MURASHKO v. HAMMER et al
Filing
34
MEMORANDUM and ORDER granting 21 Motion to Dismiss ***CIVIL CASE TERMINATED. Signed by Judge Peter G. Sheridan on 2/22/2018. (km)
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY
ALEXANDER MURASFIKO,
)
Civil Action No:
17-cv-2533 (PGS)(TJB)
PlaintfJ
)
)
)
)
)
V.
N. ROBERT HAMMER, et al.,
Deftndants.
MEMORANDUM
AND
ORDER
)
)
)
This shareholder derivative complaint arises from allegations that Commvault Systems,
Inc. (hereinafter, “Commvault”) and its former board of directors and executive officers breached
their fiduciary duties by fraudulently misrepresenting the corporation’s financial status and
engaging in a “cookie jar accounting” scheme. Presently, Defendants N. Robert Hammer, Alan
G. Bunte, Brian Carolan, Frank J. Fanzilli, Jr., Armando Geday, Keith B. Geeslin, Robert F.
Kurimsky, Louis F. Miceli, Gary Merrill, Ronald L. Muller, Daniel J. Pulver, Gary B. smith, and
David F. Walker (collectively, “Director Defendants”) seek dismissal of Plaintiff Alexander
Murashko’s amended shareholder derivative complaint (ECF No. 20) pursuant Federal Rule of
Civil Procedure 23.1 for failure to plead particularized facts showing that a demand on the
Commvault Board of Directors would have been futile. (ECF No. 21). For the reasons discussed
below, the motion is granted without prejudice.
BAcKGRouND
Commvault is
a
publicly traded data protection and information management software
company that is incorporated in Delaware and headquartered in New Jersey. (Amended Complaint
at ¶J 3, 25). Commvault has a ten-member board of directors, of which two, Defendants Hammer
and Bunte, are inside directors. Of the eight outside directors, Defendants Kurimsky, Pulver and
Walker served on the Audit Committee, and Defendants Kurimsky, Pulver, Smith, and Walker on
the Governance Committee. (Id. at ¶J 42-43). Under the terms of its corporate charter, Commvault
exempts directors from liability for monetary damages, “[t]o the fullest extent permitted by the
General Corporation law of the State of Delaware.” (ECF No. 21-6, “Corporate Charter”))
In December 2003, Commvault entered a business partnership with Dell, wherein Dell
served as Commvault’s reseller and original equipment manufacturing partner. (Amended
Complaint at
¶ 4).
After going public in 2006, Commvault’s revenue quadrupled in value from
$109,472,000 in 2007 to $406,639,000 in 2012. (Id. at
¶
5). Of this, Dell accounted tbr twenty
percent of Commvault’s total revenue. (Id.). Over the next few years, Commvault predicted that
its revenue would grow from $500 million in 2013 to over $1 billion. (Id. at
¶
6). To meet this
goal, analysts predicted that Commvault would “have to grow by at least 20% year-over-year until
fiscal {year] 2017.” (Id.). However, in 2012, Dell acquired certain Commvault competitors and
ended its partnership with Commvault; this termination would severely affect Commvault’s ability
to achieve its revenue targets. (Id. at
¶ 7).
Plaintiff claims Defendants falsely reassured investors
that Cornmvault was replacing Dell with business partners, and that the lost partnership would not
affect Cornmvault’s revenue target numbers. (Id. at ¶ 8).
On May 14, 2013, Commvault filed its annual Form 10-K for fiscal year 2013, as required
pursuant Section 13 of the Securities Exchange Act of 1934. (ECF No. 2 1-4, “FY 2013 10-K”).
2
Cornmvault’s corporate charter is properly before the Court since both parties explicitly reference
the document in their moving briefs. Moreover, the Court can take judicial notice of the corporate
charter. See In re Baxter mt ‘i, 654 A.2d 1268, 1270 (Del. Ch. 1995) (“The court may take judicial
notice of the certificate [of incorporation] in deciding a motion to dismiss.”).
2
Because these forms are regularly filed with the SEC, “Courts often take judicial notice of such
filings,” since these documents “can be accurately and readily determined from sources whose
2
In their Form 10-K, Commvault reported deferred software revenue of $9,193,000, which was
approximately $6 million more than the $3,764,000 reported in 2012. (Amended Complaint at
¶
72). Plaintiff claims that the statements in the Form 10-K “were materially false and misleading”
because a material portion of the $9.2 million reported as deferred software revenue should have
been reported as realized revenue for the fourth quarter, but “was being saved to mask
Commvault’s undisclosed declining growth prospects.” (Id. at ¶ 77).
According to the Complaint, Defendants created a “cookie jar” accounting scheme,
wherein Defendants concealed Commvault’s declining revenue and manipulated Commvault’s
finances, in violation of the Generally Accepted Accounting Principles (GAAP). (Id. at
¶
9).
Specifically, Plaintiff claims that Defendants did not recognize revenue earned in prior fiscal
periods and, instead, deferred these earnings to later periods to show financial growth. For
instance, during the second and third fiscal quarters of 2014, Plaintiff claims that “[D]efendants
caused the Company to recognize a material portion of its artificially inflated deferred software
revenue balance to create the illusion that Commvault was meeting its 20% year-over-year growth
targets.” (Id. at ¶ 10). In both quarters, Commvault recognized more than $4 million in previously
deferred software revenue, which misrepresented Commvault’s true revenue numbers. (Id. at
¶J
11-12).
However, Commvault’s financial struggles became public on April 25, 2014, when it
announced that its fourth quarter profits had declined by 7.8% and that software revenue had
dropped to 10% year-over-year, half of the 20% figure that analysts expected. (Id. at ¶ 16). Once
accuracy cannot reasonably be questioned.” In re Polycom, Inc., 78 F. Supp.3d 1006, 1011 n.3
(N.D. Ca. 2015) (quoting Fed. R. Evid. 201(b)).
3
these disclosures were made public, Cornmvault experienced a 30% drop in stock value, falling
from $68.58 per share to $47.56. (Id.).
3
Plaintiff now brings this present cause of action on behalf of Commvault, against Director
Defendants, alleging two counts of breach of fiduciary duties, one count of unjust enrichment, and
one count of insider trading. The Complaint identifies the following individual defendants and
their corporate capacities:
N. Robert Hammer, President and Chief Executive Officer of Commvault.
(Complaint at ¶ 27);
Alan G. Bunte, Excecutive Vice President and Chief Operating Officer. (Id. at
28);
Brian Carolan, Chief Financial Officer. (Id. at
¶
¶ 29);
Ronald L. Muller, senior vice president of worldwide sales. (Id. at
¶ 30);
Gary Merrill, vice President, finance and chief accounting officer. (Id. at ¶ 31);
Frank J. Fanzilli, Jr., director. (Id. at ¶ 32);
Armando Geday, director. (Id. at ¶ 33);
Keith B. Geeslin, director. (Id. at ¶ 34);
Robert F. Kurimsky, director and audit committee member. (Id. at ¶ 35);
Daniel J. Pulver, director and audit committee member. (Id. at ¶ 36);
Gary B. Smith, director. (Id. at
¶
37);
This purported misrepresentation became the basis of a securities class action filed against
Commvault on September 10, 2014. See In re Comm Vault Sys., Sec. Litig., No 14-5628, 2016 U.S.
Dist. LEXIS 135257 (D.N.J. Sept. 30, 2016). In that case, the plaintiffs alleged that Defendants
Hammer and Carolan made false and misleading statements about Commvault’s financial growth
and downplayed the significance of losing Dell’s partnership. Id. at * 2-13. In denying Defendant’s
motion to dismiss the plaintiff’s second amended complaint, this Court concluded, “the allegations
regarding the loss of Dell, juxtaposed with Defendants’ representations to the investing public that
they had replaced Dell’s business, are sufficient to make out a claim that Defendants made false or
materially misleading statements.” Id. at *25.
4
David F. Walker, director and chair of audit committee. (Id. at ¶ 38).
In seeking to establish demand futility, Plaintiff claims that Hammer and Bunte, as Commvault’s
officers, face “a substantial likelihood of liability for issuing false and misleading statements” and
engaging in insider trading. (Id. at
¶J
129-38). As for the seven outside directors, Plaintiff claims
they “face a substantial likelihood of liability” based on their positions on the Audit or Governance
Committees and for signing and approving Commvault’s Fiscal Year 2013 10-K, which Plaintiff
claims understated Commvault’s revenue “to mask CommVault’s undisclosed declining growth
prospects.” (Id. at
¶J
139-5 1). Defendants seek dismissal of Plaintiff’s Complaint based on his
failure to adequately plead sufficient facts to support demand futility.
LEGAL STANDARD
•‘[A] shareholder derivative claim is one in which a shareholder asserts a claim belonging
to the corporation.” In re Prudential Ins. Co. Litig., 659 A.2d 961, 970 (N.J. Super. Ct. Ch. Div.
1995). “A shareholder derivative action is an exception to the principle of corporate governance
that ‘the decision to bring a lawsuit or to refrain from litigating a claim on behalf of the corporation
is a decision concerning the management of the corporation and consequently is the responsibility
of the directors.” Perkins v. Daniel, No. 06-15 18, 2007 U.S. Dist. LEXIS 90104, at *5 (D.N.J.
Dec. 6, 2007) (quoting Blasband v. Rales, 971 F.2d 1034, 1048 (3d Cir. 1992)). Because these
actions interfere with director autonomy, “[s]hareholder derivative suits typically require plaintiffs
to make pre-suit demand on the board of directors that the board bring suit on behalf of the
corporation.” In re Merck & Co., Inc. Sec., Deny. & ERISA Litig., 493 F.3d 393, 399 (3d Cir.
2007).
Under Federal Rule of Civil Procedure 23.1, “a shareholder may file a derivative suit
against the board of directors to claim enforcement of a right of the corporation where the
5
corporation has failed to assert that right.” Kanter v. Barella, 489 F.3d 170, 176 (3d Cir. 2007).
Rule 23.1 sets forth a heightened pleading standard, requiring “a plaintiff to plead with
particularity either the efforts made to spur directors to take the action sought, and why these
efforts were unsuccessftil, or the reasons why no effort was made to demand action from the
board.” Id.
“The purpose of Rule 23.1’s demand requirement is to ‘affor[dj the directors an
opportunity to exercise their reasonable business judgment and waive a legal right vested in the
corporation in the belief that its best interests will be promoted by not insisting on such right.” Id.
(citing Kumen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 96 (1991)).
“As a federal court hearing a shareholders’ derivative suit involving state law claims, a
district court must apply the federal procedural requirement of particularized pleading, but apply
state substantive law to determine whether the facts demonstrate demand would have been futile
and can be excused.” In re Johnson & Johnson Derivative Litig., 865 F. Supp. 2d 545, 555 (D.N.J.
2011) (internal quotation marks and citation omitted). Here, both parties agree that Delaware law
governs this matter. Under Delaware law, there are two relevant tests for determining demand
futility. First, the Court employs the test set forth in Aronson v. Lewis, 473 A.2d 805, 809 (Del.
1984), when the plaintiff challenges a board decision. Under this test, the court must consider
whether the Complaint pleads sufficient facts that “a reasonable doubt is created that: (1) the
directors are disinterested and independent and (2) the challenged transaction was otherwise the
product of a valid exercise of business judgment.” Spiegel v. Buntrock, 571 A.2d 767, 774 (Del.
1990) (quoting Aronson, 473 A.2d at 814). “A director is considered interested where he or she
will receive a personal financial benefit from a transaction that is not equally shared by the
stockholders.” Rales v. Blasbund. 634 A.2d 927, 936 (Del. 1993). As such, where the complaint
demonstrates that a majority of the directors have a personal stake in a transaction or proposed
6
litigation, such that they would be unable to make a proper business judgment, the plaintiff has
sufficiently pleaded demand futility. Aronson, 473 A.2d at 814.
However, when the subject of a derivative suit is not predicated on a business decision, but
on a violation of the board’s oversight duties, the court applies a second test, as set forth in Rales.
See Wood v. Baum, 953 A.2d 136, 140 (Del. 2008). Under Rales, ‘a court must determine whether
or not the particularized factual allegations of a derivative stockholder complaint create a
reasonable doubt that, as of the time the complaint is filed, the board of directors could have
properly exercised its independent and disinterested business judgment in responding to a
demand.” 634 A.2d at 934.
If the plaintiff meets this burden, “then demand will be excused as
futile.” Id.
ANALYSIS
I. Breach of Fiduciary Duty Claims
Defendants first seek dismissal of Counts I and II of Plaintiff’s Complaint, since he has
failed to establish demand futility. Under Count I, Plaintiff claims Defendants breached their
fiduciary duties of loyalty and good faith by disseminating “materially misleading and inaccurate
information.” (Amended Complaint at
¶
153). Under Count II, Plaintiff alleges that Individual
Defendants breached this fiduciary duty by failing to ensure that Commvault’s financial statements
were consistent with GAAP, which he describes as “cookie jar accounting,” and failing to correct
“the known and pervasive problems with ComniVault’s internal controls and practices and
procedures.” (Id. at
¶
156-57). According to Plaintiff, because the directors faced “a substantial
risk of personal liability,” there is “reasonable doubt” that it could have properly exercised its
business judgment.
7
Under Section 1 02(b)(7) of the Delaware General Corporation Law, corporations can adopt
charter provisions that eliminate or limit “the personal liability of a director to the corporation or
its stockholders for monetary damages for breach of fiduciary duty,” subject to certain exceptions.
Del. Code Ann. tit. 8,
§ l02(b)(7). Where, as here, the directors are exculpated from liability for
certain conduct, the plaintiff has the burden of pleading a “non-exculpated claim against the
directors based on particularized facts.” Wood, 953 A.2d at 141 (internal quotation marks and
citation omitted). Specifically, under Delaware General Corporation Law, directors can be liable
for: (I) “breach of the director’s duty of loyalty to the corporation or its stockholders; (2) “acts or
omissions not in good faith or which involve intentional misconduct or a knowing violation of
law”; (3) unlawful payment of dividend or unlawful stock purchase ore redemption of stock, Del.
Code Ann. tit. 8,
§ 174; and (4) “any transaction from which the director derived an improper
personal benefit.” Del. Code Ann. tit. 8,
§ 102(b)(7). Since Plaintiff does not claim that the
directors engaged in self-dealing, he must establish that they breached their duty of loyalty, acted
in bad faith, or otherwise engaged in knowing or intentional misconduct. See Wood, 953 A.2d at
141. In doing so, Plaintiff “must also plead particularized facts that demonstrate that the directors
acted with scienter, i.e., that they had ‘actual or constructive knowledge’ that their conduct was
legally improper.” Id. (citations omitted); Desitnone v. Barrows, 924 A.2d 908, 935 (Del. Ch.
4
2007) (“director liability for failure to monitor require[sJ a finding that the directors acted with the
state of mind traditionally used to define the mindset of a disloyal director bad faith”).
-
The Court is not persuaded by Plaintiffs contention that because scienter is not a necessary
element to a breach of fiduciary claim, he is not subject to the scienter-based standard. It has been
well established in Delaware law that when a plaintiff, as is the case here, seeks to hold directors
liable for failure to monitor, he must meet the scienter-based standard. See Wood, 953 A.2d at 141;
Desimone, 924 A.2d 935.
8
Neither party disputes that, given their executive positions and employment with
Commvault, Hammer and Bunte are not independent directors. As such, in order to allege demand
futility, Plaintiff must demonstrate that at least three of the outside directors faced a substantial
likelihood of liability, such that they could not exercise their independent and disinterested
business judgment in responding to a shareholder’s demand. See Rales, 634 A.2d at 934. Here,
Plaintiff contends that since both the Audit and Governance Committees breached their fiduciary
duties, they face a substantial likelihood of liability. The Court addresses each Committee’s
potential liability in turn.
1. Audit Committee Defendants
Plaintiff claims that Defendants Kurimsky, Pulver, and Walker, as members of the Audit
Committee, “face a substantial likelihood of liability” because the Audit Committee issued false
and misleading statements to the SEC and others, and failed to “maintain internal controls” to
prevent revenue manipulation. (Plaintiff’s Brief at 24).
Turning first to the misleading statements, Plaintiff claims that the Audit Committee was
tasked with ensuring “the integrity of the financial statements of the Company” and “compliance
with legal and regulatory requirements.” (Amended Complaint at
¶ 48).
However, by failing to
correct or report the alleged revenue manipulation that was represented in the FY 2013 1 0-K,
Plaintiff claims that Defendants Kurimsky, Pulver, and Walker, breached their fiduciary duties to
Commvault. This assertion is insufficient.
“[Tjo establish a threat of director liability based on a disclosure violation, plaintiffs must
plead facts that show that the violation was made knowingly or in bad faith, a showing that requires
allegations regarding what the directors knew and when.” In re Citigroup Inc. S ‘holder Derivative
Litig., 964 A.2d 106, 133-34 (Del. Ch. 2009). However, it is well-settled that membership, alone,
9
on an Audit Committee is an insufficient basis for inferring scienter. See Wood, 953 A.2d at 142
(rejecting the argument that “membership on the Audit Committee is a sufficient basis to infer the
requisite scienter”); see also Rattner v. Bidzos, No. 19700, 2003 Del. Ch. LEXIS 103, at *44.48
(Del. Ch. Sept. 30, 2003) (same). In J’Vood, the Delaware Supreme Court refused to find audit
committee board members liable for alleged false statements, where the plaintiff failed to identify
any “red flags” that would suggest failure to exercise oversight. Id. at 143-44 (“Under Delaware
law, red flags ‘are only useful when they are either waved in one’s face or displayed so that they
are visible to the careful observer.” (citation omitted)).
Here, too, Plaintiff fails to identifv any “red flags” that would allow this Court to infer that
Defendants breached their fiduciary duties.
Instead, Plaintiff simply asserts that Defendants
should have known of the impropriety of these statements; however, such assertions do not meet
Plaintiff’s heightened pleading burden. See Guttman v. Huang, 823 A.2d 492, 498 (Del. Ch. 2003)
(dismissing the plaintiff’s complaint since it was “entirely devoid of particularized allegations of
fact demonstrating that the outside directors had actual or constructive notice of the accounting
improprieties”). The Complaint does not allege what the Audit Committee members knew or did
not know, as such, it lacks a reasonable basis to infer that Defendants acted in bad faith. See In re
Folycom, Inc., 78 F. Supp. 3d 1006, 1017 (N.D. Ca. 2015) (applying Delaware law).
Alternatively, Plaintiff contends that the Audit Committee Defendants are liable for failing
to maintain adequate internal control of Cornmvault revenue reporting. According to Plaintiff, the
Audit Committee Defendants should have noticed that the reported revenue was an attempt “to
mask Commvault’s undisclosed declining growth prospects.” (Plaintiff’s Brief at 27). As such,
they face a substantial likelihood of personal liability for failing to maintain adequate internal
controls. The Court disagrees.
10
Failure to monitor, or oversee corporate operations, “is possibly the most difficult theory
in corporation law upon which a plaintiff might hope to win a judgment.” In re Caremark Int’l
Deny. Litig., 698 A.2d 959. 967 (Del. Ch. 1996). In order to demonstrate director oversight
liability, a plaintiff must establish: “(a) the directors utterly failed to implement any reporting or
information system or controls; or (b) having implemented such a system or controls, consciously
failed to monitor or oversee its operations thus disabling themselves from being informed of risks
or problems requiring their attention.” Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006). “Plaintiffs
must plead particularized facts demonstrating that ‘the directors knew they were not discharging
their fiduciary obligations or that the directors demonstrated a conscious disregard for their
responsibilities such as by failing to act in the face of a known duty to act.” In re Polycom, 78 F.
Supp. 3d at 1015 (quoting Citigroup, 964 A.2d at 123 (emphasis in original)).
Plaintiff acknowledges that internal controls were in place. The Complaint identifies the
existence of an Audit Committee, a Governance Committee, and a Board of a Code of Business
Ethics and Conduct. (Amended Complaint at ¶J 49-51). Specifically, the Ethics Code states, “We
maintain systems of controls and procedures designed to assure the completeness and accuracy of
financial and other records.
.
.
.
We will not tolerate false or artificial entries in the Company’s
books and records or arrangements that may result in such entries.” (Id. at
¶ 51). “[I]n corporate
law, independent directors are entitled to rely in good faith on advice from the auditors that
corporate books and records are accurate and GAAP-compliant and that corporate internal controls
are adequate.” Am. Int’l Grp. v. Greenberg, 965 A.2d 763, 781 n.246 (Del. Ch. 2009) (citing Del.
Code Ann. tit. 8
§ 14 1(e)). Here, the record reflects that Commvault availed itself to the services
of an outside auditor, to perform an independent audit of its FY 2013 financial statements. (FY
2013 10-K at 58). In a report prepared by public accounting firm Ernst & Young, it concluded:
11
In our opinion, the financial statements
present fairly, in all material
respects, the consolidated financial position of CommVault Systems, Inc. at March
31, 2013 and 2012, and the consolidated results of its operations and its cash flows
for each of the three years in the period ended March 31, 2013, in conformity with
U.S. generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken
as a whole, presents fairly in all material respects in the
information set forth therein.
.
(Id.).
.
.
This statement undercuts Plaintiffs assertion that Commvault engaged in fraudulent
bookkeeping, as it demonstrates the Audit Committee’s efforts to assure the accuracy of
Cornmvault’ s financial statements.
Because such internal controls were in place, Plaintiff has the burden of demonstrating that
Defendants, in bad faith, “consciously failed to monitor or oversee its operations.” Ritter, 911 A.2d
at 370; see also In re Polycom, 78 F. Supp. 3d at 1015. Plaintiff has plainly failed to meet this
burden. Like his misrepresentation claims, Plaintiffs oversight claims fail to adequately plead
that the Audit Committee Defendants were aware of the manipulation of Commvault’s financial
statements or consciously disregarded its responsibilities. Instead, Plaintiff argues, “the Audit
Committee should have known or was negligent in not knowing, that the Company was engaged
in improper revenue manipulation” and are liable fbr having signed the FY 2013 10k. (Plaintiffs
Brief at 29). However, this, in and of itself, does not suffice to satisfy the heightened scienter
based standard. See Wood, 953 A.2d at 142 (“The Board’s execution of [the company’sJ financial
reports, without more, is insufficient to create an inference that the directors had actual or
constructive notice of any illegality.”). Although Plaintiff claims that $6 million in deferred funds
was higher than the prior five fiscal years, he fails to demonstrate how this potentially constituted
a “red flag” or how this illustrated a conscious oversight by the Audit Committee. Simply put,
Plaintiff does not identify a single instance wherein the Audit Committee disregarded a potential
“red flag” or ignored its responsibilities. As such, since the Complaint fails to plead particularized
12
facts demonstrating that the Audit Committee members breached their fiduciary duties, demand is
not excused. See In re Polycom, 78 F. Supp. 3d at 1016 (dismissing the plaintiffs’ oversight claims,
where they generally alleged that the board “should have known that violations of the law were
occurring,” hut failed to demonstrate that the board was aware of the alleged problems with the
CEO’s expense reports).
2. Governance Committee Defendants
Plaintiff next claims that demand is excused because the Governance Committee, which
includes Kurimsky, Pulver, Smith, and Walker, failed to act upon Hammer and Bunte’s alleged
insider trading. (Amended Complaint at ¶ 146).
Relying on this Court’s decision in In re Comm Vault Sys., Sec. Litig., 2016 U.S. Dist.
LEXIS 135257, Plaintiff contends that there is a sufficient basis for determining that the
Governance Committee Defendants breached their fiduciary duty. Specifically, Plaintiff argues,
“there has been no disclosure or indication that the Governance Committee has investigated
Hammer or Bunte’s illicit sales.” (Plaintiffs Brief at 36). However, this argument is unavailing
since Plaintiff fails to plead with any degree of particularity facts that demonstrate the Governance
Committee’s awareness of Hammer and Bunte’s purported misconduct or their willful disregard
thereof. See, e.g., hire Citigroup Inc. S’holder Derivative Litig., 964 A.2d at 125 (“A plaintiff can
show bad faith conduct by, for example, properly alleging particularized facts that show that a
director consciously disregarded an obligation to be reasonably informed about the business and
its risks or consciously disregarded the duty to monitor and oversee the business”).
Plaintiff also relies on In re Countrywide Financial Corp. Derivative Litigation, 554 F.
Supp. 2d 1044, 1063-64 (C.D. Cal. 2008) for the proposition that demand was futile since the
Governance Committee failed to take any action against Hammer and Bunte. In Countrywide, the
13
court excused demand where the plaintiff identified “red flags of such prominence that Individual
Defendants must necessarily have examined and considered them in the course of their Committee
oversight duties.” IcL at 1060. The defendants in Countiywide were board committee members
responsible with overseeing the corporation’s “risk exposures, investment portfolio, and loan loss
reserves.” Id. at 1062. However, since one of the “red flags” involved “increasing delinquencies
in Countrywide’s riskiest loans,” which “implicated underwriting practices at the core of
Countrywide’s business model,” the court concluded that the plaintiffs pleaded sufficient facts to
infer scienter. See id. at 1060, 1064-65.
Here, Plaintiff fails to plead any particularized facts for which the Court could reasonably
conclude that the Governance Committee would have known of the “red flags” and, nevertheless,
failed to take proper action. See In re Am. liii ‘1 Group, Inc. Derivative Litig., 700 F. Supp. 2d 419,
437-38 (S.D.N.Y. 2010) (distinguishing Countrywide, where the plaintiff did not plead any
particularized facts that the defendants, “in the course of carrying out their responsibilities as Board
members generally or as Board committee members particularly, would have become aware of
any ‘red flags’ demonstrating serious risks at the core of AIG’s business”). Unlike Countrywide,
Plaintiff does not allege that the Governance Committee, all of whom are outside directors, played
a central role in Commvault’s business operations. The sole basis for Plaintiff’s argument is that
this Court in In re Comm Vault Systems denied the defendant’s motion to dismiss the plaintiffs
securities fraud claims. However, as discussed above, this “red flag” fails to rise to the level of
“such prominence” that the Court can infer scienter. See, e.g., Countrywide, 554 F. Supp. 2d at
1058-65 (summarizing the extent and significance of the “red flags” present in Countrywide’s
operations).
14
As such, the demand requirement will also not be excused based on Plaintiff’s Governance
Committee Claims.
II. Unjust Enrichment Claim
Defendants next seek dismissal of Count III of Plaintiff’s Amended Derivative Complaint,
which alleges a claim of unjust enrichment. Specifically, Plaintiff claims, “[b]y their wrongful acts
and omissions, the Individual Defendants were unjustly enriched at the expense of and to the
detriment of CommVault.” (“Amended Complaint” at ¶ 160).
Under Delaware law, “[u]njust enrichment is defined as the ‘unjust retention of a benefit
to the loss of another, or the retention of money or property of another against the fundamental
principles of justice or equity and good conscience.” Fleer Corp. v. Topps Chewing Gum, Inc.,
539 A.2d 1060, 1062 (Del. 1988) (citation omitted). To sustain a claim of unjust enrichment, the
plaintiff must establish: “(1) an enrichment, (2) an impoverishment, (3) a relation between the
enrichment and impoverishment, (4) the absence of justification, and (5) the absence of a remedy
provided by law.” Nemec v. Shrader, 991 A.2d 1120, 1130 (Del. 2010).
Here, Plaintiff’s claim is devoid of any allegations that Defendants benefited in any way
from the purportedly unlawful conduct.
As discussed above, Plaintiff has failed to plead
particularized facts that the Defendants could not have made an independent and disinterested
business judgment in response to a demand that the company pursue unjust enrichment claims. As
such, demand for Plaintiff’s unjust enrichment claim is not excused. See In re Bank ofAm. Corp.
Sec., Derivative, & ERISA Litig., 757 F. Supp. 2d 260, 341-42 (S.D.N.Y 2010) (dismissing the
derivative plaintiffs’ unjust enrichment claim, where they failed to allege that the directors
benefited from the unlawful conduct or that they were incapable of’exercis[ing] their disinterested
and independent business judgment in considering a demand to file suit”).
15
III. Insider Trading
Finally, Defendants seek dismissal of Count IV of Plaintiffs Amended Derivative
Complaint, which alleges insider trading claims against Hammer and Bunte, since he has failed to
demonstrate that demand would be futile.
In determining whether demand is excused with respect to insider trading, a plaintiff must
plead sufficient facts that create a reasonable doubt that a majority of the directors “are incapable
of exercising their disinterested business judgment in considering” a demand to pursue claims of
insider trading. Rattner, 2003 Del. Ch. LEXIS 103, at *33 “[P]articularized allegations which, if
true, give rise to a ‘substantial likelihood’ of personal liability are necessary to raise a reasonable
doubt with respect to a director’s disinterestedness.” In re Forest Labs., Inc. Derivative Litig., 450
F. Supp. 2d 379, 389 (S.D.N.Y. 2006) (citing Rales, 634 A.2d at 936). Here, the Court must
determine “whether the plaintiffs have pled particularized facts regarding the directors that create
a sufficient likelihood of personal liability because they have engaged in material trading activity
at a time when (one can infer from particularized pled facts that) they knew material, non-public
information about the company’s financial condition.” Guttman, 823 A.2d at 502.
Here, again, Plaintiff has failed to meet this burden.
First, although Commvault is
comprised of ten directors, Plaintiff only alleges that two, Hammer and Bunte, have engaged in
insider trading. As such, Plaintiff has failed to demonstrate that a majority of the board was
incapable of making an independent and disinterested business judgment. See In re First Bancorp
Derivative Litig., 465 F. Supp. 2d 112, 121 (D.P.R. 2006) (“Because a majority of the directors
are not alleged to have engaged in insider trading, the court finds that pLaintiffs’ insider trading
allegations do not raise a reasonable doubt that the Board is incapable of being impartial in
considering a demand to challenge the insider-trading transactions.”).
16
Second, the fact that
Defendants have not pursued claims against Hammer and Bunte does not demonstrate their interest
in the matter or demand futility. Richardson v. Graves, No. 6617, 1983 Del. Ch. LEXIS 466, at *9
(Del. Ch. June 17. 1983) (“The mere fact that [the board members] have not elected to sue before
the derivative action was filed should not of itself indicate ‘interestedness.”). In short, Plaintiff
has failed to plead any particularized facts that demonstrate that the Defendants were incapable of
exercising independent judgment in considering a demand for insider trading; as such, the demand
requirement as to Plaintiff’s insider trading claims is not excused.
ORDER
Having carefully reviewed and taken into consideration the submissions of the parties, as
well as the arguments and exhibits therein presented, and for good cause shown, and for all of the
foregoing reasons,
ITlSonthis
dayoffi,2O18,
ORDERED that Defendants’ Motion to Dismiss (ECF No. 21) is GRANTED without prejudice.
PETER G. SHERIDAN, U.S.D.J.
17
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