Sarnacki v. Golden et al
Filing
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Judge Michael A. Ponsor: MEMORANDUM AND ORDER entered. As follows: Defendants motion to dismiss (Dkt. No. 29 ) is DENIED without prejudice. A renewed motion to dismiss may be filed on or before July 31, 2012 and opposed by August 31, 2012. The court will thereafter either set the motion for hearing or rule on thepapers. See the attached memo and order for complete details. (Lindsay, Maurice)
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
AARON SARNACKI, Derivatively
on behalf of Smith & Wesson
Holding Corp.,
Plaintiff
v.
MICHAEL F. GOLDEN, ET AL.,
Defendants
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) C.A. 11-cv-30009-MAP
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MEMORANDUM AND ORDER REGARDING
DEFENDANTS’ MOTION TO DISMISS
(Dkt. No. 29)
March 29, 2012
PONSOR, U.S.D.J.
This case is one of several shareholder derivative and
securities class actions filed against officers and
directors of Smith and Wesson Holdings, Inc. (“S&W”), a
gunmaker incorporated in Nevada but with its principal place
of business in Springfield, Massachusetts.
Plaintiff, Aaron Sarnacki, seeking to sue derivatively
on behalf of S&W’s shareholders, alleges that Defendant
members of S&W’s board of directors breached their state law
fiduciary duties to the corporation by knowingly allowing
allegedly incorrect sales forecasts to be published.
Before bringing this action, Plaintiff and others filed
similar shareholder derivative actions in Hampden County
Superior Court.
In response, the directors of S&W appointed
a special litigation committee (“SLC”) to investigate the
derivative plaintiffs’ claims.
The SLC concluded that it
was not worthwhile to pursue the claims, and the Defendant
S&W Board of Directors adopted the SLC’s recommendation.
Subsequently, Defendants moved to dismiss this action,
based in part on the SLC’s conclusion that the corporation
should not proceed with the derivative plaintiffs’ lawsuits.
Plaintiff has opposed the motion to dismiss substantively
and also contends that, if the court is inclined to allow
Defendants’ motion, he is entitled, at a minimum, to take
limited discovery surrounding the SLC’s independence, the
good faith of the committee’s members, and the
reasonableness of the committee’s investigation.
The arguments in favor of dismissal offered by
Defendants, but unrelated to the role of the SLC, boil down
to two.
First, Defendants contend that this complaint
merely incorporates allegations offered in a related
securities case, as to which the court has recently allowed
summary judgment based on the flat insufficiency of that
earlier complaint’s asserted facts.
See In re Smith &
Wesson Holding Corp. Sec. Litig., Nos. 07-30238-MAP, 0810028-MAP & 08-30001-MAP, 20ll WL 6089727 at *15 (D. Mass.
Mar. 25, 2011).
Facts that were insufficient to support the
earlier lawsuit are, ipso facto, also insufficient,
Defendants say, to support this one.
The flaw in this
argument is that the law in the earlier case provided
Defendants a “safe harbor” for so-called “forward-looking”
statements, whereas those statements enjoy no such
protection in this litigation.
See Malone v. Brincat, 722
A.2d 5, 12-14 (Del. 1998) (comparing federal securities law
with state business corporations law and noting that state
law claims require merely a showing that false statements
were made). Defendants’ claims of factual inadequacy may
prove persuasive at the summary judgment stage, if the case
gets that far, but cannot justify dismissal now.
Defendants’ second substantive argument is that the
allegations of the complaint fall below the bar set by the
Supreme Court in Bell Atl. Corp. v. Twombly, 550 U.S. 544
(2007), and Aschcroft v. Iqbal, 556 U.S. 662 (2009).
While
this argument has force, it is ultimately unpersuasive.
Plaintiff asserts, for example, that S&W continued
repeatedly to publish statements predicting steady or
increased earnings, despite evidence of a substantial
negative material change in the business. (Dkt. No. 1,
Compl. at ¶¶ 7-11, 66-77, 81-84.)
Plaintiff alleges, for
example, that, despite having knowledge that inventory was
building up, and that S&W had received a citation for having
guns literally spilling out of the S&W’s gun storage area
for lack of space, S&W and Defendants continued to predict
increased earnings. (Id. at ¶¶ 10-11, 76).
Allegations such
as these are enough to carry the complaint over the
preliminary hurdle, though perhaps not by a substantial
margin.
In the end, Defendants’ most powerful argument in
support of their motion to dismiss rests on the
thoroughness, competence, and good faith of the SLC.
In
order to insure fairness to Plaintiff, however, the court
will deny Defendants’ motion to dismiss on this ground
without prejudice and establish a modest schedule for
limited discovery prior to reconsideration of Defendants’
motion.
This approach has clear support in the case law.
It is
well established that federal courts should apply state law
in weighing the authority of independent directors to
discontinue suit.
Burks v. Lasker, 441 U.S. 471, 486
(1979); see also Kamen v. Kemper Fin. Servs. Inc., 500 U.S.
90, 97 (1991) (corporate law is “substantive” rather than
“procedural”).
Nevada caselaw suggests, and both parties in
their submissions have assumed, that Nevada’s Supreme Court
would follow Delaware’s procedural approach in a motion to
dismiss involving an SLC in a shareholder derivative
lawsuit.
See In re Amerco Derivative Litig., 252 P.3d 681,
697 (Nev. 2011) (following Delaware law in determining
whether shareholder has adequately pled demand futility);
see also Castillo v. Cavallaro, No. A467663, Order of Oct.
24, 2003 (Nev. 8th Jud. D. Ct. Oct. 24, 2003) (following
Delaware approach in weighing whether to grant a special
litigation committee’s request to stay litigation).
Under Delaware law, when an SLC conducts an
investigation, a derivative plaintiff normally is permitted
“limited discovery” in order to investigate the independence
and good faith of the committee’s members, and the
reasonableness of the committee’s investigation.
Zapata
Corp. v. Maldonado, 430 A.2d 779, 788 (Del. 1981).
In this case, as noted, Defendants’ motion to dismiss
rests in large part on the SLC’s recommendation not to
pursue the derivative lawsuit.
Indeed, given the court’s
position on the other substantive arguments, this is the
only argument that has the potential to justify dismissal at
this early stage.
Plaintiff has not had an opportunity to
“build a record” on the SLC’s good faith, independence, and
reasonableness.
Id.
Therefore, the court will allow
Plaintiff to take limited discovery on this narrow issue, to
be completed on or before June 30, 2012, in accordance with
Zapata and its progeny.
For the foregoing reasons, Defendants’ motion to
dismiss (Dkt. No. 29) is DENIED without prejudice.
A
renewed motion to dismiss may be filed on or before July 31,
2012 and opposed by August 31, 2012.
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The court will
thereafter either set the motion for hearing or rule on the
papers.
It is So Ordered.
/s/ Michael A. Ponsor
MICHAEL A. PONSOR
U. S. District Judge
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