Carpenters Pension Fund of Illinois, et al., v. Neidorff et al
MEMORANDUM AND ORDER... IT IS HEREBY ORDERED that defendants' Motion to Dismiss Plaintiffs' Verified Consolidated Amended Stockholder Derivative Complaint [ #77 ] isGRANTED, and plaintiffs Verified Consolidated Amended Stockholder Derivative Complaint is hereby dismissed with prejudice for plaintiffs' failure to make a demand upon Centene's board of directors before pursuing this derivative action. A separate Order of Dismissal is entered herewith. Signed by District Judge Catherine D. Perry on 9/15/2020. (NEP)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MISSOURI
CARPENTERS PENSION FUND OF
ILLINOIS, et al., derivatively and on
behalf of the nominal defendant
MICHAEL F. NEIDORFF, et al.,
No. 4:18 CV 113 CDP
MEMORANDUM AND ORDER
On July 2, 2015, each of the boards of directors of Centene Corporation and
Health Net, Inc., approved a merger plan whereby, upon a series of transactions,
Health Net would effectively merge into and become part of Centene. On
September 21, 2015, a joint proxy statement/prospectus issued to Centene and
Health Net stockholders regarding their required approval of the merger. The
stockholders approved the merger at special meetings held October 23, 2015, and
the merger closed on March 24, 2016. Centene did not disclose in the proxy
statement, however, or at any time before closing that Health Net had significant
ongoing financial problems and liabilities decreasing its value to Centene. Upon
public disclosure of these issues in July 2016, Centene’s stock price fell by more
than 8%, resulting in a loss of more than $1 billion in stockholder value.
Several Centene shareholders filed this derivative action against certain
Centene directors and officers who issued and/or approved the joint proxy
statement and proceeded with the merger despite Health Net’s problems. Plaintiffs
claim that these directors and officers made or approved false and misleading
statements in the September 2015 proxy statement and thereafter continued to
make or approve false and misleading statements regarding the extent of Health
Net’s liabilities inherited by Centene in the merger. Plaintiffs contend that, by this
conduct, the directors and officers breached their fiduciary duties, caused Centene
to violate federal securities laws, and were unjustly enriched. Plaintiffs also allege
that, armed with nonpublic information obtained during the merger process, certain
directors and officers engaged in insider trading by selling or disposing of shares of
Centene stock knowing that the price per share was artificially inflated at the time.
Defendants move to dismiss the action under Rule 12(b)(6), Federal Rules of
Civil Procedure, arguing that plaintiffs have failed to state a claim upon which
relief can be granted and, further, that plaintiffs have failed to adequately
demonstrate futility of demand to excuse them from making the required demand
upon the board before bringing this action. Because plaintiffs have failed to set
forth particularized facts excusing a pre-suit demand as the law requires, I will
grant defendants’ motion to dismiss.
Centene is a diversified, multinational health care corporation incorporated
in the State of Delaware. Among other things, it sells health insurance policies in
the United States, including policies for Medicaid, Medicare Advantage, Medi-Cal,
and other products. Through a series of mergers that ultimately closed on March
24, 2016, Centene obtained Health Net, which itself was an insurance company
that sold health insurance policies to individuals, families, and businesses; offered
behavioral health, substance abuse, and employee assistance programs; and
provided prescription drug services. Health Net’s business was concentrated in the
Western United States, with a significant presence in California.
In November 2014, Michael F. Neidorff, President and CEO of Centene,
reached out to Health Net’s CEO, Jay Gellert, to discuss a possible combination of
their two companies. These discussions continued, and executives from both
companies met in March 2015 to discuss a possible transaction. After continued
discussions between Neidorff and Gellert, Neidorff informed Health Net on June 8,
2015, that Centene was interested in pursuing a transaction. Neidorff thereafter
met with Centene’s board of directors – then composed of himself as chairman,
Robert K. Ditmore, David L. Steward, John R. Roberts, Tommy G. Thompson,
officers knew, but concealed from its shareholders, that Health Net had significant
financial problems, including that:
Health Net had poorly designed and unprofitable insurance products in
Health Net had exited the PPO market in Arizona because of its
Health Net refused to pay claims from substance abuse treatment centers in
California and Arizona, subjecting it to liability; and
Health Net was potentially liable for over $900 million in unpaid taxes to
California and was subject to future tax liabilities.
Plaintiffs also allege that Centene directors and officers should have learned
through due diligence that, in addition to the above issues, Health Net was under
investigation by the U.S. Department of Justice in a Medicare fraud scheme and
could thereby be exposed to additional liabilities. In short, plaintiffs assert that
Health Net was not as profitable as Centene represented to its shareholders, and
that Health Net’s undisclosed actual and potential liabilities assumed by Centene in
the merger were substantial.
Upon closing on March 24, 2016, Vicki B. Escarra, a former Health Net
director, joined Centene’s board of directors.
On April 26, 2016, Centene filed its SEC Form 10-Q for the first quarter
ending March 31 and reported that valuation of nearly all of Health Net’s assets
and liabilities had not been finalized and was incomplete. Centene reported that
because of the timing of the closing, it could provide only preliminary estimates of
Health Net’s assets and liabilities assumed as of the date of acquisition, and that
such accounting was therefore subject to change. The Form 10-Q did not contain
any provision, explanation, or estimate related to premium deficiency reserves
(PDRs) that may be required for any Health Net liabilities.
The audit committee at that time was composed of
directors Roberts, Eppinger, and Escarra.
During an investor conference call on April 26, Neidorff discussed the
merger and reported to investors that there were “no surprises.” During this same
call, Centene officer K. Rone Baldwin (Executive Vice President, Insurance Group
Business Unit/Markets) reported to investors that Health Net’s exchange business
had been profitable and that Health Net had pursued a strategy in California that
worked well for them. At an investor conference held May 24, Neidorff assured
Centene investors that the merger process was “fine” and was “where we
expected,” and that development of reserves “in the 90’s” was “fine.” And during
investor day on June 17, Neidorff and Centene officer Jeffrey A. Schwaneke
(Chief Financial Officer, Executive Vice President, and Treasurer) reported that
there was “no unfavorable development” on Health Net’s reserves, that the
reserves issue had found a “comfortable bed” and was “behind us,” and that
shareholders need not be concerned.
In the meanwhile, on May 31, 2016, the California Department of Insurance
announced that it had opened an inquiry into Health Net’s cessation of or delayed
payments to substance abuse treatment centers in California and Arizona. Industry
press had reported in January 2016 that Health Net had suspended such payments
pending its own initiated audit of treatment centers and their claims. In June and
July 2016, groups of treatment centers in California and Arizona sued Health Net
seeking over $200 million in unpaid claims.
On July 26, 2016, Centene released its second-quarter financial results,
which disclosed $390 million in reserves for Health Net’s increased liabilities,
including for substance-abuse-treatment-center claims and cost trends relating to
poor policy design involving several healthcare products in several States. Upon
public release of this information, Centene’s stock price fell more than 8%,
amounting to a loss of over $1 billion in stockholder value. Neidorff later admitted
that Centene knew of Health Net’s problems prior to the merger.
At various times between shareholder approval of the merger in October
2015 and public disclosure of increased reserves on July 26, 2016, Neidorff,
Gephardt, Baldwin, Schwaneke, and another Centene officer, Carol E. Goldman
(Executive Vice President and Chief Administrative Officer), sold or disposed of
several thousand shares of Centene stock, worth over $28.1 million in total.
The Operative Complaint
Shareholder Harkishan Parekh filed this derivative action in January 2018.
Shareholders Laura Wood and Peoria Police Pension Fund filed a separate but
similar action in March 2018,1 and shareholders Carpenters Pension Fund of
Illinois and Iron Workers of Local 11 Pension Fund filed a separate derivative
action in December 2018.2 After I consolidated the three cases, the shareholderplaintiffs filed a Verified Consolidated Amended Stockholder Derivative
Complaint (“amended complaint”) in February 2019, which is the operative
complaint presently before the Court.
Inside-director Neidorff is named as a defendant in the amended complaint,
as well as outside-directors Ditmore, Steward, Roberts, Thompson, Eppinger,
Gephardt, and Ayala. Plaintiffs collectively refer to these eight directors as the
“Proxy Defendants” because they were directors when the proxy statement issued
in September 2015. Although Joseph was also an outside director at the time,
plaintiffs do not name her as a defendant in the amended complaint. Escarra, who
was a Centene director from March 2016 to March 2017, is named in this action as
a defendant as well but is not given the “Proxy Defendant” moniker since she
Wood, et al. v. Neidorff, et al., Case No. 4:18CV393 CDP (E.D. Mo.).
Carpenters Pension Fund of Ill., et al. v. Neidorff, et al., Case No. 4:18CV2085 RLW (E.D.
joined the board after the proxy statement issued.
Also named as defendants are Centene executive officers Schwaneke,
Baldwin, and Goldman. Because plaintiffs allege that these officers, along with
Neidorff and Gephardt, unlawfully sold or disposed of shares of Centene stock
with insider information, they refer to these five defendants collectively as the
Centene Corporation is named as a nominal defendant.
In Count 1 of their five-count amended complaint, plaintiffs assert that the
Proxy Defendants violated § 14(a) of the Exchange Act by negligently issuing,
causing to be issued, and participating in the issuance of materially false and
misleading statements to stockholders in the September 2015 joint proxy statement
regarding Health Net’s and Centene’s business activities, operations, finances, and
prospects; and by incorporating certain of Health Net’s SEC filings into the
September 2015 proxy statement, which was misleading in that such incorporation
failed to disclose Health Net’s less profitable business, increasing liabilities, and
risk from tax liabilities. Plaintiffs allege that as a result of the Proxy Defendants’
conduct, the proxy statement misled and/or deceived Centene stockholders who
voted in favor of the merger.
Count 2 alleges that all defendants breached their fiduciary duties of good
faith, fair dealing, loyalty, and due care by allowing the merger to proceed based
on inadequate due diligence and flawed process that caused Centene to overpay for
Health Net’s business, by disseminating a false and misleading joint proxy, and by
allowing Centene to issue materially false and misleading information concerning
its business and Health Net’s finances.
In Count 3, plaintiffs allege that by concealing the problems and risks
associated with Health Net’s business, by issuing false and misleading financial
statements in violation of Generally Accepted Accounting Principles (GAAP), and
by making false and misleading SEC filings, all defendants breached their
fiduciary duties of loyalty, good faith, and candor, causing Centene to violate its
disclosure obligations under the Securities Act of 1933 and the Securities
Exchange Act of 1934.
Count 4 alleges that the Selling Defendants were in possession of
proprietary, nonpublic information concerning Centene and Health Net’s business,
financial condition, and regulatory issues and used such information for their own
benefit when they sold or otherwise disposed of Centene stock prior to July 2016
when the stock price was artificially inflated.
Finally, in Count 5, plaintiffs assert that all defendants were unjustly
enriched by their receipt of compensation and remuneration and/or insider trading
of Centene stock given that defendants obtained these benefits while breaching
their fiduciary duties owed to Centene.
Plaintiffs contend that demand on Centene’s board of directors to pursue
litigation on these claims would have been futile and that pre-suit demand is
therefore excused. Defendants argue that plaintiffs fail to plead demand futility
with the required particularized facts, thereby requiring dismissal of the amended
In determining a Rule 12(b)(6) motion to dismiss, I must consider the factual
allegations of the amended complaint as true and draw all reasonable inferences in
favor of the plaintiffs. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555-56
(2007). I must disregard, however, conclusions that are not supported by factual
allegations. Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009); Brehm v. Eisner, 746
A.2d 244, 249 (Del. 2000). In addition to the amended complaint, I may consider
materials necessarily embraced by the complaint and materials that are part of the
public record, without having to convert the motion to dismiss to one for summary
judgment. Humphrey v. Eureka Gardens Pub. Facility Bd., 891 F.3d 1079, 1081
(8th Cir. 2018); Ryan v. Ryan, 889 F.3d 499, 505 (8th Cir. 2018); In re K-tel Int’l,
Inc. Sec. Litig., 300 F.3d 881, 889 (8th Cir. 2002). Materials “necessarily
embraced” include “documents whose contents are alleged in a complaint and
whose authenticity no party questions, but which are not physically attached to the
pleading.” Ryan, 889 F.3d at 505 (internal quotation marks and citations omitted).
In addition, “public filings required to be filed with the SEC, [can be] considered
on a motion to dismiss.” Florida State Bd. of Admin. v. Green Tree Fin. Corp.,
270 F.3d 645, 663 (8th Cir. 2001). With their respective briefs on defendants’
motion, both sides have submitted numerous exhibits that fall within the
parameters set out above, and neither side has objected to the other’s submission. I
have considered these materials in conjunction with the allegations in the amended
complaint in determining the motion to dismiss.
Generally, a complaint that pleads facts plausibly stating a cause of action
and gives the defendant fair notice of the claim and the grounds upon which it rests
is sufficient to withstand a Rule 12(b)(6) motion to dismiss. Twombly, 550 U.S. at
555; Fed. R. Civ. P. 8(a). But Rule 23.1 of the Federal Rules of Civil Procedure
“imposes a heightened pleading standard on complaints in derivative actions.”
Gomes v. American Century Cos., 710 F.3d 811, 815 (8th Cir. 2013). “It requires
that the plaintiff ‘state with particularity . . . any effort by the plaintiff to obtain the
desired action from the directors or comparable authority’ and ‘the reasons for not
obtaining the action or not making the effort.’” Id. (quoting Fed. R. Civ. P.
23.1(b)(3)). The failure of plaintiffs to make a demand or a particularized showing
of why such demand was futile constitutes grounds for dismissing a derivative
complaint under Rule 12(b)(6). Ji v. Van Heyningen, No. CA 05-273 ML, 2006
WL 2521440, at *2 (D.R.I. Aug. 29, 2006).
Because Centene is a Delaware corporation, I apply Delaware law in
determining whether plaintiffs have stated sufficient facts with requisite
particularity to satisfy Delaware’s demand requirement, or their reasons excusing
them from making the required demand. Cottrell on behalf of Wal-Mart Stores,
Inc. v. Duke, 829 F.3d 983, 989 (8th Cir. 2016) (law of state of incorporation
provides substantive law on demand requirement). Because the shareholderplaintiffs here assert demand futility, they must “comply with stringent
requirements of factual particularity that differ substantially” from notice pleadings
otherwise permitted, In re INFOUSA, Inc. S’holders Litig., 953 A.2d 963, 985
(Del. Ch. 2007), and plead particularized facts suggesting that the current directors
are incapable of making an impartial decision in response to a demand regarding
litigation. Marchand v. Barnhill, 212 A.3d 805, 816 (Del. 2019); Aronson v.
Lewis, 473 A.2d 805 (Del. 1984). “Vague or conclusory allegations do not suffice
to challenge the presumption of a director’s capacity to consider demand.” In re
INFOUSA, 953 A.2d at 985.
For purposes of examining plaintiffs’ claim of demand futility, I look to
Centene’s board of directors as it existed at the time plaintiffs filed the amended
complaint in February 2019 to determine whether a majority of that board could
have impartially considered a demand. Cottrell, 829 F.3d at 989. The board at that
time (i.e., the “current” board) had nine directors: defendants Neidorff, Ditmore,
Steward, Roberts, Thompson, Eppinger, Gephardt, and Ayala, and non-defendant
Jessica L. Blume. For the following reasons, the amended complaint does not
plead facts with sufficient particularity excusing pre-suit demand on the current
board of directors. I must therefore grant defendants’ motion to dismiss on this
The decision whether to initiate or pursue a lawsuit on behalf of a
corporation is generally within the power and responsibility of the company’s
board of directors. 8 Del. C. § 141(a). Therefore, a shareholder may prosecute a
derivative suit only where either 1) the shareholder has demanded that the directors
pursue a corporate claim and the directors have wrongfully refused to do so, or 2)
where demand is excused because the directors are incapable of making an
impartial decision regarding whether to institute such litigation. Stone ex rel.
AmSouth Bancorporation v. Ritter, 911 A.2d 362, 366-67 (Del. 2006). “The
purpose of the demand requirement is not to insulate defendants from liability;
rather the demand requirement and the strict requirements of factual particularity . .
. ‘exist to preserve the primacy of board decisionmaking regarding legal claims
belonging to the corporation.’” In re Citigroup Inc. S’holder Derivative Litig., 964
A.2d 106, 120 (Del. Ch. 2009) (quoting American Int’l Grp., Inc., Consol.
Derivative Litig., 965 A.2d 763, 807-09 (Del. Ch. 2009)).
The shareholder-plaintiffs here did not make a demand upon Centene’s
board of directors to pursue this litigation. They argue that such a demand would
have been futile because eight of the nine directors on the current board are
interested in this litigation as named defendants, benefited from the alleged
misconduct, and face a substantial likelihood of liability. Plaintiffs also argue that
because these eight defendant-directors are so firmly entrenched on Centene’s
board, they are unable to be independent of each other or from management.
Under Delaware law, there are two tests for demand futility: (1) the test
articulated in Aronson v. Lewis,3 when the majority of the board to whom the
shareholders must make demand is composed of the same directors who engaged
in the alleged misconduct; and (2) the test articulated in Rales v. Blasband,4 when a
majority of the board in place at the time of the challenged conduct has been
replaced. Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera, 119 A.3d 44,
56 (Del. Ch. 2015); see also McElrath v. Kalanick, 224 A.3d 982, 990-91 (Del.
2020). The Aronson test applies here. Ryan v. Gifford, 918 A.2d 341, 352 (Del.
Ch. 2007) (Aronson test applies when at least one half of the board in place when
complaint was filed approved the underlying challenged transactions).
473 A.2d 805 (Del. 1984).
634 A.2d 927 (Del. 1993).
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Under Aronson, a shareholder-plaintiff may demonstrate demand futility by
pleading particularized facts that raise a reasonable doubt that 1) a majority of the
board is disinterested or independent,5 or 2) the challenged acts were the product of
the board’s valid exercise of business judgment. Aronson, 473 A.2d at 814; Ryan,
918 A.2d at 352. Under the first prong, a director is interested if s/he would face a
“substantial likelihood” of personal liability for the conduct alleged in the
complaint, McElrath, 224 A.3d at 991, or if s/he has or will receive a personal
financial benefit from a transaction not equally shared by stockholders, Rales, 634
A.2d at 936. If plaintiffs show that any director was interested, I must then
consider whether any other directors were not independent of that interested party.
McElrath, 224 A.3d at 991. “Independence turns on whether ‘the director’s ability
to act impartially on a matter important to the interested party can be doubted
because that director may feel either subject to the interested party’s dominion or
beholden to that interested party.’” Id. (quoting Marchand, 212 A.3d at 818). See
also Brehm, 746 A.2d at 257. As to the second prong, plaintiffs must rebut the
presumption that the challenged acts were a proper exercise of the directors’
business judgment by pleading particularized facts that create a reasonable doubt
that “the informational component of the directors’ decisionmaking process,
measured by concepts of gross negligence, included consideration of all material
Both the Aronson test and Rales test share this element.
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information reasonably available.” Id. at 259 (emphasis in Brehm).
I consider plaintiffs’ assertion of demand futility with regard to each count
of the amended complaint. Beam ex rel. Martha Stewart Living Omnimedia, Inc.
v. Stewart, 833 A.2d 961, 977 n.48 (Del. Ch. 2003). If plaintiffs satisfy either
prong of the Aronson test on a particular count, demand is excused as to that count.
Brehm, 746 A.2d at 256.
Disinterested and Independent Directors
Delaware law presumes that a corporation’s board of directors is
disinterested and independent. Raul v. Rynd, 929 F. Supp. 2d 333, 346 (D. Del.
2013). To rebut this presumption, plaintiffs must allege sufficient particularized
facts “director-by-director” to suggest “that a majority of the Board was incapable,
due either to a material personal interest or domination and control, of objectively
evaluating a demand” that the board assert the claims raised in this litigation. Id.;
see also Brehm, 746 A.2d at 257. Because Centene’s board was made up of nine
directors when the amended complaint was filed, Aronson’s first prong requires
plaintiffs to allege particularized facts raising a reasonable doubt that, as to each
claim, at least five of those directors were disinterested and independent. The
amended complaint does not meet this heightened pleading standard.
First, plaintiffs do not plead any particularized facts that could raise a
reasonable doubt that current board member Blume is a disinterested and
independent director as to any claim raised in this litigation. I therefore consider
her from the outset to be a disinterested and independent director as to all claims.
On the flip side, however, plaintiffs’ allegations are sufficient to show that
Neidorff is an interested director as to all claims. The particularized facts show
that he was the moving force behind the merger transaction and the conduit of all
information presented to the board in seeking approval to pursue the merger. And
it is reasonable to infer from the facts alleged that he was the primary behind-thescenes decisionmaker regarding significant issues – such as the initial
determination to pursue merger, beginning due diligence, selecting and hiring the
particular financial advisors
He was the only director
to sign the September 2015 proxy statement that issued to shareholders.6
Moreover, Neidorff was Centene’s primary spokesperson to the investors and to
the public regarding the merger, both before and after closing; and he admitted to
knowing of Health Net’s financial and business problems before closing but did
not disclose them to investors or the public – indeed, he made misleading
statements regarding the same. Finally, according to the amended complaint,
Plaintiffs allege that all of the defendant-directors signed the proxy statement. (ECF 47, ¶ 72.)
But a review of the proxy statement itself (ECF 79-3) shows that Neidorff was the only Centene
director to sign it. The proxy statement provides the best evidence of its signatories. Regardless,
“[d]irectors’ signatures . . . do not go very far in showing those directors’ knowing acquiescence
in misrepresentations.” Ji, 2006 WL 2521440, at *9.
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Neidorff sold and/or disposed of Centene stock worth at least $20 million between
the October 2015 shareholder vote approving the merger and the July 2016 public
disclosure of liabilities assumed by Centene in the merger. On the particularized
facts alleged in the amended complaint, I consider Neidorff to be an interested
director for purposes of all claims raised in this action.
I therefore turn to plaintiffs’ demand futility allegations as they relate to the
remaining directors. Since Neidorff is an interested director throughout, plaintiffs’
allegations must create – as to each claim – a reasonable doubt as to the disinterest
or independence of at least four additional directors in order to satisfy Aronson’s
first prong for demand futility.
Count 1 – September 2015 Proxy Statement
The amended complaint provides no details particularly identifying the
specific conduct of any director other than Neidorff regarding the approval of the
merger transaction or the contents of the proxy statement. All that is alleged is that
the directors were present at the board meetings and must have been aware
especially since the financial advisors admitted in their
reports annexed to the proxy statement that their analyses were based on estimates,
assumptions, and adjusted data given to them by Centene “management.” But
merely asserting that the directors “must have known” is insufficient to create
reasonable doubt that the directors are disinterested.
The advisors’ summaries of their work and the proxy statement itself
repeatedly distinguish between Centene’s “management” and the “board” (e.g.,
ECF 79-3 at header pp. 73-74), suggesting that the two entities are distinct from
each other and not interchangeable. Therefore, it is not reasonable to infer, as
plaintiffs urge, that it was the directors who collectively provided the advisors the
allegedly incomplete information and adjusted data for their analyses. Nor does
the board’s alleged consent for the advisors to use information provided by
management support a reasonable inference that the directors themselves knew the
data was flawed, especially since they were not the source of the information.
Directors are presumed to have properly relied on expert advice. Brehm, 746 A.2d
at 261. And plaintiffs do not allege particularized facts that, if proved, would show
that the directors’ reliance on the experts was not in good faith. See id. at 261-62.
Further, the proxy statement disclosed that the relevant analyses were based on
estimates, assumptions, and adjusted data, cutting against plaintiffs’ argument that
the shareholders were misled by the information shared in that document.
Plaintiffs also assert that the directors were advised
Weighing, evaluating, and taking risks in business define the role of a
board of directors. See In re House of Lloyd, Sales LLC, No. 02-40208, 2008 WL
957663, at *7 (Bankr. W.D. Mo. Apr. 8, 2008). And a review of the proxy
statement itself shows that, while the dual demonstration program was included
among several existing businesses that the merger was expected to strengthen, this
section of the statement also specifically cautioned that “there can be no assurance
that any of the potential benefits described above . . . will be realized,” referencing
ten pages of risk factors the shareholders were advised to consider. (ECF 79-3 at
header pp. 76-77, referencing header pp. 56-65.) Providing these cautionary
statements relating to the identified programs and delineating specific risk
considerations, including risk to future performance of programs, likewise cuts
against plaintiffs’ assertion that the proxy statement misled Centene’s
Allegations that the directors were present at board meetings
815, 817. Otherwise, “any plaintiff could circumvent the demand requirement by
merely naming as defendants a majority of the corporation’s board.” Markewich
ex rel. Medtronic v. Collins, 622 F. Supp. 2d 802, 808 (D. Minn. 2009). On the
particularized facts alleged, only inside-director Neidorff is an interested director
on the claim.
The particularized facts of the amended complaint likewise do not
adequately demonstrate that any of the non-interested directors are either
dominated by or so beholden to Neidorff or to Centene management that a
reasonable doubt is created as to their independence for purposes of impartially
considering a shareholder demand. First, plaintiffs assert that seven of Centene’s
nine current directors have served on the board for at least twelve years and that
board committees have been chaired by the same respective director for at least
twelve years, thus showing that these directors will accede to the decisions of
management, especially since it is management who re-nominates them to serve as
directors year after year. It is well established under Delaware law, however, “that
the number of years that defendants have served on a board or multiple boards
together cannot suffice as a basis to successfully plead a lack of independence for
demand futility purposes.” In re Pfizer, Inc. Derivative Sec. Litig., 307 F. App’x
590, 595 (2d Cir. 2009) (citing In re Walt Disney Co. Derivative Litig., 731 A.2d
342, 357 (Del. Ch. 1998), rev’d on other grounds sub. nom, Brehm, 746 A.2d at
244; Beam, 845 A.2d at 1049). And being nominated or appointed to serve as
director by someone in control is insufficient to reasonably doubt that director’s
independence, “because ‘[t]hat is the usual way a person becomes a corporate
director.’” McElrath, 224 A.3d at 995 (quoting Aronson, 473 A.2d at 816).
Plaintiffs also assert that these directors are not independent because they are
personal friends and have longstanding personal and business relationships
between themselves and Centene officers. But this bare assertion of having a
personal and business relationship, with nothing more, does not raise a reasonable
doubt about the directors’ independence, especially given the lack of any specific
facts demonstrating that these relationships are particularly close or intimate.
Beam, 845 A.2d at 1050-52 (to make a reasonable inference that a particular
friendship casts doubt on a director’s independence, specific factual allegations
supporting the conclusion must be asserted).
Accordingly, as to Count 1 of the amended complaint, plaintiffs have failed
to plead sufficient particularized facts to cast a reasonable doubt upon the
disinterest or independence of any current Centene director other than Neidorff.
Count 2 – Fiduciary Duties
Count 2 alleges that the defendant directors and officers breached their
fiduciary duties of good faith, fair dealing, loyalty, and due care by continuing to
conceal and mislead regarding Health Net’s actual business performance,
prospects, and liabilities. Plaintiffs specifically allege that
, and that Neidorff later made
public statements to investors and others that everything was fine only to reveal
later that he knew all along that there were problems. Plaintiffs claim that given
this and other publicly available information, the directors should have known
there were problems with the merger and done something about it. For the
following reasons, the particularized facts in the amended complaint are
insufficient to create reasonable doubt as to the disinterest or independence of a
majority of the directors on this claim.
Centene’s articles of incorporation contain an exculpation clause that
eliminates a director’s personal liability to the corporation or its stockholders “for
monetary damages for breach of fiduciary duty as a director . . . to the fullest extent
authorized by the GCL [General Corporation Law of the State of Delaware].”
(Defts.’ Exh. 10, ECF 79-12.) Because the GCL authorizes exculpation clauses
that eliminate director liability for breach of duty of care, Del. Code tit. 8, §
102(b)(7), plaintiffs must plead more than negligence – even more than gross
negligence – to “get out from under an exculpated breach of the duty of care.”
McElrath, 224 A.3d at 992. Notably, liability cannot be limited under the GCL for
breach of duty of loyalty, bad faith acts or omissions, intentional misconduct or
knowing violations of the law, unlawful stock purchase or redemption, and actions
from which directors derive an improper benefit. Del. Code tit. 8, § 102(b)(7).
But to show a substantial likelihood of personal liability on such claims, plaintiffs
must plead with particularity that the directors “acted with scienter, meaning they
had actual or constructive knowledge that their conduct was legally improper.”
McElrath, 224 A.3d at 991 (internal quotation marks and citations omitted).
In other words, directors are liable for subjective bad faith when their
conduct is motivated by an actual intent to do harm, or when there is
an intentional dereliction of duty, a conscious disregard for one’s
responsibilities. Pleading bad faith is a difficult task and requires that
a director acted inconsistent with his fiduciary duties and, most
importantly, that the director knew he was so acting.
Id. at 991-92 (internal quotation marks and citations omitted) (emphasis added).
Plaintiffs’ allegations of scienter must be supported by facts that “plead with
particularity the specific conduct in which each defendant ‘knowingly’ engaged, or
that the defendants knew that such conduct was illegal.” Wood v. Baum, 953 A.2d
136, 142 (Del. 2008). Conclusory statements that a director acted in bad faith are
The factual assertions in the amended complaint are insufficient to suggest
that the directors acted in bad faith in continuing to move forward with the Health
Net merger. Plaintiffs allege only that the directors knew or should have known of
Health Net’s actual status, the risks of continuing with the merger, and
management’s corresponding concealment because 1)
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2) their general roles as
directors impute such knowledge to them, and 3) due diligence would have
disclosed the issues if done properly. Plaintiffs contend that the availability of
information regarding Health Net’s history and practices put the directors on notice
of significant risks to Centene in pursuing the merger, thus demonstrating the
directors’ bad faith in allowing the merger to proceed.
“A showing of bad faith in the context of demand excusal is a high hurdle,
and essentially requires the plaintiff[s] to demonstrate intentional wrongdoing by
the board.” McElrath, 224 A.3d at 993 (emphasis added). The facts alleged in the
amended complaint and related materials do not support a reasonable inference that
the directors knew the extent of Health Net’s specific liability risks that Centene
would inherit and intentionally ignored them in order to do harm or in conscious
disregard of their duties to the company and its investors.
While plaintiffs contend and an arguable inference can be made that
the board should have done more and could have dug deeper, it is not reasonable to
infer from the facts alleged that its failure to do so was an intentional dereliction of
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liability on this claim, the interest of only three directors of a nine-member board
does not create reasonable doubt that a majority of the board is disinterested.
Especially where the particularized facts, if proved, do not show that the audit
committee passed its information to the rest of the board. See Cottrell, 829 F.3d at
, the absence of specifically pled facts that
the audit committee actually shared their knowledge with the rest of the board
cannot support such an inference. See id. at 995.
Plaintiffs also contend that there is a substantial likelihood the directors face
personal liability on this claim because they failed to conduct appropriate
monitoring and oversight of the merger process and the related statements made on
behalf of Centene. Delaware courts have recognized that a failure in oversight “is
possibly the most difficult theory in corporation law upon which a plaintiff might
hope to win a judgment.” In re Caremark Int’l Inc. Derivative Litig., 698 A.2d
959, 967 (Del. Ch. 1996). To have a substantial likelihood of director liability on
an oversight claim, “a plaintiff must plead the existence of facts suggesting that the
board knew that internal controls were inadequate, that the inadequacies could
leave room for illegal or materially harmful behavior, and that the board chose to
do nothing about the control deficiencies that it knew existed.” Desimone, 924
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A.2d at 940. “[O]nly a sustained or systemic failure of the board to exercise
oversight – such as an utter failure to attempt to assure a reasonable information
and reporting system exists – will establish that lack of good faith that is a
necessary condition to liability.” In re Caremark, 698 A.2d at 971. Thus, liability
under this theory is premised “on a showing that the directors were conscious of
the fact that they were not doing their jobs.” Guttman, 823 A.2d at 506.
The particularized facts alleged in the amended complaint do not support an
inference of a “sustained or systemic failure” of the board to exercise oversight of
the merger process or of the dissemination of related information. Plaintiffs have
not pleaded that the directors, other than Neidorff and possibly Roberts and
Eppinger, had actual knowledge of the allegedly misleading statements or of
Health Net’s particular issues that would eventually harm Centene’s shareholders.
To the extent plaintiffs argue that such knowledge must be inferred given that
Centene management regularly reported to the board, as was its duty, Delaware
courts have “consistently rejected” this logic, that is, “the inference that directors
must have known about a problem because someone was supposed to tell them
about it.” Cottrell, 829 F.3d at 995. Plaintiffs also argue that public information
related to Health Net’s business performance,
, and lengthy discussions and hearings with California regulators put the
director-defendants on notice that Health Net’s practices created additional
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substantial liabilities that could harm Centene in the merger, thereby rendering
Centene’s public assurances regarding the stability of the merger misleading and
the directors liable for their failure to act. But on the particularized facts alleged in
the amended complaint, I cannot reasonably infer that the directors gleaned from
these circumstances that something improper was afoot.
The pre-merger information relating to Health Net’s cessation of payments
to substance abuse treatments centers reported that Health Net took this action in
conjunction with its audit of these centers. Nothing in the amended complaint
supports an inference that the directors knew of the questionable nature of this
audit activity or the potential liability thereon until well after the merger closed.
To the extent plaintiffs allege that
And other than alleging that the process of obtaining regulatory approval for the
merger in California was lengthy, nothing in the amended complaint provides any
reason why this fact should give pause to the directors or raise suspicion as to the
propriety of the merger. Accordingly, it cannot be said in the circumstances here
that the alleged “warnings” pointed to conduct that was so “enormous and
egregious” and posed a threat to Centene “so massive” that the board must have
known about the impropriety. Cottrell, 829 F.3d at 995.
“[R]ed flags are only useful when they are either waved in one’s face or
displayed so that they are visible to the careful observer.” Wood, 953 A.2d at 143
(internal quotation marks and citation omitted). Other than “they should have
known,” the amended complaint does not describe with particularity how red flags
were “waved in the face” of any director other than inside-director Neidorff.
it is not reasonable to infer that any potential
harmful risk was displayed in such a way that a careful director would consciously
know that harm to Centene was on the horizon despite public assurances otherwise.
Regardless, from the facts alleged in the amended complaint, a reasonable
inference cannot be made that the directors made “a conscious decision to take no
action in response to red flags.” In re Forest Labs, Inc. Derivative Litig., 450 F.
Supp. 2d 379, 396 (S.D.N.Y. 2006) (emphasis added); see also Cottrell, 829 F.3d
at 993, 995 (knowledge of problem alone is insufficient to show scienter; deciding
that no action was required is what matters).
To the extent plaintiffs contend that the directors’ failure to learn of other
substantial Health Net issues through the due diligence process shows the process
itself to be inadequate, “Delaware courts routinely reject the conclusory allegation
that because illegal behavior occurred, internal controls must have been deficient,
and the board must have known so.” Desimone, 924 A.2d at 940. Regardless,
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even assuming that the process was inadequate, the amended complaint does not
plead with sufficient particularity that such inadequacy was the consequence of the
directors’ intentional failure to conduct oversight or that they were conscious of
the process’s inadequacy and deliberately failed to correct it. Directors cannot be
liable, under a bad faith or duty of loyalty theory, for their failure to take corrective
or preventative action when they were unaware of the issues needing correcting or
preventing. Cf. Stone, 911 A.2d at 369-70 (a failure to act in good faith can be
shown “where the fiduciary intentionally fails to act in the face of a known duty to
act, demonstrating a conscious disregard for his duties.”). Accordingly, on the
particularized facts alleged in the amended complaint, it cannot be said that a
majority of the directors face a substantial likelihood of personal liability for bad
faith execution of their oversight duties.
The allegations thus fail to raise a reasonable doubt that a majority of the
board is disinterested with respect to the claim raised in Count 2 of the amended
complaint. And, as set out above, the facts alleged do not sufficiently suggest that
any non-interested director is so dominated by or beholden to any interested party
that a reasonable doubt exists as to their independence to impartially consider a
shareholder demand on this claim. Plaintiffs have thus failed to meet Aronson’s
first prong of demonstrating demand futility as to this claim.
Count 3 – Federal Securities Laws
Plaintiffs contend that defendants breached their duty of loyalty, good faith,
and candor “by concealing the problems and risks concerning Health Net’s
business and by issuing false and misleading financial statements in violation of
GAAP and false and misleading SEC filings,” thereby causing Centene to violate
its disclosure obligations under the Securities Act of 1933 and the Securities
Exchange Act of 1934.8 Plaintiffs argue that demand is excused on this claim
because the directors’ conscious decision to allow Centene and Neidorff to violate
securities laws through their false and misleading statements is not protected by
I agree with plaintiffs that a board’s conscious decision to allow its company
to engage in illegal conduct, including a board’s failure to act after being faced
with evidence of illegality, excuses demand under Aronson’s business-judgment
prong. See Louisiana Mun. Police Employees’ Ret. Sys. v. Pyott, 46 A.3d 313, 341
(Del. Ch. 2012), rev’d on other grounds, 74 A.3d 612 (Del. 2013); see also Strong
ex rel. Tidewater, Inc. v. Taylor, 877 F. Supp. 2d 433, 449 (E.D. La. 2012)
(applying Delaware law). Fatal to plaintiffs’ claim of demand futility on this basis,
In a separate federal securities class action arising from the Health Net merger, Sanchez v.
Centene Corp., et al., Case No. 4:17CV806 AGF (E.D. Mo.), the Court held that the alleged
misstatements and GAAP violations in Centene’s April 26, 2016, Form 10-Q and alleged
misstatements in a quarterly earnings call that same day were not actionable under federal
securities laws. In light of that ruling, the parties here have stipulated that plaintiffs’ claims that
the April 26 statements give rise to liability under the federal securities laws are moot. (ECF
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however, is the amended complaint’s lack of particularized facts supporting the
allegation that the board acted (or failed to act) with conscious awareness of any
alleged illegality. Moreover, as discussed more fully above, the amended
complaint and related materials do not support a reasonable inference that the
board failed to conduct its oversight duties in relation to the merger process or to
the challenged statements regarding the merger.
First, to properly frame the demand futility issue as it relates to this claim, it
is important to identify what plaintiffs allege regarding the directors’ conduct.
Other than Neidorff, plaintiffs do not allege that the individual directors
themselves violated federal securities laws. Instead, they claim that the directors’
conduct in permitting false and misleading statements to be made and their failure
to disclose evidence of Health Net’s actual problems and their impact on Centene’s
business caused Centene to violate federal securities laws.
In response to defendants’ motion to dismiss, plaintiffs generally aver that
the director-defendants face personal liability on this claim because they
knowingly disseminated false information. But the amended complaint does not
allege any particular fact detailing specific knowledge or conduct as to any director
other than inside-director Neidorff and audit committee members Roberts and
Eppinger. To the extent plaintiffs contend that board approval of SEC filings and
financial statements render all directors responsible for the false and misleading
statements contained therein, plaintiffs must particularly allege the directors’
personal involvement in the process of preparing the company’s statements in
order for me to infer that the directors had knowledge of the alleged improprieties.
Ji, 2006 WL 2521440, at *12 (citing Guttman, 823 A.2d at 498). Plaintiffs have
not done so here. And to impute knowledge to the outside directors that Neidorff’s
public statements and statements to investors were false, plaintiffs need to make
other factual allegations connecting the outside directors to the day-to-day
workings of the corporation so that a reasonable inference can be made that they
knew the true state of affairs. Id. at *9 (citing Dresner v. Utility.com, Inc., 371 F.
Supp. 2d 476, 494 (S.D.N.Y. 2005)). Plaintiffs have not done so here. Plaintiffs’
general assertions that the directors received routine updates and reports from
Centene management are insufficient to establish such knowledge. Cottrell, 829
F.3d at 995.
The amended complaint does not plead particularized facts sufficient to
create reasonable doubt that a majority of the current board of directors faces a
substantial likelihood of personal liability on plaintiffs’ claim that defendants’
conduct caused Centene to violate federal securities laws. And, as discussed
above, the facts alleged do not sufficiently suggest that any non-interested director
is so dominated by or beholden to any interested party that a reasonable doubt
exists as to their independence to impartially consider a shareholder demand on
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this claim. Accordingly, plaintiffs do not plead sufficient particularized facts
casting reasonable doubt upon the disinterest or independence of a majority of
Centene’s current nine-member board of directors on the claim raised in Count 3 of
the amended complaint.
Count 4 – Insider Trading
Because claims of insider trading do not challenge board action, Aronson’s
second prong directed to the business judgment of challenged board action is
inapplicable to this claim. Rales, 634 A.2d at 933-34 (business-rule prong of
Aronson not applicable where subject of derivative suit is not a business decision
of the board); Oswald on Behalf of Identiv, Inc. v. Humphreys, 806 F. App’x 577,
579 (9th Cir. 2020) (insider trading is not action of the board). Plaintiffs are thus
required to allege particularized facts that create a reasonable doubt that the current
board could have properly exercised its independent and disinterested business
judgment in responding to a demand on the claim. Rales, 634 A.2d at 934;
Oswald, 806 F. App’x at 579 (citing Beam, 833 A.2d at 977; Rales, 634 A.2d at
Plaintiffs argue that Neidorff’s and Gephardt’s sales and dispositions of
Centene stock while in possession of insider information make demand on them
futile.9 Other than asserting the personal and business relationships the other
Although plaintiffs allege that officer-defendants Schwaneke, Baldwin, and Goldman also
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directors have with Neidorff and Gephardt and with Centene management in
general, plaintiffs offer no reason why demand on the current board’s seven other
directors would be futile regarding this claim. And, as discussed above, a bare
assertion of a relationship is insufficient to demonstrate demand futility as to these
other directors. Accordingly, even if Neidorff and Gephardt face a substantial
likelihood of personal liability for insider trading and thus are interested directors
for purposes of demand futility, this liability does not render demand futile on this
claim because no other board member faces a similar threat or lacks the
independence to properly consider a demand.
Plaintiffs have failed to plead sufficient particularized facts casting
reasonable doubt upon the disinterest or independence of a majority of Centene’s
current nine-member board of directors on this claim of insider trading. Because
they have failed to demonstrate that demand on the board would have been futile, I
must dismiss the claim for failure to make a pre-suit demand.
Count 5 – Unjust Enrichment
Finally, in Count 5, plaintiffs claim that all defendants were unjustly
enriched by their receipt of compensation and remuneration while breaching their
fiduciary duties and, in the case of the Selling Defendants, by benefiting from their
engaged in insider trading, they are not members of the board of directors. Their interest is
therefore not relevant to the demand futility analysis on this claim except in the context of
whether the particularized facts of the amended complaint sufficiently raise a reasonable doubt
as to the other directors’ independence from them.
insider trading of Centene stock. Courts have rejected similar allegations that
recipients of compensation were unjustly enriched by receiving payment while
breaching their fiduciary duties. See In re Bank of N.Y. Mellon Corp. Forex
Transactions Litig., 991 F. Supp. 2d 457, 463-64 (S.D.N.Y. 2013) (finding no
reasonable doubt that the decision to pay allegedly wrongdoing officers was a valid
exercise of business judgment where the plaintiffs failed to allege the board was
aware of wrongful activity); see also Central Laborers’ Pension Fund v. Dimon,
No. 14 Civ. 1041(PAC), 2014 WL 3639185, at *5 (S.D.N.Y. July 23, 2014)
(“[T]he unjust enrichment claim fails because the ‘only enrichment alleged by
plaintiffs consists of defendants’ salaries, benefits, and unspecified bonuses.’”)
(quoting In re Pfizer Inc. S’holder Derivative Litig., 722 F. Supp. 2d 453, 465
(S.D.N.Y. 2010)). And because plaintiffs fail to plead particularized facts
demonstrating a causal connection between defendants’ alleged improper acts and
their compensation, the allegations of unjust enrichment fail as a matter of law,
thereby relieving the director-defendants of any substantial likelihood of personal
liability on the claim. See In re Pfizer Inc. S’holder Derivative Litig., 722 F. Supp.
2d at 466. To the extent the claim is directed to benefits obtained from insider
trading, I have already determined that plaintiffs failed to create reasonable doubt
as to the disinterest or independence of a majority of directors on the claim.
Accordingly, the particularized facts alleged in the amended complaint are
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insufficient to create a reasonable doubt as to the disinterest or independence of a
majority of the current board regarding the challenged compensation levels and
other benefits raised in Count 5.
Plaintiffs have failed to satisfy the first prong of Aronson. I therefore turn to
the second prong, which requires me to determine whether the amended complaint
sets forth particularized facts creating a reasonable doubt that the board’s decisions
challenged by plaintiffs in this action were protected by the business judgment
rule, that is, were they the product of a valid exercise of business judgment.
Brehm, 746 A.2d at 256, 258.
To invoke the protection of the business judgment rule, “directors have a
duty to inform themselves, prior to making a business decision, of all material
information reasonably available to them. Having become so informed, they must
then act with requisite care in the discharge of their duties.” Aronson, 473 A.2d at
812. The rule operates “only in the context of director action. Technically
speaking, it has no role where directors have either abdicated their functions, or
absent a conscious decision, failed to act.” Id. at 813 (emphasis added). And in
some circumstances, “a conscious decision to refrain from acting may nonetheless
be a valid exercise of business judgment and enjoy the protections of the rule.” Id.
To be actionable, the directors’ process in making business decisions must be, at
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reasonably available to it. Brehm, 746 A.2d at 266.
On the particular facts alleged, plaintiffs may well prove that the board
approved a flawed transaction and did not act to halt it
evaluating, and taking risks in business define the role of a board of directors.
Allegations that the board here exercised its role imperfectly does not create a
reasonable doubt that its decisions to approve the merger and continue with the
process were the products of business judgment. “To rule otherwise would invite
courts to become super-directors, measuring matters of degree in business
decisionmaking,” an area in which we are “ill-fitted.” Brehm, 746 A.2d at 263,
266. “Such a rule would run counter to the foundation of our jurisprudence.” Id.
The particularized facts alleged in the amended complaint, when considered
with the related materials submitted by the parties on defendants’ motion, do not
show that demand on Centene’s board of directors was futile for purposes of
pursuing this litigation. I will therefore dismiss the amended complaint with
prejudice for plaintiffs’ failure to make a pre-suit demand as required by law.
IT IS HEREBY ORDERED that defendants’ Motion to Dismiss Plaintiffs’
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Verified Consolidated Amended Stockholder Derivative Complaint  is
GRANTED, and plaintiffs’ Verified Consolidated Amended Stockholder
Derivative Complaint is hereby dismissed with prejudice for plaintiffs’ failure to
make a demand upon Centene’s board of directors before pursuing this derivative
A separate Order of Dismissal is entered herewith.
CATHERINE D. PERRY
UNITED STATES DISTRICT JUDGE
Dated this 15th day of September, 2020.
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