his termination, in
an attempt to justify the Compensation Committee’s dereliction in awarding benefits to
Hurd including a $12,224,693 “cash severance benefit” Id. ¶¶56-57, 59.

•

7

The Company concealed material amounts paid to Hurd for travel and related expenses as
well as his personal benefit, including substantial sums to a special friend of Hurd’s. Id.
¶58.

8

“[T]he Court will independently examine the nature of the wrong alleged and any potential

1
2
3
4
5
6

9

relief to make its own determination of the suit’s classification. . . . Plaintiffs’ classification of the

United States District Court
For the Northern District of California

10

suit is not binding.” Tooley v. Donaldson, Luftkin & Jenrette, Inc., 845 A.2d 1031, 1035 (Del.

11

2004) (second alteration in original) (citation omitted). In determining whether a shareholder claim

12

is direct or derivative under Delaware law, courts examine: (1) who suffered the alleged harm (the

13

corporation or the suing stockholders, individually); and (2) who would receive the benefit of any

14

recovery or other remedy (the corporation or the stockholders, individually). See Indiana Elec.

15

Workers Pension Trust Fund, IBEW v. Dunn, 352 F. App’x 157, 162 (9th Cir. 2009) (citing

16

Feldman v. Cutaia, 951 A.2d 727, 732 (Del. 2008)). To establish a direct action, “[t]he

17

stockholder’s claimed direct injury must be independent of any alleged injury to the corporation.

18

The stockholder must demonstrate that the duty breached was owed to the stockholder and that he

19

or she can prevail without showing an injury to the corporation.” Id. at 1039.

20

Defendants argue that the Copeland is creatively recasting a derivative claim about

21

mismanagement by alleging the same harm as a direct disclosure violation. Specifically,

22

Defendants argue that the Section 14(a) claim in the FAC is based on mismanagement that harmed

23

HP. Because the Section 14(a) claim alleges that the Proxy Statements included false statements

24

and omissions that hid the fact that the Defendants were mismanaging HP, Copeland must prove

25

that HP was mismanaged in order to prevail on his claim. Additionally, Defendants argue that

26

Copeland has not identified any individual benefit he can receive by this action; there can be no re-

27

vote because the directors elected in the 2010 and 2011 proxies have already served their terms, as

28

has EY.
14
Case No.: 5:11-CV-1058 EJD
ORDER GRANTING MOTIONS TO DISMISS; DENYING MOTION TO STRIKE

1

Copeland argues that a claim that shareholders were deprived of the right to a fully

2

informed vote is independent of any injury to the corporation, implicates a duty of disclosure owed

3

to shareholders and is almost always an individual, direct claim. Copeland further argues that it is

4

clear that direct proxy disclosure claims may support equitable relief granted to Copeland, such as

5

an order to void or amend the tainted Proxy Statements and require a re-vote. Copeland argues that

6

a re-vote is possible because many of the directors elected at the 2010 or 2011 Annual Shareholder

7

Meetings as a result of the Proxy Statements at issue are still on the HP Board, and EY remains as

8

HP’s independent auditor.

9

Copeland is correct that where a shareholder has been denied one of the most critical rights

United States District Court
For the Northern District of California

10

he or she possesses—the right to a fully informed vote—the harm suffered is almost always an

11

individual, not corporate, harm. See, e.g., In re Tyson Foods, Inc., 919 A.2d 563, 601 (Del. Ch.

12

2007). Even assuming that Copeland could prevail on his claim that the Proxy Statements

13

contained false statements and material omissions—which appear to depend on a showing that the

14

directors failed to perform their duties and mismanaged HP—without showing injury to HP, the

15

Section 14(a) claim does not satisfy the second prong of Tooely. Copeland has not pleaded facts

16

showing that he could receive any remedy that would benefit him individually through this action.

17

“Direct proxy disclosure claims, if made promptly, may support equitable relief such as an

18

order to amend a proxy solicitation and require a re-vote. However, when the eggs have been

19

irretrievably scrambled[,] . . . there is no possibility of effective equitable relief. . . . [E]ven if other

20

remedies ‘flow naturally’ from the avoidance of the vote, these remedies are unavailable because

21

they impermissibly conflate [plaintiff’s] direct claim with a derivative claim.” Calamore v. Juniper

22

Networks Inc., 364 F. App’x 370, 372 (9th Cir. 2010) (some alterations in original) (emphasis

23

added) (internal quotation marks and citations omitted).

24

Here, it appears that each the 2010 and 2011 shareholder votes elected the Board members

25

for one year, and the directors elected in the 2010 and 2011 proxies would have already served

26

their one-year terms. Ex. E to Supplemental Danitz Declaration at 24, Docket No. 101-1 (“2010

27

Proxy”) (“Each director is elected annually to serve until the next annual meeting or until his or her

28

successor is elected.”); New HP Director Def.’s RJN Ex. C, Docket No. 75-3 at 25 (“2011 Proxy”)
15
Case No.: 5:11-CV-1058 EJD
ORDER GRANTING MOTIONS TO DISMISS; DENYING MOTION TO STRIKE

1

(“each to serve for a one-year term or until the director’s successor is elected and qualified”). 2 EY

2

has similarly served its one-year terms. 2010 Proxy at 27 (“for the fiscal year ending October 31,

3

2010)”; 2011 Proxy at 32 (“for the 2011 fiscal year”). Thus, although many of the directors are still

4

on the Board, Defendants argue that the terms of those directors elected via the 2010 and 2011

5

Proxies have expired and new elections have been held. Copeland has not argued or pleaded

6

otherwise.
Copeland therefore has not requested any individual relief that logically arises from the lack

8

of disclosure and which could be granted at this point in time. See General Electric Co. v. Cathcart,

9

980 F.2d 927, 934 (3rd Cir. 1992) (the court “cannot grant effective relief . . . because the terms of

10
United States District Court
For the Northern District of California

7

the directors elected in 1987-1991 have expired and there was a new election for directors on April

11

22, 1992 . . . . Thus, a court only could grant him equitable relief with respect to the expired terms

12

by doing the impossible: enjoining the directors from serving expired terms.”); see also Cohen v.

13

Ayers, 449 F. Supp. 298, 321 (N.D. Ill. 1978) (dismissing Section 14(a) claim as moot because it

14

was impossible to bar directors from holding office for terms now concluded). Because Copeland

15

has not pleaded any recovery or remedy that benefits him individually, as opposed to HP, the claim

16

is derivative under Tooley.

17

Because all claims asserted in the FAC are derivative claims and Copeland has not pleaded

18

facts sufficient to claim his Demands were wrongly refused, the FAC is dismissed in its entirety.

19

E. Cross-Motion To Strike

20

With the exception of the 2011 Proxy Statement, which, as discussed above, is incorporated

21

by reference in the FAC, Defendants’ pending Requests for Judicial Notice are DENIED as moot

22

because the court has reached its decision without relying on those documents. See Docket Nos.

23
24
25
26
27
28

2

The 2010 and 2011 Proxy Statements are incorporated by reference in the FAC. See In re Silicon
Graphics Inc. Sec. Litig., 183 F.3d 970, 986 (9th Cir. 1999) (Under the incorporation by reference
doctrine, district courts may “consider documents ‘whose contents are alleged in a complaint and
whose authenticity no party questions, but which are not physically attached to the [plaintiff’s]
pleading.’”) (alteration in original). The court notes Copeland’s objection that, although the Proxy
Statements may be cited to establish what statements they contain, they should not be cited for the
truth of those statements. See Docket No. 90 at 3:24-6:17. Here, Defendants cite the documents to
establish what statements were made to shareholders about the vote, specifically, the term of the
director to be elected by the shareholder votes.
16
Case No.: 5:11-CV-1058 EJD
ORDER GRANTING MOTIONS TO DISMISS; DENYING MOTION TO STRIKE

1

69, 73, 75. On March 27, 2012, Copeland filed a motion to strike the documents that are the subject

2

of those requests. See Docket No. 90. The motion to strike, however, appears to be limited to

3

opposing to the RJNs and does not argue that there is any reason the documents and references to

4

those documents must be stricken in addition to the RJNs being denied. Thus, because the RJNs

5

have been denied as moot, the motion to strike those documents is also DENIED as moot.

6
7

IV. CONCLUSION
For the reasons discussed above, Defendants’ motions to dismiss (Docket Nos. 68, 71, 72,

8

74) are GRANTED and the FAC is DISMISSED WITH LEAVE TO AMEND. Any amended

9

complaint shall be filed no later than November 1, 2012.

United States District Court
For the Northern District of California

10

The motion to strike (Docket No. 89) is DENIED AS MOOT.

11

The court schedules this case for a Case Management Conference on November 30, 2012

12

at 10:00 a.m. The parties shall file a Joint Case Management Conference Statement on or before

13

November 21, 2012.

14

IT IS SO ORDERED

15

Dated: October 10, 2012

16
17

_________________________________
EDWARD J. DAVILA
United States District Judge

18
19
20
21
22
23
24
25
26
27
28
17
Case No.: 5:11-CV-1058 EJD
ORDER GRANTING MOTIONS TO DISMISS; DENYING MOTION TO STRIKE