Mioduszewski v. Plank et al
Filing
50
MEMORANDUM OPINION. Signed by Judge George Levi Russell, III on 3/30/2020. (bmhs, Deputy Clerk)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
IN RE UNDER ARMOUR, INC.
SHAREHOLDER DERIVATIVE
LITIGATION
Civil Action No. GLR-18-1084 (Lead Case)
(Consolidated with GLR-18-1264)
***
MEMORANDUM OPINION
THIS MATTER is before the Court on Defendants Under Armour, Inc., Sagamore
Development Company, LLC,
Kevin A. Plank, Douglas E. Coltharp, A.B. Krongard,
Byron K. Adams, Jr., George W. Bodenheimer, Karen W. Katz, Williams R. McDermott,
Eric T. Olson, and Harvey L. Sanders’ Motion to Dismiss Plaintiff’s Verified Consolidated
Shareholder Derivative Complaint (ECF No. 44). The Motion is ripe for disposition, and
no hearing is necessary. See Local Rule 105.6 (D.Md. 2018). For the reasons set forth
below, the Court will grant the Motion.1
Also pending before the Court is Plaintiff’s Request for Hearing (ECF No. 48).
Because the Court will grant the Motion, this request will be denied.
1
I.
BACKGROUND2
This stockholder suit arises from allegations that Under Armour’s (the “Company”)
founder and controlling stockholder, Kevin Plank, steered the Company into financially
disadvantageous agreements with Plank’s other companies, notably Sagamore
Development Co., LLC (“Sagamore”)—a real estate company that Plank owns through his
personal holding company, Plank Industries. (Consol. Compl. ¶¶ 2, 7, ECF No. 42). In
doing so, Plank and Sagamore allegedly benefitted financially to the detriment of the
Company’s stockholders. (Id. ¶ 1). The Company’s Board of Directors allegedly breached
its fiduciary duty by approving the transactions. (Id. ¶ 108). Lead Plaintiff Scott King3
brings this action derivatively for the benefit of nominal Defendant Under Armour and
alleges the following facts in support of his claim.
A.
Challenged Transactions
Under Armour is a Maryland-based sports apparel brand that Plank founded in 1996.
(Id. ¶ 2). In 2002, the Company relocated its global headquarters to the Locust Point section
of South Baltimore, Maryland (the “Locust Point Headquarters”). (Id. ¶ 53). In 2008, the
Company predicted that it would outgrow its Locust Point Headquarters in five years. (Id.
¶¶ 3, 55). Thus, Plank sought to move the Company’s headquarters to the West Covington
2
Unless otherwise noted, the Court takes the following facts from Plaintiff Scott
King’s Consolidated Complaint and accepts them as true. See Erickson v. Pardus, 551 U.S.
89, 94 (2007) (citations omitted). Additional facts will be discussed where relevant to the
analysis.
3 Patricia Mioduszewski is also a named Plaintiff. As detailed below, Mioduszewski
filed a lawsuit against the Company and various directors on April 16, 2018. King filed a
related lawsuit on August 30, 2018, and he was eventually named Lead Plaintiff.
2
section of South Baltimore through an urban renewal plan . (Id. ¶¶ 4–5). When Baltimore
City officials rejected the plan, Plank redirected his efforts to expanding the Company’s
existing headquarters. (Id. ¶¶ 58–60).
However, Plank allegedly developed a plan, as early as 2012, to “covertly” acquire
a substantial amount of real estate in the Port Covington neighborhood , intending to sell
some of this land to the Company for use as its future headquarters. (Id. ¶¶ 65–66). Many
of Plank’s real estate acquisitions occurred between 2012 and 2014 through Plank’s longtime acquaintance Marc Weller. (Id. ¶¶ 69–71). In June 2014, it was revealed that Plank
was affiliated with Weller through Sagamore. (Id. ¶ 7).
In September 2014, Plank leased Port Covington land, owned by Sagamore, to the
Company for use beginning in 2016. (Id. ¶¶ 74–75). The Company’s Board, specifically
its Audit Committee, then comprised of former director Anthony W. Deering and
Defendants A.B. Krongard and Douglas E. Coltharp, approved the lease. (Id. ¶ 8). In 2016,
Plank allegedly “caused” the Company to purchase the land that the Company had leased
from Sagamore for $70.3 million (the “Port Covington Sale”). (Id. ¶ 88). The Company
paid twice what Plank and Sagamore paid for the land two years earlier. ( Id.). The Audit
Committee approved the Port Covington Sale. (Id. ¶ 12). King alleges that, in addition to
being unjustly enriched at the Company’s expense through the Port Covington Sale, Plank
also stands to make a substantial profit on Sagamore’s future development of the Port
Covington area. (Id. ¶ 90).
In addition to the Port Covington Sale, King alleges that Plank “caused” the
Company to enter into several financially disadvantageous “related-party transactions”
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with Plank’s other companies. (Id. ¶ 98). For example, the Company leases a jet aircraft
for business purposes from one of Plank’s entities, even when it is used by Plank. (Id. ¶
99). Another Plank entity owns a helicopter, and in June 2016, the Company began leasing
that helicopter. (Id.). The Company paid Plank’s entities $2.2 million, $2.4 million, $2.0
million, and $1.8 million to use these aircrafts during 2017, 2016, 2015 and 2014,
respectively. (Id. ¶ 100). Additionally, in 2015, the Company entered a five-year lease with
Sagamore for a large industrial space to carry out the Company’s domestic manufacturing
initiatives. (Id. ¶ 102; Compl. Ex. D [“Initial Report”] at 12, ECF No. 1-5). The annual
lease rate was $5 million, subject to an annual escalation rate of 2.5 percent. (Id. ¶ 102).
Finally, in March 2017, Plank opened a Baltimore hotel in partnership with Sagamore and
War Horse, the real estate development company controlled by Plank’s brother. (Id. ¶ 103).
The Company plans to use this hotel for business purposes, and Plank and his brother are
entitled to receive a percentage of the hotel’s profits. In 2017 alone, the Company paid the
hotel $4 million. (Id.).
Meanwhile, the Company’s performance has allegedly declined, and its stock price
has tumbled. (Id. ¶ 104). Since reaching a five-year high of almost $100 per share in 2015,
the Company’s stock price has dropped approximately 80 percent, hovering around $20
per share as of the filing of this suit. (Id.).
B.
Shareholder Demand
On May 25, 2017, Plaintiff Patricia Mioduszewski sent the Company’s Board of
Directors a letter stating that the Company “paid over $73 million in 2016 to businesses
controlled by . . . Plank” and alleging that “these self-dealing transactions were not the
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product of arm’s-length negotiations and rather served to enrich Plank personally to the
detriment of the Company and its stockholders.” (Id. ¶ 115; Compl. Ex. A. [“Initial
Demand”] at 1, ECF No. 1-2). The Initial Demand challenged the transactions identified
above and accused Plank, the Directors, and other officers of breaching their fiduciary
duties of loyalty and good faith by approving the related -party transactions and by failing
to establish internal audit controls to prevent the approval of such transactions. (Initial
Demand at 2). On behalf of the Company’s shareholders, Mioduszewski demanded that
the Board take action to recover damages for the benefit of the Company and to correct
internal auditing systems. (Id.). The Initial Demand threatened legal action if the Board
failed to act in a reasonable time frame. (Id.).
On June 1, 2017, the Company’s attorney at Fried, Frank, Harris, Shriver &
Jacobson LLP (“Fried Frank”) acknowledged receipt of the Initial Demand. (Id. ¶ 116). On
June 21, 2017, Mioduszewski’s counsel received a letter from Williams & Connolly LLP
(“W&C”), advising that W&C had been retained as counsel to investigate the Initial
Demand. (Id. ¶ 117; see also Compl. Ex. C [“W&C Aug. 15, 2017 Letter”], ECF No. 1-4).
C.
Review Group, Investigation, and Refusal
The Board appointed a Review Group—which consisted of Defendants Eric Olson,
who was selected to lead it, and George Bodenheimer—to investigate the allegations in the
Initial Demand. (Consol. Compl. ¶ 123; see Initial Report at 3). Following an investigation,
the Review Group found no evidence supporting the allegations in the Initial Demand and
prepared an Initial Report, recommending the Board decline to pursue claims relating to
those allegations. (Consol. Compl. ¶ 123).
5
On January 8, 2018 and March 2, 2018, Kessler Topaz Meltzer & Check, LLP
(“Kessler Topaz”), counsel for Lead Plaintiff, sent letters to Fried Frank focusing on the
Port Covington Sale and identifying deficiencies with the Initial Report and Review
Group’s investigation (together, the “Supplemental Demand”). (Id. ¶ 137).
On June 29, 2018, Fried Frank sent a letter to Kessler Topaz indicating that the
Review Group had completed a “supplemental investigation” in response to the
Supplemental Demand and issued a final report to the Board (the “Supplemental Report”),
which was enclosed with the letter. (Id. ¶ 142). The Supplemental Report found no
evidence supporting the allegations and again recommended the Board decline to pursue
litigation. (Consol. Compl. Ex. 11 [“Suppl. Report”] at 3–12, ECF No. 42-3).
On April 16, 2018, Mioduszewski filed a derivative action against Plank, Coltharp,
and Krongard on behalf of nominal Defendant Under Armour.4 (ECF No. 1). On August
30, 2018, King filed a related lawsuit against the above-named Defendants as well as
Adams, Bodenheimer, Katz, McDermott, Olson, Sanders (collectively, “Director
Defendants”), and Sagamore. See Scott King v. Kevin Plank, No. 1:18-cv-01264-GLR
(D.Md. filed Aug. 30, 2018).
On March 20, 2019, this Court issued an Order consolidating the cases, naming
King as Lead Plaintiff, and appointing Kessler Topaz as lead counsel. (ECF No. 40). On
May 1, 2019, King filed a Consolidated Complaint, alleging breach of duty against Plank
In derivative lawsuits, the “claim pressed by the stockholder against directors or
third parties is not his own but the corporation’s,” so the corporation is named as a
defendant “to ensure its presence.” Franklin v. Jackson, DKC 14-0497, 2015 WL 1186599,
at *3 (D.Md. Mar. 3, 2015).
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(Count I); breach of fiduciary duties against Director Defendants (Count II); aiding and
abetting against Sagamore (Count III); and unjust enrichment against Plank and Sagamore
(Count IV). (ECF No. 42). Plaintiff seeks disgorgement of unlawfully obtained profits and
unspecified monetary damages. (Consol. Compl. at 48).
Defendants filed a Motion to Dismiss on July 2, 2019. (ECF No. 44). Plaintiff filed
an Opposition and a Request for Hearing on August 29, 2019. (ECF Nos. 47, 48). On
October 17, 2019, Defendants filed a Reply. (ECF No. 49).
II.
A.
DISCUSSION
Standard of Review
Derivative actions are governed by Federal Rule of Civil Procedure 23.1, which
requires plaintiffs to “allege with particularity the efforts, if any, made by the pla intiff to
obtain the action the plaintiff desires from the directors or comparable authority and, if
necessary, from the shareholders or members, and the reasons for the plaintiff’s failure to
obtain the action or for not making the effort.’” Jolly Roger Fund LP v. Sizeler Prop. Inv’rs,
Inc., No. RDB-05-841, 2005 WL 2989343, at *7 (D.Md. Nov. 3, 2005) (quoting Fed.R
Civ.P. 23.1) (emphasis removed). “[L]ike a Rule 12(b)(6) motion, the plaintiff’s allegations
receive the benefit of a presumption of truthfulness, and the Court will accept as true wellpleaded allegations and draw all fair and reasonable factual inferences in the plaintiff’s
favor that flow logically from those facts.” Morefield v. Bailey, 959 F.Supp.2d 887, 896
(E.D.Va. 2013) (citing In re ITT Corp. Derivative Litig., 653 F.Supp.2d 453, 457 (S.D.N.Y.
2009)).
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B.
Analysis
The business judgment rule protects corporate directors from liability when the
majority of directors act prudently and in good faith . Devereux v. Berger, 284 A.2d 605,
612 (Md. 1971). The rule’s protection “can be claimed only by disinterested directors
whose conduct otherwise meets the tests of business judgment.” 5 Boland v. Boland, 31
A.3d 529, 549 (Md. 2011) (internal quotations and citations omitted). To be considered
disinterested, “directors can neither appear on both sides of a transaction nor expect to
derive any personal financial benefit from it in the sense of self -dealing, as opposed to a
benefit which devolves upon the corporation or all stockholders generally.” Id. Thus,
“[u]nder the traditional business judgment rule, courts apply a presumption of
disinterestedness, independence, and reasonable decision-making to all business decisions
made by a corporate board of directors.” Oliveira v. Sugarman (“Oliveira II”), 152 A.3d
728, 736 (Md. 2017) .
5
In the Consolidated Complaint, Plaintiff argues that Olson and Bodenheimer, the
only members of the Review Group, “[did] not appear to be able to independently and
impartially consider the Demand,” and that they, along with the other Defendant Directors,
were “beholden to Plank,” because he determined who sat on the Board . (See Consol.
Compl. ¶ 135). Plaintiff then concluded that the refusal was wrongful because a “conflicted
Board” rubberstamped the Review Group’s recommendation. (Id. ¶ 150).
In their Motion to Dismiss, Defendants note that Plaintiff failed to offer any
particularized allegations sufficient to demonstrate that a majority of the Board lacked
independence or disinterestedness and challenge Plaintiff’s generalized allegation as to
each member of the Board and Review Group. (See Mot. Dismiss at 14–20). Plaintiff fails
to address any of these arguments in his Opposition. Thus, the Court concludes that
Plaintiff has abandoned his claim that the Defendant Directors were not disinterested.
Muhammad v. Maryland, No. ELH-11-3761, 2012 WL 987309, at *1 n.3 (D.Md. Mar. 20,
2012) (“[B]y failing to respond to an argument made in a motion to dismiss, a plaintiff
abandons his or her claim.”).
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Developed as a check on that power, derivative lawsuits allow shareholders to bring
“suit to enforce a corporate cause of action against officers, directors, and t hird parties”
when the directors or those in control of the company refuse to assert a claim belonging to
the corporation. Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 95 (1991). Because a
derivative lawsuit encroaches upon the board of directors’ managerial control, shareholders
must either make a demand on the board that the corporation initiate litigation or show that
the demand is excused as futile. Id. at 96. Once a demand is made, the board must
investigate the allegations and determine if litigation is in the corporation’s best interests.
Bender v. Schwartz, 917 A.2d 142, 152 (Md. 2007). A committee of disinterested directors,
appointed by the board, may conduct the investigation. Id.
The board’s decision to deny a demand receives the same business judgment rule
presumption as other board decisions. Boland, 31 A.3d at 549. “In determining whether a
demand was wrongly refused, a court reviews the board’s investigation under the business
judgment rule, deferring to the decision of the board or committee” unless a plaintiff can
demonstrate that the board’s investigation or decision “was not conducted independently
and in good faith, or that it was not within the realm of sound business judgment.” Bender,
917 A.2d at 152. A plaintiff’s allegations cannot be based on “mere suspicions” and must
be stated with particularity. Id. at 152–53.
Here, Plaintiff challenges the reasonableness of the Review Group’s investigation,
arguing the Review Group initially failed to interview key witnesses ; delegated the
investigation process to outside counsel, who did not act independently; and produced an
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inadequate report. Defendants assert that Plaintiff’s allegations are facially insufficient to
overcome the business judgment rule. The Court agrees with Defendants.
In assessing whether a demand investigation was conducted reasonably and in good
faith, Maryland courts consider the following non-exhaustive factors: (1) whether the
committee engaged independent counsel; (2) whether the committee “produced a report,
the length of such report, and whether the report documented th e committee’s procedures,
reasoning, and conclusions”; (3) “whether the committee properly identified the claims at
issue” 6; (4) “whether the committee reviewed the testimony of or interviewed directors,
officers, and employees”; (5) whether the committee “reviewed documents regarding the
complained-of transactions”; and (6) “the number of times the demand committee met.”
Bender, 917 A.2d at 155–56. The Court considers each factor in turn.
1.
Independent Counsel
Defendants note that the Review Group retained W&C as independent counsel to
assist with the investigation. Further, Defendants contend that Plaintiff’s assertion that
W&C may not have acted independently is the sort of “generalized or speculative
allegation” rejected by Werbowsky v. Collomb, 766 A.2d 123, 143 (Md. 2001).
Plaintiff criticizes the Review Group’s engagement of W&C as an “abdication” of
its investigatory and decision-making responsibilities and questions whether W&C acted
independently. Plaintiff asserts that the Review Group, relying solely on W&C’s efforts,
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Plaintiff does not allege, and there is nothing in this record suggesting, that the
Review Group improperly identified the claims at issue. Accordingly, the Court presumes
that this factor weighs in Defendants’ favor and will not analyze it independent of the
Court’s evaluation of the sufficiency of the Review Group’s report.
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failed to participate in the document review, interview, report drafting, and review
processes. Plaintiff further argues that, to the extent Defendants raise a “reliance on counsel
defense,” it should be rejected as a “fact-intensive, affirmative defense” warranting further
discovery.7 (Pl.’s Mem. Opp’n Defs.’ Mot. Dismiss Pl.’s Consol. Compl. [“Opp’n”] at 25,
ECF No. 47). Finally, Plaintiff contends that the Review Group’s lack of participation in
the investigatory process demonstrates a failure to act reasonably and in good faith.
Plaintiff’s argument regarding the Review Group’s reliance on outside counsel is
unavailing. First, Plaintiff alleges that Kessler Topaz emailed a letter to W&C requesting
the names of the directors who were reviewing the Demand on June 23, 2017 and again on
August 24, 2017; the August letter also requested an update on the status of the
investigation.8 (Consol. Compl. ¶¶ 118–19). On August 28, 2017, Kessler Topaz received
a “cryptic” email from W&C acknowledging receipt of the August 24 letter and stating that
it was “referred . . . to Under Armour and the Company’s legal counsel.” (Id. ¶ 120)
(alteration in original). Based on that email, which Plaintiff did not submit as an exhibit,
Plaintiff argues that W&C did not act independently. The Court is unaware of any
authority—and Plaintiff cites none—holding that a single communication between
corporate counsel and independent counsel, without more, eviscerates the latter’s claim
that it acted independently.
7
According to Defendants, Plaintiff misconstrues their argument, which does not
raise such a defense but instead asserts that the Review Group was entitled to delegate
investigative tasks to independent counsel. (See Reply Mem. Supp. Defs.’ Mot. Dismiss
Pl.’s Consol. Compl. [“Reply”] at 11 n.6, ECF No. 49).
8 Contrary to counsel’s assertions, neither letter is attached to the Consolidated
Complaint.
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Second, while Plaintiff may disagree with W&C’s level of involvement in the
investigation, the Review Group was not legally obligated to conduct every aspect of the
investigation. Maryland courts have recognized that a “Demand Committee [is] entitled to
rely on independent counsel to investigate and advise.” Bender, 917 A.2d at 162.
Commensurate with the discretion to engage independent counsel is the authority to
delegate investigatory tasks. See, e.g., Zucker v. Hassell, No. CV 11625-VCG, 2016 WL
7011351, at *10 (Del.Ch. Nov. 30, 2016), aff’d, 165 A.3d 288 (Del. 2017) (concluding that
the “informed decision to delegate a task is as much an exercise of business judgment as
any other”).9 Moreover, Plaintiff does not allege that W&C is not competent in the area of
corporate governance and litigation, such that W&C’s involvement may have adversely
impacted the integrity or result of the investigation. See Oliveira v. Sugarman (“Oliveira
I”), 130 A.3d 1085, 1097 (2016), aff’d, 152 A.3d 728 (2017) (finding that demand
investigation was reasonable where committee “hired highly respected and experienced
legal counsel to assist”).
Third, the Review Group’s decision to delegate aspects of the investigation does not
mean, and Plaintiff offers no evidence proving, that the Review Group played absolutely
no role in the fact-gathering and decision-making processes. Plaintiff’s allegations amount
“This Court frequently looks to Delaware courts for guidance on issues of
corporate law.” Oliveira II, 152 A.3d at 736; see also Shenker v. Laureate Educ., Inc., 983
A.2d 408, 420 n.14 (Md. 2009) (“This Court has noted the respect properly accorded
Delaware decisions on corporate law ordinarily in our jurisprudence.” ) (internal quotation
marks omitted).
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to, or are based on, “mere suspicions”—precisely the sort of allegations Bender rejects.
917 A.2d at 153–54.
Fourth, the Review Group identified its involvement in the investigatory and
decision-making processes in both reports. For example, the Initial Report indicates that
the Review Group met with W&C to discuss the status of the investigation, considered the
legal merits of the potential claims under W&C’s advice, and examined whether litigation
would be in the Company’s best interest. Maryland courts have expressly adopted the
Delaware rule, providing that “statements contained in a letter refusing demand, when the
demand was refused by a board consisting of majority -disinterested and majorityindependent directors, are presumptively true absent a particularized allegation rebutting a
specific statement.” Oliveira I, 130 A.3d at 1099. Consistent with this principle, the Review
Group’s statements regarding its participation are presumed to be true, and Plaintiff’s
conclusory allegation that the Review Board did nothing falls short of rebutting those
statements.
The Court thus concludes that this factor—engagement of independent counsel—
weighs in Defendants’ favor when considering the extent to which the investigation was
conducted reasonably and in good faith.
2.
Frequency of Meetings
W&C was retained around August 2017 to investigate the Initial Demand, and the
Supplemental Report was produced on June 29, 2018. It is undisputed that the Review
Group and W&C met only three times over the course of both investigations. Three
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meetings of unknown duration over the course of ten months seems scant. This factor
weighs in Plaintiff’s favor.
3.
Interviews and Document Review
Plaintiff argues that the investigation was unreasonably deficient because W&C
failed to interview Sagamore President Weller, who he characterizes as a “key figure in
Plank’s acquisition of the Port Covington parcels;” Plank’s brother, who was “heavily
involved in Under Armour’s real estate endeavors” before partnering with Sagamore; and
Defendant Coltharp, an Audit Committee member who would have “approved the Port
Covington Sale and other related-party transactions comprising the focus of the Demand.”
(Opp’n at 22). Plaintiff also highlights W&C’s failure to review pre-2014 Board and Audit
Committee materials and documents from Sagamore, Plank Industries, and Plank in his
personal capacity.
Defendants note that the Review Group, through W&C, initially cond ucted sixteen
interviews with thirteen witnesses, including Plank; Deering and Krongard, who are
members of the Board and the Audit Committee; Neil Jurgens, the Company’s Senior Vice
President of Global Real Estate; Andrew Page, the Company’s Corporate Con troller; Mehri
Shadman, the Company’s Senior Counsel; and Tom Geddes, CEO of Plank Industries. (See
Initial Report at 4–5). Upon receiving the Supplemental Demand, the Review Group
launched a second investigation, interviewing six additional witnesses and re-interviewing
Plank, Krongard, and Jurgens. (Suppl. Report at 4–5).
As to the types of the documents examined, Defendants note that the Review Group,
through W&C, initially reviewed approximately 2,000 pages of filings in a related
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litigation; Securities and Exchange Commission (“SEC”) documents ; the Company’s
governance documents; and approximately 2,000 pages of Company documents and
related internal documents, such as board meeting minutes, Audit Committee materials,
and meeting minutes from 2014 to 2016. (See Initial Report at 3–4). In response to the
Supplemental Demand, the Review Group, through W&C, further considered press
coverage of the Company’s various related-party transactions, an additional 600 pages of
documents related to alternative locations for the Company’s headquarters, and
approximately 2,400 pages of documents regarding Plank and Sagamore’s public
comments and presentations. (See Suppl. Report at 3–4).
As courts have observed, “there is obviously no prescribed procedure that a board
must follow” when responding to a demand. Oliveira I, 130 A.3d at 1097. Accordingly,
“the substance and scope of the required investigation will ‘turn on the nature and
characteristics of the particular subject being investigated’” and the key question is simply
“whether the board ‘acted on an informed basis in rejecting [the] demand.’” Bender, 917
A.2d at 155 (citing Levine v. Smith, 591 A.2d 194, 213 (Del. 1991), overruled on other
grounds Brehm v. Eisner, 746 A.2d 244, 251 (Del. 2000)). “[A] stockholder’s criticisms
regarding the types of documents reviewed or the persons interviewed in connection with
an investigation” are insufficient to render a demand investigation unreasonable. Belendiuk
v. Carrion, No. 9026–ML, 2014 WL 3589500, at *6 (Del.Ch. July 22, 2014).
Here, the Review Group accurately identified the legal claims raised in the Demands
as follows: whether Plank, in collusion with Sagamore, breache d his fiduciary duties by
causing the Company to enter into the challenged transactions and usurping the Company’s
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opportunity to purchase and develop land in the Port Covington area; whether Plank and
Sagamore were unjustly enriched by the transactions; a nd whether other Board members
breached their fiduciary duties by approving the challenged transactions.
With the assistance of counsel, the Review Group reviewed documents and
interviewed witnesses reasonably calculated to identify which, if any, claims warranted
legal action. For example, the Review Group, through W&C, examined the Company’s
policy governing related-party transactions; independent appraisal information regarding
the Company’s related-party transactions with Plank; and Audit Committee materials and
meeting minutes from 2014 to 2016. (See Initial Report at 4). The Review Group
interviewed the Company’s directors and officers, including its CEO and two directors.
After conducting its initial investigation, the Review Group decided to reject the
Initial Demand and outined it’s reasoning for doing so in its Initial Report. When
confronted with Plaintiff’s assertion that the Review Group failed to consider “key”
witnesses and documents, the Review Group, without being asked, launched a second
investigation to address those alleged deficiencies. In doing so, the Review Group re interviewed witnesses and interviewed others specifically identified by Plaintiff. The
Review Group’s decision remained unchanged at the conclusion of that second
investigation, and it again recommended that the Board reject the Demand.
Though it was not obligated to do so, the Review Group augmented its investigation
using the roadmap Plaintiff provided, addressing specific concerns raised in the
Supplemental Demand. Accordingly, the Court is not persuaded by Plaintiff’s continued
criticism of the witnesses interviewed and documents reviewed, as disagreement with those
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aspects of the investigation are insufficient to render the investigation unreasonable. See
Belendiuk, 2014 WL 3589500, at *6.
4.
Production and Substance of Report
Plaintiff notes that neither the fifteen-page Initial Report nor the thirteen-page
Supplemental Report contained “appendices or exhibits to document how and on what
basis the Review Group’s counsel reached its conclusions.” (Opp’n at 24). Plaintiff
dismisses the reports as “shallow” and reflective of the depth of the investigation. (See id.).
Defendants argue that courts have not established a minimum page limit and have upheld
refusal decisions where demand committees produced reports of similar length or even no
report. Defendants further assert that the reports sufficiently document the Review Group’s
procedures, reasoning, and conclusions irrespective of the ir length.
Boland makes clear that “the mere length of the report and the sheer volume of items
considered should not be given undue weight by the court. Page totals are a shallow metric,
especially given the ‘relative ease with which a committee could construct a record o f
apparently diligent investigation.’” 31 A.3d at 566 (citing Abella v. Universal Leaf
Tobacco Co., 546 F.Supp. 795, 799 (E.D.Va. 1982)). Although the page count is relevant,
of equal import is the “thoroughness of the [committee’s] investigation and the
reasonableness of the methodology it employed.” Id. at 569. To that point, courts also
consider whether the report documented the committee’s procedures, reasoning, and
conclusions. Bender, 917 A.2d at 156.
Here, the Initial and Supplemental Reports total twenty-eight pages. Despite their
brevity, each report describes the procedures, reasoning, and conclusions of the Review
17
Group, which were adopted by the Board. As described above, the Initial Report defined
the potential claims against the Company and identified the scope of W&C’s review,
including the documents reviewed, the individuals interviewed, legal issues researched,
and consultations with the Review Group. The Review Group ultimately concluded that
there was no evidentiary support for the potential claims and recommended that the Board
deny the demand. (See Initial Report at 15). In doing so, the Review Group outlined its
reasoning, which included consideration of: (1) the merits of the potential claims, including
burdens of proof and possible defenses; (2) legal standards governing breach of fiduciary
duty, the business judgment rule, third-party transactions, and usurpation of corporate
opportunity; (3) whether pursuing the demand was in the Company’s best interest; (4)
individualized review of the challenged transactions, coupled with a review of the
Company’s “Policy on Transactions with Related Persons” ; (5) the cost of the litigation
relative to the likelihood and magnitude of financial recovery; (6) indemnification of, and
advance payment to, directors and officers embroiled in litigation; (7) effects of litigation
on the Company’s operations, reputation, employee morale, and talent acquisition and
attrition; and (8) the potential for counterclaims and countersuits. (Id. at 3–15).
Similarly, the Supplemental Report identified the Review Group and W&C’s
investigatory process, which included reviewing the Supplemental Demand, expanding the
scope of its investigation to include documents that would address the concerns raised in
the Supplemental Demand, interviewing additional individuals, investigating the Port
Covington deal in greater detail, supplementing legal research, and consulting with the
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Review Group. (See Suppl. Report at 3–12). The Review Group once again recommended
that the Board reject the Supplemental Demand.
As in the Initial Report, the Review Group explained the bases for its decision,
which including consideration of: (1) applicable legal standards; (2) the circumstances
surrounding the Port Covington Sale; (3) continued evaluation of legal costs that would be
incurred under the Company’s indemnification obligations; and (4) Company-oriented
concerns previously addressed in its Initial Report, such as harm to the Company’s
reputation and diminished employee morale. (Id. at 5–12).
Although Plaintiff criticizes the content and page count of each report, the Court
concludes that the reports adequately document the committee’s procedures, reasoning,
and conclusions. The Court’s conclusion is not altered by what Plaintiff characterizes as
inconsistencies between the reports.
First, Plaintiff alleges that “after stating falsely in the Initial Report that Plank began
acquiring parcels in Port Covington in 2014, the Supplemental Report finally
acknowledged that Plank began these acquisitions in 2012.” (Consol. Compl. ¶ 145).
Second, Plaintiff asserts that after “claiming incorrectly in the Initial Report that Port
Covington ‘emerged as an attractive candidate’ for the Company’s corporate headquarters
in 2016, the Supplemental Report acknowledged that the Company had decided to move
to Port Covington much earlier than that.” (Id. ¶ 146) (internal citations omitted).
However, Plaintiff fails to explain how these facts would have altered the Review
Group’s conclusions that the evidence did not support a claim for usurpation of corporate
opportunity and that the Company paid fair market value in the Port Covington deal.
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Irrespective of when Plank began acquiring land in Port Covington or when the Company
developed an interest in relocating to that area, the Review Group’s initial investigation
uncovered these dispositive facts: (1) that the Board declined Plank’s 2014 proposal that
the Company acquire land in Port Covington but agreed that Plank could purchase the land
himself, without promising that the Company would purchase the land from him in the
future; and (2) when the Company decided to relocated to Port Covington in 2016, the
Company obtained market appraisals from two companies, thus informing the Company’s
decision to purchase the parcel for $70.3 million. (See Initial Report at 9, 11). The alleged
inconsistencies identified by Plaintiff are inconsequential in analyzing whether Plank
usurped the Company’s opportunity to purchase property in Port Covington and whether
he was unjustly enriched through the Port Covington Sale.
Third, Plaintiff asserts that “despite suggesting in the Initial Report that the Port
Covington Sale was governed by the Company’s Policy on Transactions with Related
Persons [“TRP”], the Supplemental Report now attributes a statement to Defendant
Krongard that the Port Covington Sale was instead governed by a purported ‘tacit
agreement.’” (Consol. Compl. ¶ 146) (internal citations omitted). As Defendants note, this
assertion is premised on a misunderstanding of the Supplemental Report, which does not
state or even suggest that the “tacit agreement,” which also concerns the conditions under
which the Company would negotiate with Sagamore, replaced or preempted the
Company’s TRP Policy.
Fourth, Plantiff contends that “while the Initial Report indicated that the
negotiations between Under Armour and Sagamore focused on the [Port Covington]
20
purchase price,” the Supplemental Report identifies these other considerations: “(1) the
assumption of prospective environmental liabilities; (2) investment of tax -increment
financing; and (3) possible other tenants in the non-[Under Armour] Port Covington
parcels.” (Id. ¶ 147) (internal citations omitted). As Defendants argue, just because the
negotiations “focused” on the price for the Port Covington Sale does not mean that the
companies did not discuss other considerations.
Fifth, Plantiff notes that “whereas the Initial Report stated that ‘th[e] purchase [for
the Port Covington Sale] represented an approximate $1.5 million loss to Sagamore ’ the
Supplemental Report now clarifies that this figure was calculated ‘according to Sagamore
leadership.’” (Id. ¶ 148) (alterations in original). This “clarification” does not render the
calculation false, and Plaintiff has offered no evidence suggesting that the figure is
inaccurate simply because Sagamore provided it. The Court is thus unpersuaded that
differences in the Initial and Supplemental Reports provide evidence that the investigatory
process was unreasonable or conducted in bad faith.
In sum, an analysis of the Bender factors persuade the Court that Plaintiff’s
allegations do not overcome the presumption that the Review Group’s investigations were
conducted reasonably and in good faith.10 Upon receiving the Initial Demand, the Company
properly identified the claims at issue and retained independent counsel, who assisted the
Review Group in examining probative documents and interviewing directors, officers, and
Because the Court ultimately concludes that the Review Group’s initial
investigation was conducted independently and in good faith, the Court will not consider
Plaintiff’s argument that the Review Group was not entitled to a “do over.”
10
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others regarding the challenged transactions, culminating in the production of two reports
that documented the Review Group’s procedures, reasoning, and conclusion.
Plaintiff has failed to rebut the presumption of reasonableness of th e investigation.
Therefore, under the business judgment rule, the Court must defer to the Review Group’s
conclusions, as adopted by the Board, and dismiss the Consolidated Complaint .
III.
CONCLUSION
For the foregoing reasons, the Court will grant Defendants’ Motion to Dismiss
Plaintiff’s Verified Consolidated Shareholder Derivative Complaint and Request for
Hearing (ECF No. 44) and deny Plaintiff’s Request for Hearing (ECF No. 48). A separate
Order follows.
Entered this 30 th day of March, 2020.
/ s/
George L. Russell, III
United States District Judge
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