McDowell v. Bracken et al
Filing
44
ORDER GRANTING 25 DEFENDANTS' MOTION TO DISMISS. Plaintiff's Verified Shareholder Derivative Complaint is DISMISSED with prejudice. Closing Case. Signed by Judge Beth Bloom on 6/5/2018. (pes) NOTICE: If there are sealed documents in this case, they may be unsealed after 1 year or as directed by Court Order, unless they have been designated to be permanently sealed. See Local Rule 5.4 and Administrative Order 2014-69.
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF FLORIDA
Case No. 17-cv-61535-BB
ANGUS MCDOWELL,
Plaintiff,
v.
GEORGE R. BRACKEN, et al.,
Defendants.
__________________________________/
ORDER ON DEFENDANTS’ MOTION TO DISMISS
THIS CAUSE is before the Court upon Defendants’ Motion to Dismiss Plaintiff’s
Verified Shareholder Derivative Complaint (the “Motion”). See ECF No. [25]. The Court has
reviewed the Motion, all supporting and opposing submissions, the record and applicable law,
and is otherwise fully advised. For the reasons that follow, Defendants’ Motion is granted.
I.
BACKGROUND
Plaintiff brings the present action derivatively and on behalf of National Beverage Corp.
(“NBC”), a Delaware corporation with its principal place of business in Fort Lauderdale,
Florida.1 See ECF No. [1], at ¶ 1. “Through its subsidiaries, NBC develops, produces and
distributes a portfolio of beverage brands that are sold and distributed in the United States and
abroad.” Id. The action is brought against NBC’s board of directors, certain executive officers,
and related entities for purported violations of Delaware law and Section 14(a) of the Securities
and Exchange Act, 15 U.S.C. § 78a et seq., during fiscal years 2015–2017 through the present
(the “Relevant Period”). See Id. To better understand the nature of the allegations, a quick
summary of the ten defendants is provided below:
1
Plaintiff is a stockholder of NBC. See ECF No. [1], at ¶ 15.
Case No. 17-cv-61535-BB
(1) N. Caporella founded NBC in 1985. See Id. at ¶ 3. He is NBC’s Chief Executive
Officer, the Chairman of the board of directors, and the beneficial owner of 73.6
percent of NBC’s outstanding common stock as of August 8, 2016.2 See Id. at ¶ 1.
(2) Bracken is NBC’s Executive Vice President of Finance. See Id. at ¶ 22.
(3) Cook is the Vice President – Controller and Chief Accounting Officer of NBC. See
Id. at ¶ 24.
(4) J. Caporella is N. Caporella’s son, President of NBC since 2002, and member of the
board since 1987. See Id. at ¶ 21.
(5) Conlee has served on the NBC board since 2009. See Id. at ¶ 23. He has served as
Chairman of NBC’s Compensation and Stock Option Committee, and has been a
member of the Audit Committee and Strategic Planning Committee during the
Relevant Period. See Id.
(6) Hathorn has been on NBC’s board since 1997. See Id. at ¶ 25. He previously served
on the board from 1985 through 1993 prior to returning. See Id. Throughout the
Relevant Period, Hathorn has served as Chairman of the Audit Committee, Deputy
Chairman of the Compensation and Stock Option Committee and Nominating
Committee, and has been a member of the Strategic Planning Committee. See Id.
(7) Sheridan has served on the NBC board since 2009, serving as Deputy Chairman of
the Audit Committee and as a member of the Compensation and Stock Option
Committee and Nominating Committee during the Relevant Period. See Id. at ¶ 26.
2
N. Caporella owns 71.5 percent of NBC’s outstanding common stock through Defendant IBS Partners
Ltd. See ECF No. [1], at ¶ 18. IBS Partners Ltd. is a Texas limited partnership whose sole general
partner is Defendant IBS Management Partners, Inc., a Texas corporation wholly-owned by N. Caporella.
See Id. at ¶¶ 18–19.
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(8) Corporate Manager Advisors, Inc. (“CMA”) is a Delaware corporation wholly-owned
by N. Caporella, with its principal place of business in Fort Lauderdale, Florida. See
Id. at ¶ 17. N. Caporella is the President of CMA, while Bracken is the Vice
President. See Id. Pursuant to a management agreement (the “Agreement”) between
NBC and CMA, CMA provides the services of NBC’s CEO and Chief Financial
Officer (that is, N. Caporella and Bracken), as well as the services of other “unnamed
senior
and
corporate
personnel,
who
purportedly
provide
management,
administrative, and creative functions” to NBC under the Agreement.3 See Id. at ¶ 2.
Many, if not all, of Plaintiff’s allegations stem from alleged omissions or inconsistencies
between the provisions of the Agreement and NBC’s filings with the Securities and Exchange
Commission (“SEC”) during the Relevant Period. For instance, under the Agreement, CMA
provides its management services and other functions to NBC for an annual fee of 1 percent of
NBC’s net sales. See Id. at ¶ 41. However, the proxy statements filed with the SEC during the
Relevant Period state that CMA is “entitled to a fee for rendering advice and expertise in
connection with significant transactions up and above the 1% of net revenues management fee.”
See Id. at ¶ 89.
Moreover, Plaintiff alleges that the Agreement duplicates various responsibilities and
functions between NBC and CMA—including administrative, sales, marketing, and legal
services—for which NBC employees are already being compensated. See Id. at ¶¶ 45–68.
Plaintiff further alleges that the Agreement contains a Standard of Care provision4 that violates
3
NBC and CMA first entered into the Agreement in 1991. See ECF No. [1], at ¶ 40.
“The Manager [CMA] (including any person or entity acting for or on behalf of the Manager) shall not
be liable for any mistakes of fact or errors of judgment, for losses sustained by the Company [NBC] or
any subsidiary or for any acts or omissions of any kind, unless caused by intentional misconduct of the
Manager engaged in by the Manager in bad faith.” See ECF No. [1], at ¶ 71.
4
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Case No. 17-cv-61535-BB
Delaware law because it “permit[s] officers to be shielded from liability under Delaware’s
exculpatory [statutory] provision, which applies only to directors.”
See Id. at ¶ 72.
The
Agreement also contains an “unreasonable” termination clause that requires one year’s written
notice to either NBC or CMA to terminate the Agreement, yet provides for an automatic oneyear renewal if not terminated. See Id. at ¶ 73. According to Plaintiff, the NBC board has
continued to approve the Agreement during the Relevant Period despite these “invalid” and
“onerous” provisions.
Within the proxy statements filed with the SEC during the Relevant Period, NBC stated
that the only perquisite received by its employees beyond retirement, health, and insurance
benefits, was a car allowance. See Id. at ¶ 83. Nevertheless, Plaintiff alleges that NBC paid for
N. Caporella’s personal use of an aircraft partly owned by NBC while failing to disclose this use
in the company’s proxy statements.5 See Id. at ¶¶ 84, 87.
As a result of these allegedly false acts, statements, and omissions, Plaintiff filed the
present action against Defendants on behalf of NBC, bringing forth claims for breach of
fiduciary duty (Count I) and corporate waste (Count II) under Delaware law, and violations of
Section 14(a) of the Securities and Exchange Act (Count III) in connection with the proxy
statements filed during the Relevant Period.
See Id. at 44–47.
On November 20, 2017,
Defendants filed the Motion. See ECF No. [25]. Plaintiff timely filed his response, ECF No.
[36], and Defendants timely filed their reply, ECF No. [37]. On May 15, 2018, the Court held a
hearing on the Motion. See ECF Nos. [42]–[43]. The Motion is ripe for adjudication.
5
The proxy statements also allegedly failed to include complete and accurate information regarding the
ownership of the aircraft. See ECF No. [1], at ¶ 87. Specifically, the proxies only mentioned that NBC
was a 20 percent owner of the aircraft, yet failed to indicate that the rest of the aircraft was owned by
Broad River Aviation, Inc., a company managed by N. Caporella and Bracken (and previously managed
by J. Caporella). See Id. at ¶ 7.
4
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II.
LEGAL STANDARD
Rule 8 of the Federal Rules of Civil Procedure requires that a pleading contain “a short
and plain statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P.
8(a)(2). Although a complaint “does not need detailed factual allegations,” it must provide
“more than labels and conclusions, and a formulaic recitation of the elements of a cause of action
will not do.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007); see Ashcroft v. Iqbal, 556
U.S. 662, 678 (2009) (explaining that Rule 8(a)(2)’s pleading standard “demands more than an
unadorned, the-defendant-unlawfully-harmed-me accusation”). In the same vein, a complaint
may not rest on “‘naked assertion[s]’ devoid of ‘further factual enhancement.’” Iqbal, 556 U.S.
at 678 (quoting Twombly, 550 U.S. at 557 (alteration in original)). “Factual allegations must be
enough to raise a right to relief above the speculative level.” Twombly, 550 U.S. at 555. These
elements are required to survive a motion brought under Rule 12(b)(6), which requests dismissal
for “failure to state a claim upon which relief can be granted.”
When reviewing a motion under Rule 12(b)(6), a court, as a general rule, must accept the
plaintiff’s allegations as true and evaluate all plausible inferences derived from those facts in
favor of the plaintiff. See Miccosukee Tribe of Indians of Fla. v. S. Everglades Restoration
Alliance, 304 F.3d 1076, 1084 (11th Cir. 2002); AXA Equitable Life Ins. Co. v. Infinity Fin. Grp.,
LLC, 608 F. Supp. 2d 1349, 1353 (S.D. Fla. 2009). However, this tenet does not apply to legal
conclusions, and courts “are not bound to accept as true a legal conclusion couched as a factual
allegation.” Twombly, 550 U.S. at 555; see Iqbal, 556 U.S. at 678; Thaeter v. Palm Beach Cnty.
Sheriff’s Office, 449 F.3d 1342, 1352 (11th Cir. 2006). Moreover, “courts may infer from the
factual allegations in the complaint ‘obvious alternative explanations,’ which suggest lawful
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conduct rather than the unlawful conduct the plaintiff would ask the court to infer.” Am. Dental
Ass’n v. Cigna Corp., 605 F.3d 1283, 1290 (11th Cir. 2010) (quoting Iqbal, 556 U.S. at 682).
A court considering a Rule 12(b)(6) motion is generally limited to the facts contained in
the complaint and the attached exhibits, including documents referred to in the complaint that are
central to the claim. See Wilchombe v. TeeVee Toons, Inc., 555 F.3d 949, 959 (11th Cir. 2009);
Maxcess, Inc. v. Lucent Technologies, Inc., 433 F.3d 1337, 1340 (11th Cir. 2005) (“[A]
document outside the four corners of the complaint may still be considered if it is central to the
plaintiff’s claims and is undisputed in terms of authenticity.”) (citing Horsley v. Feldt, 304 F.3d
1125, 1135 (11th Cir. 2002)). “[W]hen the exhibits contradict the general and conclusory
allegations of the pleading, the exhibits govern.” Griffin Indus., Inc. v. Irvin, 496 F.3d 1189,
1206 (11th Cir. 2007). It is through this lens that the Court addresses the instant Motion.
III.
DISCUSSION
Defendants have moved to dismiss all of Plaintiff’s claims against them. As the primary
basis for dismissal, Defendants assert that Plaintiff has not met the heightened pleading standards
that govern derivative suits in Delaware. In the alternative, Defendants also allege that Plaintiff
has failed to state his claims as a matter of law. The Court will first address Plaintiff’s claims
arising under Delaware law, and will then discuss Plaintiff’s federal claim against Defendants.
A.
Demand Futility under Delaware law.
It is undisputed that both of Plaintiff’s claims for breach of fiduciary duty and for
corporate waste are subject to Delaware’s Court of Chancery Rule 23.1.
“Because the
shareholders’ ability to institute an action on behalf of the corporation inherently impinges upon
the directors’ power to manage the affairs of the corporation[,] the law imposes certain
prerequisites on a stockholder’s right to sue derivatively.” Kaplan v. Peat, Marwick, Mitchell &
6
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Co., 540 A.2d 726, 730 (Del. 1988). Under Rule 23.1, stockholders may “initiate a derivative
suit to enforce unasserted rights of the corporation without the board’s approval where they can
show either that the board wrongfully refused the plaintiff’s pre-suit demand to initiate the suit
or, if no demand was made, that such a demand would be a futile gesture and is therefore
excused.” White v. Panic, 783 A.2d 543, 550 (Del. 2001). “Where, as in this case, a stockholder
plaintiff initiates a derivative action without making a pre-suit demand on the board, Rule 23.1
requires that the complaint allege with particularity the reasons for the plaintiff’s failure to
demand action from the board.” Id. at 550–51; see also Ct. Ch. Rule 23.1(a) (“The complaint
shall . . . allege with particularity the efforts, if any, made by the plaintiff to obtain the action the
plaintiff desires from the directors . . . and the reasons for the plaintiff’s failure to obtain the
action or for not making the effort.”).
In Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984), the Supreme Court of Delaware
held that a demand on the board is excused only if the complaint contains particularized factual
allegations raising a reasonable doubt that either: “(1) the directors are disinterested and
independent” or “(2) the challenged transaction was otherwise the product of a valid exercise of
business judgment.” At the motion to dismiss stage, “[p]laintiffs are entitled to all reasonable
factual inferences that logically flow from the particularized facts alleged, but conclusory
allegations are not considered as expressly pleaded facts or factual inferences.” Brehm v. Eisner,
746 A.2d 244, 255 (Del. 2000). As will be explained in further detail below, Plaintiff has not
made the requisite showing under Aronson to excuse pre-suit demand on the NBC board.6
1.
Director Independence.
The directors of the NBC board during the Relevant Period are N. Caporella, J.
Caporella, Conlee, Hathorn, and Sheridan. “To establish demand futility under Aronson . . .
6
The parties agree that Aronson controls the Court’s demand futility analysis.
7
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Plaintiff must impugn the ability of at least half of the directors in office when it initiated this
action . . . to have considered a demand impartially.” Teamsters Union 25 Health Servs. & Ins.
Plan v. Baiera, 119 A.3d 44, 57 (Del. Ch. 2015).
At the hearing, Plaintiff admitted that he should have filed an amended complaint rather
than make arguments for the first time in his response to the Motion that Conlee, Hathorn, and
Sheridan were not disinterested due to their compensation and stock options. Nevertheless,
when specifically asked by the Court, Plaintiff stated that there were no other facts he would
have used or included in an amended complaint to support his demand futility allegations, and,
as such, all the facts in support of those allegations were before the Court. The Court also notes
that Plaintiff had ample time and opportunity to file an amended complaint, yet did not do so.7
See Delaware Cty. Employees Ret. Fund v. Sanchez, 124 A.3d 1017, 1021 n.14 (Del. 2015)
(“[W]e note that the proper way for the plaintiffs to have used these materials is by seeking to
amend their complaint. It is not fair to the defendants, to the Court of Chancery, or to this Court,
nor is it proper under the rules of either court, for the plaintiffs to put facts outside the complaint
before us. Perhaps as important for stockholder plaintiffs themselves, this approach hazards
dismissal with prejudice on the basis of a record the plaintiffs had the fair chance to shape and
that omitted facts they could have, but failed to, plead.”).
7
For instance, the Complaint was filed on August 2, 2017, see ECF No. [1], and due to an extended
briefing schedule requested by the parties and granted by the Court, see ECF Nos. [8]–[9], the Motion
was filed on November 20, 2017, the response was filed on January 8, 2018, and the reply was filed on
January 29, 2018, see ECF Nos. [25], [36], [27]. Plaintiff also admitted on the record that he did not avail
himself of Del. Code Ann. tit. 8, § 220, which allows stockholders to inspect a corporation’s books and
records. See White v. Panic, 783 A.2d 543, 557 n. 15 (Del. 2001) (“We have emphasized on several
occasions that stockholder ‘[p]laintiffs may well have the “tools at hand” to develop the necessary facts
for pleading purposes,’ including the inspection of the corporation’s books and records under 8 Del. C. §
220.”); see also Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1057 n.
52 (Del. 2004) (“[W]e approved the Vice Chancellor’s admonition in that case that a plaintiff should
pursue a books and records inspection in order to secure the facts necessary to support an allegation of
demand futility if the factual allegations would otherwise fall short.”).
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Plaintiff has not alleged that any of the directors apart from N. Caporella are “interested”
in the Agreement or any of the transactions at issue.8 Nevertheless, the parties seem to agree that
neither N. Caporella (in light of his substantial financial and personal interest in the company)
nor J. Caporella (as N. Caporella’s son) are disinterested or independent for purposes of the
demand futility analysis. Instead, the parties contest the independence of Conlee, Hathorn, and
Sheridan from NBC’s founder, CEO, Chairman, and controlling shareholder, N. Caporella. If
Plaintiff’s particularized factual allegations support a showing that at least one of the remaining
directors lacks independence, pre-suit demand on the board would be excused.
In the demand futility context, directors are “presumed to be independent.” Id. at 59.
Under Delaware law, “[i]ndependence means that a director’s decision is based on the corporate
merits of the subject before the board rather than extraneous considerations or influences.” Id.
“[A] lack of independence can be shown by pleading facts that support a reasonable inference
that the director is beholden to a controlling person or ‘so under their influence that their
discretion would be sterilized.’” Id. (quoting Rales v. Blasband, 634 A.2d 927, 936 (Del. 1993)).
Thus, a non-interested director is not independent if particularized allegations support the
inference that he or she “would be more willing to risk his or her reputation than risk the
relationship with the interested [person].” Id.
Plaintiff contends that Conlee, Hathorn, and Sheridan are “incapable of making an
impartial decision to . . . vigorously prosecute” this action as a result of their “longstanding
professional relationships” with N. Caporella. ECF No. [1], at ¶ 108. In particular:
8
A director is interested in a transaction if “he or she will receive a personal financial benefit from a
transaction that is not equally shared by the stockholders” or if “a corporate decision will have a
materially detrimental impact on a director, but not on the corporation and the stockholders.” Rales v.
Blasband, 634 A.2d 927, 936 (Del. 1993).
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(1) Conlee served for more than 20 years as lead director of Burnup & Sims, Inc., where
N. Caporella was President and CEO from 1976 to 1994, and Chairman from 1979 to
1994. See Id. at ¶¶ 20, 108.
(2) Hathorn served as a director of Burnup & Sims, Inc., from 1981 to 1997, while also
serving on NBC’s board during its “formative years,” 1985 to 1993. See Id. at ¶ 108.
(3) Sheridan was employed by Faygo Beverages, Inc., a wholly-owned subsidiary of
NBC since 1987, from 1974 until his retirement in 2004. See Id. at ¶¶ 26, 108.
Sheridan joined Faygo Beverages, Inc., in 1974 as Chief Financial Officer and was
promoted to President in 1987 when the company was acquired by NBC. See Id.
“Further, . . . Conlee, Hathorn and Sheridan are beholden to N. Caporella, as they are dependent
on him for their position as NBC directors. The combination of their reliance on N. Caporella, as
well as their longstanding professional relationship with him, render . . . Conlee, Hathorn and
Sheridan incapable of objectively and fairly evaluating a demand by Plaintiff.” See Id. at ¶ 109.
These allegations are not sufficient to satisfy Aronson’s first prong, as Delaware courts
have dismissed derivative complaints containing allegations that are more particularized than
those presented by Plaintiff in this case. For instance, in Beam ex rel. Martha Stewart Living
Omnimedia, Inc. v. Stewart, 845 A.2d 1040 (Del. 2004), a shareholder brought a derivative
action claiming that the board of directors lacked independence for purposes of considering a
pre-suit demand from the company’s controlling shareholder, Martha Stewart. At issue on
appeal was the independence of three directors. The first director, Arthur C. Martinez, had
served on the board of the company since 2001, had previously established a relationship with
the company while an officer and director of Sears, had been recruited to the board of the
company by Stewart’s longtime personal friend, Charlotte Beers, and was himself a
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“longstanding personal friend” of Stewart and another director named Sharon L. Patrick, who
stated in a 2001 article that “[Martinez] is an old friend to both me and Martha.” Id. at 1045.
The second director, Darla D. Moore, had also served on the board of the company since 2001
and was “a longstanding friend” of Stewart, having attended a wedding reception in 1995 that
was hosted by Stewart’s personal lawyer and in which Stewart was also in attendance. See Id.
In 1996, moreover, Fortune magazine printed an article highlighting Moore’s “close personal
relationship” with Stewart and Beers, whom Moore replaced when Beers resigned from the
company’s board. See Id. Finally, director Naomi O. Seligman was alleged to have been a
director since 1999 and, according to a 2002 story that appeared in the Wall Street Journal,
contacted the CEO of a publishing house (where Seligman was also a director) at the behest of
Stewart “to express concern over its planned publication of a biography that was critical of
Stewart.” Id. at 1045–46.
The Supreme Court of Delaware, however, held that even though the shareholder
“attempted to plead affinity beyond mere friendship between Stewart and the other directors, . . .
her attempt [was] not sufficient to demonstrate demand futility.” Id. at 1051. This is because:
Allegations that Stewart and the other directors moved in the same social circles,
attended the same weddings, developed business relationships before joining the
board, and described each other as “friends,” even when coupled with Stewart’s
94% voting power, are insufficient, without more, to rebut the presumption of
independence. They do not provide a sufficient basis from which reasonably to
infer that Martinez, Moore and Seligman may have been beholden to Stewart.
Whether they arise before board membership or later as a result of collegial
relationships among the board of directors, such affinities—standing alone—will
not render presuit demand futile.
Id. In the present case, Plaintiff has not even alleged that Conlee, Hathorn, or Sheridan shared “a
particularly close or intimate personal” affinity with N. Caporella. Id. Nor has Plaintiff provided
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any “evidence that in the past the relationship caused the director[s] to act non-independently vis
a vis an interested director.” Id.
Instead, Plaintiff’s allegations—which are limited to the business relationships between
N. Caporella and the three directors—“largely boil down to a ‘structural bias’ argument, which
presupposes that the professional and social relationships that naturally develop among members
of a board impede independent decisionmaking.” Id. at 1050–51. As the Delaware Supreme
Court stated in Aronson, 473 A.2d at 815 n.8, however, “[t]he difficulty with structural bias in a
demand futile case is simply one of establishing it in the complaint for purposes of Rule 23.1.
We are satisfied that . . . review by the Court . . . of complaints alleging specific facts pointing to
bias on a particular board will be sufficient for determining demand futility.”
No such
allegations are present in this case.
In his response to the Motion, Plaintiff states that the Court “should draw the inference
that long-standing ties across two companies existed between N. Caporella and Conlee extending
back approximately 40 years, Hathorn [and Sheridan] extending back over 30 years,” and that
these ties should put the directors’ independence in doubt. ECF No. [36], at 17. It is true that “it
may be possible to plead additional facts concerning the length, nature or extent of . . . previous
relationships that would put in issue that director’s ability to objectively consider the challenged
transaction.” Orman v. Cullman, 794 A.2d 5, 27 (Del. Ch. 2002). Nevertheless, “the Court
cannot make a reasonable inference that a particular [relationship is of a bias-producing nature]
without specific factual allegations to support such a conclusion.” Beam, 845 A.2d at 1050
(emphasis in original).
Here, Plaintiff has simply alleged that N. Caporella and the three
directors have served on the board of two companies for a long time. These allegations, absent
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more particularized facts regarding “the nature of the relationship or additional circumstances,”
Id. at 1052, are not sufficient to demonstrate demand futility.9
Delaware law is clear that “[a]llegations of mere personal friendship or a mere outside
business relationship, standing alone, are insufficient to raise a reasonable doubt about a
director’s independence.”
Id. at 1050.
Plaintiff’s allegations surrounding the business
relationships between N. Caporella and the three directors as a result of their service on the board
of a couple of companies over a long span of time do not create a reasonable doubt that either
Conlee, Hathorn, or Sheridan would risk their reputation at the expense of jeopardizing their
relationship with N. Caporella.10
2.
Valid exercise of business judgment.
Plaintiff can still excuse pre-suit demand upon the NBC board if he can show that the
Agreement and the other transactions at issue were not the result of a valid exercise of business
9
See, e.g., Crescent/Mach I Partners, L.P. v. Turner, Del.Ch., C.A. No. 17455, mem. op. at 30, Steele,
V.C., 2000 WL 1481002 (by designation) (Sept. 29, 2000) (holding that allegations of a “long-standing
15–year professional and personal relationship” between a director and the CEO and Chairman of the
Board of his company were insufficient to support a finding of control); State of Wisconsin Inv. Bd. v.
Bartlett, Del.Ch., C.A. No. 17727, mem. op. at 17, Steele, V.C., 2000 WL 238026 (Feb. 24, 2000)
(stating that “[e]vidence of personal and/or past business relationships does not raise an inference of selfinterest”); In re Walt Disney Co. Derivative Litig., 731 A.2d 342, 355 (Del. Ch. 1998), aff’d in part, rev’d
in part and remanded sub nom. Brehm v. Eisner, 746 A.2d 244 (Del. 2000) (“The fact that [the
Chairman/CEO] has long-standing personal and business ties to [the employee] cannot overcome the
presumption of independence that all directors . . . are afforded.”). Plaintiff’s principal case demonstrates
the insufficiency of Plaintiff’s allegations. See Delaware Cty. Employees Ret. Fund v. Sanchez, 124 A.3d
1017, 1021 (Del. 2015) (“[P]laintiffs . . . pled facts support[ing] an inference that Jackson cannot act
independently of Chairman Sanchez, because he is Sanchez’s close friend of a half century, derives his
primary employment from a company over which Sanchez has substantial control, [and] has a brother in
the same position . . . .”).
10
That N. Caporella is a controlling shareholder does not affect the demand futility analysis. See
Teamsters, 119. A.3d at 67 (“As Aronson, Beam, and Rule 23.1 make plain . . . . neither the presence of a
controlling stockholder nor allegations of self-dealing by a controlling stockholder changes the directorbased focus of the demand futility inquiry.”).
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judgment.11 “The business judgment rule is an acknowledgment of the managerial prerogatives
of Delaware directors . . . . It is a presumption that in making a business decision the directors of
a corporation acted on an informed basis, in good faith and in the honest belief that the action
taken was in the best interests of the company. Absent an abuse of discretion, that judgment will
be respected by the courts. The burden is on the party challenging the decision to establish facts
rebutting the presumption.” Aronson, 473 A.2d at 812 (internal citations omitted). Under the
business judgment rule, “director liability is predicated upon concepts of gross negligence.” Id.
a. Breach of fiduciary duty.
In Count I, Plaintiff claims that Defendants breached their fiduciary duties by: (1)
allowing for materially inadequate controls over NBC’s policies and practices as evidenced by
the lack of definition and duplication of functions between employees of NBC and CMA; (2)
approving the Agreement every year during the Relevant Period even though it contains the
illegal Standard of Care provision, one year termination clause, and potential additional fees to
be earned by CMA in connection with significant transactions; and (3) allowing NBC to file
false and misleading periodic reports such as the 2015–17 proxy statements with the SEC in
violation of federal regulations. See ECF No. [1], at ¶ 112. As will be explained below, Plaintiff
must show that directors Conlee, Hathorn, and Sheridan acted in bad faith when both approving
the Agreement (allegation two) and in failing to provide the proper oversight (allegations one
and three). This is a high standard, and one that Plaintiff has failed to meet.
11
Although the parties spent much time in theirs briefs arguing whether the “entire fairness” rule applies
to the second prong of Aronson due to N. Caporella’s status as a controlling shareholder, Plaintiff
conceded at the hearing that the business judgment rule was applicable at this demand futility stage.
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The Delaware Court of Chancery’s decision in Caremark12 articulates the necessary
conditions “where directors are alleged to be liable for a failure to monitor liability creating
activities,” as in Plaintiff’s first and third allegations outlined above. In re Citigroup Inc.
S’holder Derivative Litig., 964 A.2d 106, 123 (Del. Ch. 2009). To prove director oversight
liability, a plaintiff must demonstrate:
(a) the directors utterly failed to implement any reporting or information system
or controls; or (b) having implemented such a system or controls, consciously
failed to monitor or oversee its operations thus disabling themselves from being
informed of risks or problems requiring their attention. In either case, imposition
of liability requires a showing that the directors knew that they were not
discharging their fiduciary obligations. Where directors fail to act in the face of a
known duty to act, thereby demonstrating a conscious disregard for their
responsibilities, they breach their duty of loyalty by failing to discharge that
fiduciary obligation in good faith. Thus, to establish oversight liability a plaintiff
must show that the directors knew they were not discharging their fiduciary
obligations or that the directors demonstrated a conscious disregard for their
responsibilities such as by failing to act in the face of a known duty to act. The
test is rooted in concepts of bad faith; indeed, a showing of bad faith is a
necessary condition to director oversight liability.
Id. (internal citations omitted) (emphasis in original). Plaintiff’s allegations again fall short. For
instance, regarding Plaintiff’s contention that the directors allowed for materially inadequate
controls over NBC’s policies and practices as evidenced by the lack of definition and duplication
of functions between employees of NBC and CMA, Plaintiff has not provided the Court with any
information about the “internal controls” (or lack thereof) that led to the supposed duplication of
services. Nor has Plaintiff alleged with particularity which employees are being compensated for
performing these duplicated functions,13 or, importantly, that the directors knew that particular
12
In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996). In Stone ex rel. AmSouth
Bancorporation v. Ritter, 911 A.2d 362, 364 (Del. 2006), the Delaware Supreme Court approved of the
Caremark standard.
13
Indeed, Plaintiff has alleged that employees are “presumably” being compensated for “duplicating
responsibilities.” ECF No. [1], at ¶ 70. Moreover, many of the allegations supporting Plaintiff’s
argument concerning the duplication of services predate the Relevant Period, so they do not aid the Court
in determining whether these “overlaps” in responsibility are ongoing. See, e.g., Id. at ¶¶ 50–51, 61, 63.
15
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functions were being replicated yet continued to allow corporate assets to be wasted. Finally,
even if the Court were to accept that services and functions are being replicated, the Complaint
fails to allege the nature, quality, duration, or financial terms of the services being provided by
CMA to allow the Court to make a meaningful comparison of what the services are worth
relative to the price NBC has paid for them. Without these particular facts, which Plaintiff
admitted at the hearing he is not in possession of, the Court cannot infer “that the . . . Agreement
[or duplication of services] was ‘so far beyond the bounds of reasonable judgment’ as to
constitute bad faith or to demonstrate that the [directors] put the interests of [N. Caporella] ahead
of the best interests of the Company.” Teamsters, 119 A.3d at 64.
Plaintiff’s Caremark claim pertaining to the filing of false and misleading periodic
reports, such as the 2015–17 proxy statements, with the SEC in violation of federal regulations is
similarly deficient. First, Plaintiff admitted in the hearing that there is no evidence that the
directors knew or authorized N. Caporella’s personal use of the aircraft.14 Moreover, “[i]t is
unclear from [the] allegations how the board was actually involved in creating or approving the
statements, factual details that are crucial to determining whether demand on the board of
directors would have been excused as futile.” Citigroup, 964 A.2d at 133 n.88. Plaintiff has
failed to provide specific factual allegations to allow the Court to determine the degree of
involvement of Conlee, Hathorn, and Sheridan in the preparation of the proxy statements: as
such, the Complaint fails to adequately plead facts reasonably suggesting that the three directors
“allowed” for the filing of the proxy statements with knowledge that they were false, misleading,
or in bad faith.
14
Plaintiff has alleged that the proxy statements contained false statements and omitted material facts
regarding NBC’s employee perquisites and N. Caporella’s use of the aircraft. See ECF No. [1], at ¶ 88.
16
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“In the absence of red flags, good faith in the context of oversight must be measured by
the directors’ actions ‘to assure a reasonable information and reporting system exists’ and not by
second-guessing after the occurrence of employee conduct that results in an unintended adverse
outcome.” Stone, 911 A.2d at 373 (quoting Caremark, 698 A.2d 967–68, 971). Plaintiff has not
provided the Court with particularized factual allegations regarding the directors’
implementation or monitoring of NBC’s internal controls, let alone that the directors knew they
were not discharging their fiduciary obligations or that the directors demonstrated a conscious
disregard for their responsibilities. Plaintiff’s director oversight liability claims under Caremark
thus fail.
Plaintiff has also alleged that Defendants breached their fiduciary duties to NBC by
approving the Agreement every year during the Relevant Period despite the Agreement
containing the illegal Standard of Care provision, one year termination clause, and potential
additional fees to be earned by CMA in connection with significant transactions. In Aronson,
473 A.2d at 815, the Supreme Court of Delaware made clear that “the mere threat of personal
liability for approving a questioned transaction, standing alone, is insufficient to challenge either
the independence or disinterestedness of directors, although in rare cases a transaction may be so
egregious on its face that board approval cannot meet the test of business judgment, and a
substantial likelihood of director liability therefore exists.” In situations where, as here, a
corporation’s charter includes an exculpatory provision pursuant to 8 Del C. § 102(b)(7), see
ECF No. [25–7], at 24 (Eighth Article), a substantial likelihood of liability “may only be found
to exist if the plaintiff pleads a non-exculpated claim against the directors based on particularized
facts.” Wood v. Baum, 953 A.2d 136, 141 (Del. 2008) (emphasis in original); see also In re
Baxter Int’l, Inc. Shareholders Litig., 654 A.2d 1268, 1270 (Del. Ch. 1995) (“When the
17
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certificate of incorporation exempts directors from liability, the risk of liability does not disable
them from considering a demand fairly unless particularized pleading permits the court to
conclude that there is a substantial likelihood that their conduct falls outside the exemption.”).
The exculpatory provision in NBC’s charter does not eliminate or limit director liability:
(i) for any breach of the director’s duty of loyalty . . . (ii) for act or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the General Corporation Law of the State of
Delaware, (iv) for any transaction from which the director derived an improper
personal benefit, or (v) for any act or omission occurring prior to the date when
the provision becomes effective.
ECF No. [25–7], at 24 (Eighth Article).15 “Because the duty of loyalty mandates that the best
interest of the corporation and its shareholders takes precedence over any interest possessed by a
director, officer or controlling shareholder and not shared by the stockholders generally, a
plaintiff can show a lack of good faith by establishing that a director failed to pursue the best
interests of the corporation and its stockholders.” Teamsters, 119 A.3d at 63 (internal citations
and quotations omitted). A plaintiff, moreover, may show a lack of good faith by establishing
that a director’s decision was “so far beyond the bounds of reasonable judgment that it seems
essentially inexplicable on any ground other than bad faith.” In re J.P. Stevens & Co., Inc.
Shareholders Litig., 542 A.2d 770, 780–81 (Del. Ch. 1988). “This is a high pleading standard, as
Delaware courts typically frame a lack of good faith in terms of ‘intentional’ misconduct.”
Teamsters, 119 A.3d at 63.16
15
Only violations of subsections (i) and (ii) seem to be in question, as Plaintiff has not: mentioned
Section 174 of the General Corporation Law of the State of Delaware anywhere in the Complaint; alleged
that Conlee, Hathorn, or Sheridan derived personal benefits from the Agreement or the provisions at
issue; or claimed that any acts or omissions occurred prior to the date the charter’s exculpatory provision
became effective.
16
Furthermore, in Wood v. Baum, 953 A.2d 136, 141 (Del. 2008), the Delaware Supreme Court stated
that when “directors are exculpated from liability except for claims based on ‘fraudulent,’ ‘illegal’ or ‘bad
faith’ conduct, a plaintiff must also plead particularized facts that demonstrate that the directors acted
with scienter, i.e., that they had ‘actual or constructive knowledge’ that their conduct was legally
18
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Plaintiff has not met this high burden.
Specifically, Plaintiff has not pled with
particularity that the NBC board engaged in bad faith or intentional misconduct when they
approved the Agreement’s provisions. For instance, Plaintiff has not pointed the Court to any
authority stating that there is anything wrong or improper (let alone illegal) with the Agreement’s
“onerous” one-year termination provision. Similarly, regarding the additional fees that CMA can
potentially earn in connection with significant transactions, Plaintiff has not provided the Court
with any specific financial information regarding the amount of fees CMA can earn or has
earned for these “significant transactions.” As a result, the Court cannot determine that the
provision for additional fees is “so facially unfair as to constitute a lack of good faith” by the
directors. See Teamsters, 119 A.3d at 64.
Plaintiff contends that the Standard of Care provision is illegal because it purports to
exculpate NBC’s officers when Delaware law only allows for the exculpation of directors in the
corporate charter. Even disregarding the fact that the exculpatory provision in the Agreement is
a contractual clause limiting liability (rather than an exculpatory provision in the charter) that is
qualified by another clause in the Agreement stating that “each term . . . shall be valid and be
enforced to the fullest extent permitted by law,” the deficiency of Plaintiff’s claim here is more
basic. The Complaint does not allege that the directors had actual or even constructive
knowledge that the Standard of Care provision was illegal, yet they included it anyway. See
Solak v. Sarowitz, 153 A.3d 729, 745 (Del. Ch. 2016), appeal refused sub nom. Paylocity
Holding Corp. v. Solak, 154 A.3d 1167 (Del. 2017) (“According to plaintiff, the individual
defendants must have known they were violating the law when they approved the Fee–Shifting
Bylaw because they took this action ‘more than six months after [the amendment to] Section
improper. Therefore, the issue . . . is whether the Complaint alleges particularized facts that, if proven,
would show that a majority of the defendants knowingly engaged in ‘fraudulent’ or ‘illegal’ conduct or
breached ‘in bad faith’ the covenant of good faith and fair dealing.”
19
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109(b) became effective.’ This single allegation is insufficient . . . to support a reasonable
inference that [the] directors acted with scienter—that they knew they were violating the law—
when they approved the Fee–Shifting Bylaw.”).
In sum, Plaintiff’s claims that the aforementioned provisions are “unreasonable and
unfair to NBC” are too sparse and conclusory for the Court to determine that Conlee, Hathorn,
and Sheridan’s actions were “so egregious that there is a substantial likelihood of liability.”
Aronson, 473 A.2d at 815.
b. Corporate Waste.17
At the hearing, the parties agreed that Count II for corporate waste is limited to NBC
allegedly paying for N. Caporella’s personal use of the company aircraft. “A board’s decisions
do not constitute corporate waste unless they are exceptionally one-sided.” White v. Panic, 783
A.2d 543, 554 (Del. 2001). Accordingly, the Supreme Court has defined “waste” to mean “an
exchange of corporate assets for consideration so disproportionately small as to lie beyond the
range at which any reasonable person might be willing to trade.” Id. “As a practical matter, a
stockholder plaintiff must generally show that the board ‘irrationally squander [ed]’ corporate
assets—for example, where the challenged transaction served no corporate purpose or where the
corporation received no consideration at all.” Id.
Plaintiff admitted at the hearing that there is nothing to suggest that the members of the
board knew or authorized N. Caporella’s personal use of the aircraft. In other words, there is no
board transaction for the Court to scrutinize. As a result, Plaintiff’s corporate waste claim fails.
See In re The Home Depot, Inc. S’holder Derivative Litig., 223 F. Supp. 3d 1317, 1327–28 (N.D.
Ga. 2016), appeal dismissed sub nom. Bennek v. Ackerman, No. 16–17742–DD, 2017 WL
17
Plaintiff brings Count II against N. Caporella, J. Caporella, Bracken, Cook, Conlee, Hathorn, and
Sheridan. See ECF No. [1], at 45.
20
Case No. 17-cv-61535-BB
6759075 (11th Cir. Oct. 24, 2017) (“The problem with the Plaintiffs’ argument is that there is no
transaction.
Corporate waste claims typically involve situations where there has been an
exchange of corporate assets for no corporate purpose or for no consideration; in effect, waste is
a gift. The Plaintiffs cite no case law to suggest anything to the contrary.”).
In sum, Plaintiff has not met his burden under either of Aronson’s prongs to excuse presuit demand on NBC’s board. See Teamsters, 119 A.3d at 65 (“In the absence of well pleaded
allegations of director interest or self-dealing, failure to inform themselves, or lack of good faith,
the business decisions of the board are not subject to challenge because in hindsight other
choices might have been made instead.”). His claims under Delaware law for breach of fiduciary
duty and corporate waste must therefore be dismissed.
B.
Securities and Exchange Act.
In Count III, Plaintiff alleges that directors N. Caporella, J. Caporella, Conlee, Hathorn,
and Sheridan violated Section 14(a) of the Securities and Exchange Act in connection with the
proxy statements filed by the company with the SEC in 2015, 2016, and 2017. See ECF No. [1],
at 46. Specifically, Plaintiff claims that these proxy statements were deficient because they
failed to disclose: (1) that N. Caporella, J. Caporella, and Bracken were or are affiliated with
Broad River; (2) that Broad River is the predominant owner of NBC’s aircraft; (3) that N.
Caporella utilized the airplane for personal trips; and (4) all of the provisions of the Agreement.
See Id. at 46–47.
“Section 14(a) and Rule 14–A–9 promulgated thereunder require that proxy statements
not be false or misleading with regard to any material statement, nor omit to state any material
fact necessary in order to make the statements therein not false or misleading. A fact or
statement is material if there is a substantial likelihood that a reasonable shareholder would
21
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consider it important in deciding how to vote.” In re The Home Depot, Inc., 223 F. Supp. 3d at
1329 (internal citations and quotations omitted).
Regarding whether a defendant omitted
important information, a plaintiff “must show that the Board had a duty to disclose the omitted
material fact, which is determined by whether the SEC regulations specifically require disclosure
of the omitted information in a proxy statement, or the omission makes other statements in the
proxy statement materially false or misleading.” Id. at 1329–30. To sustain a private claim
under Section 14(a), a plaintiff must show “that the proxy solicitation itself, rather than the
particular defect in the solicitation materials, was an essential link in the accomplishment of the
transaction.” Mills v. Elec. Auto–Lite Co., 396 U.S. 375, 385 (1970). The transaction at issue,
moreover, must be the source of the plaintiff’s injury. See Id. In particular, the Eleventh Circuit
Court of Appeals has stated “that Section 14(a) claims must show two types of causation:
transaction and loss causation. In other words, the shareholders must have voted for the . . .
Proxy Statement because of the omission (i.e., transaction causation), and the losses to the
company must have resulted directly from the . . . Proxy Statement vote, not from the omission
itself (i.e., loss causation).” In re The Home Depot, Inc., 223 F. Supp. 3d at 1331 (citing Edward
J. Goodman Life Income Tr. v. Jabil Circuit, Inc., 594 F.3d 783, 796–97 (11th Cir. 2010)).
Plaintiff alleges that the “omissions and misrepresentations were material to a reasonable
investor in deciding to vote on the issues presented by the 2015, 2016 and 2017 Proxies,
including the election of the Current Director Defendants.”18 ECF No. [1], at ¶ 125. Courts,
however, “have . . . regularly dismissed Section 14(a) claims based on the election of directors
because the losses are indirect.” In re The Home Depot, Inc., 223 F. Supp. 3d at 1331.
18
The 2016 and 2017 proxy statements show that the election of two directors was on the agenda at each
year’s annual meeting of NBC shareholders, see ECF Nos. [26–4], [26–5], whereas the 2015 proxy
statement states that the election of one director and “a non-binding advisory vote on executive
compensation” was on the agenda for that year’s shareholder meeting, ECF No. [26–6].
22
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For instance, in Edward J. Goodman Life Income Tr. v. Jabil Circuit, Inc., 594 F.3d 783,
796 (11th Cir. 2010), the shareholders alleged “that several individual Jabil insiders violated
section 14(a) by making false statements in proxy solicitations related to Jabil’s stock option
compensation policy. . . .
They contend[ed] that they relied on these false statements in
approving corporate compensation and stock option policies and that the nondisclosure
prevented them from removing the offending corporate directors.”
Relying on the Third
Circuit’s decision General Electric Company by Levit v. Cathcart, 980 F.2d 927 (3d Cir. 1992),19
the Eleventh Circuit affirmed the dismissal of the proxy solicitation claims because the damages
suffered by the shareholders were caused “not by the policies that they approved via proxy, but
by management’s failure to follow those policies. Additionally, the election of directors who
violated those policies only indirectly caused the shareholders’ loss.” Jabil Circuit, Inc., 594
F.3d at 797 (emphasis added).
The same is true in the instant case. Even assuming that (1) the directors had a duty to
disclose the information Plaintiff believes should have been included in the proxies; (2) the
omitted information was material; and (3) Plaintiff’s allegations of materiality are sufficient to
demonstrate transaction causation, Plaintiff has failed to show loss causation. Like in Jabil
Circuit, the reelection of the directors was not an essential link to the supposed losses that
Plaintiff complains of: that is, the “wast[ing] of corporate assets” stemming from the duplication
19
In Cathcart, the Third Circuit addressed a Section 14(a) claim against corporate insiders based on their
alleged non-disclosure of criminal activity and mismanagement of the company. “The plaintiff claimed
that the absence of this information caused him to vote to reelect board members and approve corporate
governance rules during the class period.” Jabil Circuit, Inc., 594 F.3d at 797. The Third Circuit
affirmed the lower court’s dismissal of the claim, holding that the plaintiff’s injuries were too attenuated
to support a proxy solicitation claim. See Id. (citing Cathcart, 980 F.2d at 933). The Cathcart court held
that the plaintiff’s real injuries came from mismanagement of the corporation—not the transactions
approved via the proxy solicitation materials—thus reasoning that the harm to the plaintiffs was only
indirect and not sufficient to base a Section 14(a) claim. See Id. (citing Cathcart, 980 F.2d at 933).
“Essentially, it was management’s failure to follow corporate policies, and not the actual election of
directors, that contributed to the shareholder’s loss.” Id.
23
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of services or N. Caporella’s personal use of the aircraft, see ECF No. [1], at ¶¶ 92, 126, “was
not accomplished or endorsed by any proxy solicitation materials,” Jabil Circuit, Inc., 594 F.3d
at 797. Because the Complaint fails to allege a link between the proxy statements and Plaintiff’s
alleged damages, Plaintiff’s Section 14(a) claim must be dismissed.
IV.
CONCLUSION
For all of the reasons stated, it is ORDERED AND ADJUDGED that
1. Defendants’ Motion to Dismiss, ECF No. [25], is GRANTED.
2. Plaintiff’s Verified Shareholder Derivative Complaint is DISMISSED with prejudice.
3. The Clerk is directed to CLOSE this case.
DONE AND ORDERED in Miami, Florida, this 5th day of June, 2018.
_________________________________
BETH BLOOM
UNITED STATES DISTRICT JUDGE
Copies to:
Counsel of Record
24
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