Canty v. Christine McCormick Day et al
Filing
53
OPINION AND ORDER re: (43 in 1:13-cv-05629-KBF) MOTION for Joinder Hallandale Beach Police Officers And Firefighters' Personnel Retirement Fund's Motion for Leave to Join in Part The Laborers' District Council Construction Industry Pension Fund's Motion to Intervene and Memor filed by Hallandale Beach Police Officers And Firefighters' Personnel Retirement Fund, (21 in 1:13-cv-05629-KBF) MOTION to Dismiss the Verified Amended Shareholder Derivative Complaint fil ed by Michael Casey, Martha A.M. Morfitt, John E. Currie, Roann Costin, Robert Bensoussan, Sheree Waterson, Rhoda M. Pitcher, Christine McCormick Day, Dennis J. Wilson, Emily White, Lululemon Athletica, Inc., Jerry Stritzke, Thomas G. Stemberg, Willi am Glenn, (36 in 1:13-cv-05629-KBF) MOTION to Intervene filed by Laborers District Council Construction Industry Pension Fund, (22 in 1:13-cv-05977-KBF) MOTION to Dismiss the Verified Amended Shareholder Derivative Complaint filed by Christine McCormick Day, Martha A.M. Morfitt, Lululemon Athletica Inc., Michael Casey, Roann Costin, Robert Bensoussan, Sheree Waterson, Rhoda M. Pitcher, Emily White, Dennis J. Wilson, Jerry Stritzke, Thomas G. Stemberg, William Glenn, (37 in 1:13-cv-05977-K BF) MOTION to Intervene filed by Laborers District Counsel Construction Industry Pension Fund, (44 in 1:13-cv-05977-KBF) MOTION for Joinder Hallandale Beach Police Officers And Firefighters Personnel Retirement Funds Motion for Leave to Join in Pa rt The Laborers' District Council Construction Industry Pension Fund's Motion to Intervene and Memorandum in Sup filed by Hallandale Beach Police Officers And Firefighters Personnel Retirement Fund. For the reasons set forth above, defendants' motion to dismiss the Amended Complaint pursuant to Rule 23.1 is GRANTED, because plaintiffs have failed to adequately allege particularized facts showing demand on lululemon's Board of Directors was excused. Th e Court thus DISMISSES the complaint without prejudice, in the event plaintiffs seek to pursue these claims after making a demand on the Board. Accordingly, the pending motions to intervene by the Laborers' District Council Construction Industr y Pension Fund and the Hallandale Beach Police Officers and Firefighters' Personnel Retirement Fund are DENIED as moot. The Clerk of Court is directed to close the motions at ECF Nos. 21, 36, and 43 in 13 Civ. 5629, and ECF Nos. 22, 37, and 44 in 13 Civ. 5977. The Clerk of Court is also directed to close both actions. SO ORDERED. (Signed by Judge Katherine B. Forrest on 4/9/2014) (ajs)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
--------------------------------------------------------------)(
USDC SDNY
DOCUMENT
ELECTRONICALL Y FILED
DOC#:
DATE FILED:
APR 0 92014
THOMAS CANTY,
Plaintiff,
13 Civ. 5629 (KBF)
-v-
OPINION & ORDER
CHRISTINE MCCORMICK DAY, et al.,
Defendants.
TAMMY M. FEDERMAN,
Plaintiff,
13 Civ. 5977 (KBF)
-v-
OPINION & ORDER
CHRISTINE MCCORMICK DAY, et al.,
Defendants.
------------------------------------------------------------KATHERINE B. FORREST, District Judge:
)(
Plaintiffs Thomas Canty and Tammy M. Federman bring these derivative
actions on behalf of nominal defendant lululemon athletica inc. ("lululemon" or the
"company") against thirteen current or former lululemon directors or executives for
violations of Section 14(a) of the Securities Exchange Act and Rule 14a-9
thereunder, as well as state law claims for breaches of fiduciary duties, arising out
of "serious quality control problems" and "materially false and misleading
statements" that were made concerning those problems. (See Am. CompI. ,-r,-r 2,
209-238, ECF No. 20.) Plaintiffs' claims center around lululemon's March 2013
recall of one of its "flagship" products-its black luon yoga pants-and the events
that followed, including the announcement of the departure oflululemon's chief
executive officer ("CEO") and stock sales by its founder and Chairman of the Board
of Directors in June 2013. (See id.
'l~
15-34.)
Plaintiffs originally filed these actions on August 12 and 23, 2013,
respectively. On October 3, 2013, these actions were transferred to the undersigned
and consolidated for pretrial purposes. l In an order dated October 24,2013, and as
discussed at the conference that day, the Court ordered plaintiffs to either file an
amended complaint or designate one of the two previously filed complaints as the
operative complaint. (ECF No. 9.)2 On November 8, 2013, plaintiffs designated the
complaint in Canty v. Day et al., as the operative complaint. (ECF No. 11.)
Defendants thereafter moved to dismiss the operative complaint on December 11,
2013 pursuant to Federal Rule of Civil Procedure 23.1. (ECF Nos. 12-14.) By letter
dated December 18, 2013, plaintiffs requested leave to file an amended complaint.
(ECF No. 15.) The Court granted plaintiffs' request, indicating that it was its
intention to rule on the sufficiency of the pleadings only once. (ECF No. 18.)
Plaintiffs thereafter filed an amended complaint on January 17, 2014.
Defendants again moved to dismiss pursuant to Rule 23.1 on January 31,2014, and
the motion became fully briefed on February 21, 2014. The Court held argument on
the motions on April 4, 2014.
1 Also pending before this Court is the related securities class action litigation, In re Lululemon
Securities Litigation, 13 Civ. 4596 (KBF), which involves many of the same facts and allegations as
are at issue in these actions.
2 Unless otherwise specified, all ECF references in this Opinion are to the docket in Canty v. Day et
al., 13 Civ. 5629 (KBF).
2
For the reasons set forth below, defendants' motion to dismiss is GRANTED
and these actions are DISMISSED without prejudice.
I.
FACTS
A.
The Parties
Plaintiffs Canty and Federman have been holders of lululemon stock since
June 2011 and May 2010, respectively. (Am. CompI.
~'r
46, 47.)
Defendants Robert Bensoussan, Michael Casey, RoAnn Costin, Christine
McCormick Day, William Glenn, Martha A.M. Morfitt, Rhoda M. Pitcher, Thomas
S. Sternberg, Jerry Strizke, Emily White, and Dennis J. Wilson (collectively, with
the exception of Day and Wilson, the "Director Defendants") served as lululemon's
Board of Directors on the date the instant actions were filed. (ld.
,r,r 49-50, 53-61.)
Director Defendants Casey, Morfitt, Glenn, and White served on the Board's Audit
Committee during the "Relevant Period" (which is defined as 2012 to present). (ld.
~~
1, 53, 54, 57, 61, 63.) Director Defendants Bensoussan, Casey, Pitcher, and
Stemberg served on the Board's Nominating and Governance Committee during the
Relevant Period. (ld.
'1'[ 54, 55, 58, 59, 64.)
Day served as lululemon's CEO from July 2008 until January 2014. (ld.
~
49.) Day's resignation was announced on June 10, 2013, but she remained with
lululemon until her successor officially took over as CEO in January 2014. (Id.)
Wilson is lululemon's founder, and has been a member of the Board and the
company's largest individual shareholder since 1998. (ld.
~
50.) Wilson has served
as Chairman of the Board since 1998, but announced in December 2013 that,
3
although he will remain on the board, he intends to resign as Chairman shortly
before lululemon's annual meeting in June 2014. (Id.) The company's Annual
Report on Form 10-K that was filed on March 21, 2013 states that Wilson "controls
a significant percentage of our stock and is able to exercise significant influence
over our affairs," and that he "is able to influence or control ... the election of
directors." (Id.)
Defendant John E. Currie has served as an Executive Vice President ("EVP")
and CFO at lululemon since January 2007. (Id.
~
51.) Defendant Sheree Waterson
served as Chief Product Officer until April 15, 2013, and previously served as EVP,
General Merchandise Management and Sourcing beginning in June 2008. (Id.
~
52.) Neither Currie nor Waterson are alleged to be or to have been directors.
B.
Lululemon
Nominal defendant lululemon is a Delaware corporation with its principal
executive offices in Vancouver, British Columbia. (Id.
~~
1, 48.)
Lululemon designs and sells premium athletic apparel and accessories,
including yoga pants, shorts, and tops. (Id.
~l
3.) Lululemon's business model
involves selling garments at high prices (approximately $100 per pair of pants and
$60 per shirt) based upon their purported high quality, offering minimal discounts,
and maintaining low store inventory to drive demand. (rd.
~'r
3, 70, 142.)
Lululemon's most important and popular products are women's fitness pants
designed from a proprietary material known as "luon." (Id.
4
~
71.)
During Day's tenure as CEO, the Company's apparel sales led to enormous
growth. (Id.
~
83.) In just a few short years, from 2009 to 2012, lululemon
quadrupled annual revenues to $1.37 billion, quadrupled gross profits to $763
million, and more than doubled its number of stores to over 200. (I d.) Fueled by
strong financial results, lululemon's stock price increased dramatically, from
approximately $4 per share at the beginning of 2009 to approximately $70 per share
at the end of 2012. (Id.
~
85.) Black-colored luon products, a significant driver of
sales, contributed substantially to this success. (rd.)
C.
The Alleged Wrongdoing
Plaintiffs allege that the Director Defendants were aware of certain "red
flags" concerning quality control issues at lululemon. Specifically, in November
2007, The New York Times revealed that the Company's "Vitasea" line of seaweed
fabric-which lululemon claimed released "marine amino acids, minerals, and
vitamins into the skin"-in fact contained no seaweed at all. (Id.
'r~
7, 90.)
Lululemon was forced to apologize for and withdraw its prior claims of the line's
health benefits and Wilson was forced to concede that in fact no tests had been
conducted to confirm the veracity of these claims. (Id.
~~
90, 91.)
In December 2010, it was revealed that the company shipped and distributed
reusable shopping bags that had been printed using ink containing high levels of
lead. (ld.
'[~
8, 94.)
5
In late 2011 and 2012, many customers complained that luon garments "bled"
when used during exercise, or when it came into contact with sweat or water. (Id.
'I~
9-10, 96, 100.)
In February and March 2013, customers began reporting that certain
brightly colored luon pant fabrics were sheer when worn. (Id.'1 106.) Lululemon
initially offered a disclaimer with these pmducts as to their "sheerness." (Id.)
Ultimately, however, following the close of trading on March 18, 2013, lululemon
announced a recall of its black luon pants and cmps, and offered refunds for all
affected products (the "Black Luon Recall," or the "Recall"). (Id.
~
107.) This
resulted in a reduction in the company's revenue guidance for the first quarter of
2013 by approximately $20 million, or 5%, from $350-$355 million to $333-$343
million. (Id.) The company announced three days later that lululemon expected to
lose $57-$67 million in revenue and $0.25-$0.27 in earnings per share ("EPS")
during the 2013 fiscal year due to the Recall. (Id.)
Day's resignation from lululemon was announced in an earnings press
release on June 10,2013, after the close of trading that day. (Id.
~~
129, 168.)
Media reports suggested that her departure was tied to the Black Luon Recall. (Id.
~~
130-31.)
According to news reports in October 2013, lululemon continued to receive
additional complaints about the transparency of its yoga pants following the Recall,
as well as "pilling"-small balls of fabric accumulating on the surface of the product.
(Id.
'1 133.)
On December 12, 2013, lululemon announced a $30 million cut to
6
earnings guidance for the fourth quarter of 2013, or nearly 5%. (Id. '1)138.) On
January 13, 2014, the company revised its fourth quarter 2013 revenue and EPS
projections downward due to a "meaningful" drop in sales attributed to quality
control failures and related events. (Id. '1)177.)
On June 7, 2013, Wilson sold 607,545 lululemon shares for proceeds of nearly
$50 million. (Id. '1)196.) This was the largest single day sale he ever made. (Id. 'I)
197.) All told, between June 4 and June 7,2013, Wilson sold one million lululemon
shares for proceeds totaling $81 million at stock prices near lululemon's all-time
high. (Id.) These sales constituted more than half of all of his sales during the
Relevant Period. (Id.
~1197.)
Over a six-month span during the Relevant Period, \Vilson sold almost 2.3
million lululemon shares for proceeds of over $184 million. (Id.
~r
194.) Plaintiffs
challenge Wilson's trades from June 4-7, 2013 as suspicious based on the timing of
the announcement of Day's resignation-after the close of trading on June 10,
2013-and the fact that the Board was informed of her resignation on June 7 (the
previous Friday). (Id. '1)'1) 33, 169.) Plaintiffs cite media reports which state that
Day's resignation announcement was "unexpected." (Id. '1)171.) Plaintiffs allege
that the Director Defendants and the members of the Audit Committee "caused" the
press release disclosing Day's resignation to be issued on June 10, 2013. (Id. 'I)
208.bj.)
Plaintiffs allege that Wilson's stock sales were made pursuant to "a pre
arranged stock trading plan that Wilson agreed to in December 2012." (Id. 'I) 32.)
7
Plaintiffs allege that Wilson's trading plan allowed him to selliululemon stock on a
semi-regular basis, and up to 6.7 million shares over an eighteen-month period. (ld.
~I
196.) Plaintiffs further allege that the trading plan did not establish pre-set
amounts for each planned sale, and that there were no limits placed on Wilson's
discretion regarding the size of these sales. (ld.
~'I
32 n.6, 196.)
As compared to the company's stock price at the end of the day on June 10,
2013, lululemon's stock price fell by nearly 18% by the end of the day on June 11,
2013, and by a total of 22% by the end of the day on June 12, 2013. (ld. '1'1 170-71.)
During the Relevant Period, Day sold 196,043 shares of lululemon stock for
over $14 million. (ld.'1 200.) Plaintiffs allege that Day capitalized on spikes in the
stock price in September 2012, December 2012, and September 2013 following
statements she issued concerning the company's quality assurance issues. (rd.
~~
201-03.)
D.
April 30, 2013 Proxy Statement
Plaintiffs allege that "Defendants"3 caused lululemon to disseminate a proxy
statement dated April 30, 2013 (the "2013 Proxy") to shareholders in connection
with the company's annual shareholder meeting. (Id.
~
204.) Plaintiffs allege that
"Defendants drafted, approved, reviewed and/or signed the 2013 Proxy before it was
filed with the SEC and disseminated to Lululemon shareholders." (rd.) Plaintiffs
allege that "Defendants knew, or were deliberately reckless in not knowing, that the
2013 Proxy was materially false and misleading." (Id.)
3
Plaintiffs use the term "Defendants" to refer to all thirteen defendants in both actions.
8
The two pieces of the 2013 Proxy that are excerpted in the Amended
Complaint concern defendants Day and Wilson. With respect to Day, the 2013
Proxy describes her history with the company, her prior work history, her service on
other boards of directors, and her educational background. (Id.) The 2013 Proxy
states: "Our board of directors selected Ms. Day to serve as director because she is
our Chief Executive Officer and she has extensive experience in sales and
marketing, managing retail focused operations, international operations, corporate
finance and strategic planning." (Id.)
With respect to Wilson, the 2013 Proxy notes that \Vilson's current position is
Chairman of the Board. (Id.) The 2013 Proxy states: "Our board of directors
believes that Mr. Wilson, as the founder of lululemon, is in a unique position to
support continuity in both the product vision and the cultural values of our
company that have been an integral part of our success, and his role as Chairman of
the Board enables him to be more effective in this role." (Id.)
II.
LEGAL STANDARDS
A.
Rule 23.1 Pleading Requirements
Defendants move to dismiss the complaint under Federal Rule of Civil
Procedure 23.1. Rule 23.1 requires that a plaintiff in a shareholder derivative
action "state with particularity ... any effort by the plaintiff to obtain the desired
actions from the directors ... and ... the reasons for not obtaining the action or not
making the effort." Fed. R. Civ. P. 23.1(b)(3). This rule sets forth a "rule of
pleading" as to "the specificity of facts alleged with regard to efforts made to urge a
9
corporation's directors to bring the action in question," which is referred to as
"demand" on the corporation. Halebian v. Berv, 590 F.3d 195, 206 n.7 (2d Cir. 2009)
(internal quotation marks and citation omitted).
The "adequacy" of a plaintiffs pre-suit demand efforts "is to be determined by
state law absent a finding that application of state law would be inconsistent with a
federal policy underlying a federal claim in the action." Id. (internal quotation
marks and citation omitted). It is undisputed that lululemon is a Delaware
corporation and that Delaware law thus governs. See Scalisi v. Fund Asset Mgmt.,
L.P., 380 F.3d 133, 138 (2d Cir. 2004) ("The substantive law which determines
whether demand is, in fact, futile is provided by the state of incorporation of the
entity on whose behalf the plaintiff is seeking relief.").
'''In contrast to a motion to dismiss pursuant to Rule 12(b)(6), a Rule 23.1
motion to dismiss for failure to make a demand is not intended to test the legal
sufficiency of the plaintiffs' substantive claim. Rather, its purpose is to determine
who is entitled, as between the corporation and its shareholders, to assert the
plaintiffs underlying substantive claim on the corporation's behalf.'" In re SAIC
Inc. Derivative Litig., 948 F. Supp. 2d 366, 376 (S.D.N.Y. 2013) (citation omitted).
"'Because Rule 23.1 requires that plaintiffs make particularized allegations, it
imposes a pleading standard higher than the normal standard applicable to the
analysis of a pleading challenged under Rule 12(b)(6).'" In re Am. Int'l Grp., Inc.
Derivative Litig,., 700 F. Supp. 2d 419, 430 (S.D.N.Y. 2010), affd, 415 F. App'x 285
(2d Cir. 2011) (citation omitted).
10
B.
The Demand Requirement
Derivative suits permit "an individual shareholder to bring 'suit to enforce a
corporate cause of action against officers, directors, and third parties.'" Kamen v.
Kemper Fin. Servs., 500 U.S. 90, 95 (1991) (emphasis in original) (citing Ross v.
Bernhard, 396 U.S. 531, 534, (1970».
Under Delaware law, "[a] stockholder may not pursue a derivative suit to
assert a claim of the corporation unless the stockholder: (a) has first demanded that
the directors pursue the corporate claim and the directors have wrongfully refused
to do so; or (b) establishes that pre-suit demand is excused because the directors are
deemed incapable of making an impartial decision regarding the pursuit of the
litigation." Wood v. Baum, 953 A.2d 136, 140 (Del. 2008). "[T]he demand
requirement implements 'the basic principle of corporate governance that the
decisions of a corporation-including the decision to initiate litigation-should be
made by the board of directors or the majority of shareholders.'" Kamen, 500 U.S.
at 101 (citation omitted). "[T]he demand requirement is a recognition of the
fundamental precept that directors manage the business and affairs of
corporations." Aronson v. Lewis, 473 A.2d 805,811 (Del. 1984).
"The purpose of the demand requirement is to affor[d] 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." Kamen, 500 U.S. at 96 (internal quotation marks and
citations omitted). In short, "[t]he purpose of requiring a precomplaint demand is to
11
protect the directors' prerogative to take over the litigation or to oppose it." Id. at
101. "A board may in good faith refuse a shareholder demand to begin litigation
even if there is substantial basis to conclude that the lawsuit would eventually be
successful on the merits. It is within the bounds of business judgment to conclude
that a lawsuit, even iflegitimate, would be excessively costly to the corporation or
harm its long-term strategic interests." In re InfoUSA, Inc. S'holders Litig., 953
A.2d 963,986 (Del. Ch. 2007).
These interests are particularly relevant where, as here, a shareholder
derivative action seeks recovery on the basis of the same allegations alleged against
the company in a federal securities class action also pending before this Court. 4 See
South v. Baker, 62 A.3d 1, 25 (Del. Ch. 2012) (noting that the pursuit of a derivative
action during the pendency of other related litigation against the corporation "may
well compromise the corporation's position on the merits, thereby causing or
exacerbating precisely the harm that the ... plaintiff ostensibly seeks to remedy").
C.
When Demand Is Excused
Under Delaware law, demand is not required if the facts pled show that such
demand would have been futile. Aronson, 473 A.2d at 808. Demand is futile when,
"under the particularized facts alleged, a reasonable doubt is created that: (1) the
directors are disinterested and independent and (2) the challenged transaction was
4 As is described in detail in defendants' opening brief, the allegations in the Amended Complaint are
not only related to those advanced by lead plaintiffs in In re Lululemon Securities Litigation, 13 Civ.
4596 (KBF), they are in many instances copied verbatim or with minimal conforming changes from
the operative complaint in that action. (See Mem. of Law at 7-8, ECF No. 22.) This dramatic degree
of overlap further heightens the importance of the demand requirement for bringing a derivative
action as applied to the facts and circumstances of the instant actions.
12
otherwise the product of a valid exercise of business judgment." Id. at 814. In cases
where plaintiffs allege that board inaction, rather than board action, renders
demand futile, courts focus on the first prong of the Aronson test. In such cases,
courts must determine whether 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."
Rales v. Blasband, 634 A.2d 927,934 (Del. 1993); see also Wood, 953 A.2d at 140
(describing situations in which to apply the Aronson and Rales tests).
In light of the allegations in the Amended Complaint and the arguments
provided in opposition to the instant motions-that the Defendant Directors caused,
allowed, or permitted lululemon to disseminate false and misleading information,
failed to maintain internal controls, and failed to take action as to Wilson's June
2013 stock sales 5 (see Am. Compl.
~~I
208(b)-(f); Opp. at 17-22, ECF No. 24)-there
can be no dispute that the allegations in these actions implicate the Rales test for
demand futility concerning board inaction.
The reasonable doubt standard "can be said to mean that there is a reason to
doubt"; "[t]his concept is sufficiently flexible and workable to provide the
stockholder with 'the keys to the courthouse' in an appropriate case where the claim
is not based on mere suspicions or stated solely in conclusory terms." Grimes v.
Though plaintiffs argue that the Defendant Directors "facilitated" Wilson's June 2013 stock sales,
the manner of facilitation they allege is failing to act so as to stop Wilson from executing those sales.
(Opp. at 17-18.) Plaintiffs do not allege that lululemon's directors made a decision to make false or
misleading statements, or to fail to maintain internal controls, so "the subject of the derivative suit is
not a business decision of the board." Rales, 634 A.2d at 934.
5
13
Donald, 673 A.2d 1207, 1217 (Del. 1996). Though the reasonable doubt standard
does not require plaintiffs to demonstrate a reasonable probability of success on the
merits, see Rales, 634 A.2d at 934, it does not water down the pleading threshold
requiring that reasonable doubt be pled with particularized facts sufficient to
overcome the presumption that directors are "faithful to their fiduciary duties."
Beam ex reI. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d at 1050
n.26, 1048-49 (Del. 2004). Courts "draw all reasonable inferences in the plaintiffs
favor," but only if they "logically flow from particularized facts alleged by the
plaintiff." Wood, 953 A.2d at 140 (quoting Beam, 845 A.2d at 1048).
Under Delaware law, plaintiffs who are seeking to allege such reasonable
doubt may do so in at least two ways. First, plaintiffs must allege particularized
facts that "show that a given director is personally interested in the outcome of the
litigation, in that the director will personally benefit or suffer as a result of the
lawsuit." InfoUSA, 953 A.2d at 985. The "existence of some financial ties between
the interested party and the director, without more, is not disqualifying"; "[t]he
inquiry must be whether, applying a subjective standard, those ties were material,
in the sense that the alleged ties could have affected the impartiality of the
individual director." Kahn v. M & F Worldwide Corp., No. 334, 2013, 2014 WL
996270, at *10 (Del. Mar. 14, 2014) (citations omitted).
Second, plaintiffs must allege particularized facts that demonstrate a director
faces a substantial likelihood of liability related to the subject of the proposed
demand. See, e.g., Ryan v. Gifford, 918 A.2d 341, 355 (Del. Ch. 2007) (internal
14
quotation marks and citation omitted). A '''mere threat of personal liability ... is
insufficient to challenge either the independence or disinterestedness of directors'"
in order to excuse demand. Wood, 953 A.2d at 141 n.11 (quoting Aronson, 473 A.2d
at 815). "Without a substantial threat of director liability, a court has no reason to
doubt the board's ability to address the corporate trauma and evaluate a related
demand." South, 62 A.3d at 14. "A simple allegation of potential directorial
liability is insufficient to excuse demand, else the demand requirement itself would
be rendered toothless, and directorial control over corporate litigation would be
lost." In re Goldman Sachs Grp., Inc. S'holder Litig., Civ. A. No. 5215-VCG, 2011
WL 4826104, at *18 (Del. Ch. Oct. 12, 2011).
"[A] derivative complaint must plead facts specific to each director,
demonstrating that at least half of them could not have exercised disinterested
business judgment in responding to a demand." Desimone v. Barrows, 924 A.2d
908,943 (Del. Ch. 2007); see Blaustein v. Lord Baltimore Capital Corp., 84 A.3d
954, 958 (Del. 2014) ("[A] plaintiff must allege with particularity that a majority of
the board lacks independence or is otherwise incapable of validly exercising its
business judgment."). The "'group' accusation mode of pleading demand futility" is
insufficient. In re Citigroup Inc. S'holder Derivative Litig., 964 A.2d 106, 121 n.36
(Del. Ch. 2009); see In re ITT Corp. Derivative Litig., 588 F. Supp. 2d 502,511
(S.D.N.Y. 2008) ("Whether the Directors face a substantial likelihood of liability
must be determined on a director-by-director basis, and thus Plaintiffs' conflation of
all the directors into a single entity is insufficient under Rule 23.1.").
15
In sum, alleging that demand is excused is "a difficult feat." Ryan, 918 A.2d
at 352 n.23 (Del. Ch. 2007). "[C]onsistent with the long-standing principle that
directors and not shareholders manage a corporation, the Delaware precedents on
demand futility make clear that the bar is high, the standards are stringent, and
the situations where demand will be excused are rare." Pirelli Armstrong Tire
Corp. Retiree Med. Benefits Trust v. Raines, 534 F.3d 779,782·83 (D.C. Cir. 2008).
III.
DISCUSSION
In the Amended Complaint, plaintiffs allege one federal claim-violation of
Section 14(a) of the Securities Exchange Act and Rule 14a·9 thereunder as a result
of alleged false or misleading statement in the 2013 Proxy (Count VII). Plaintiffs
allege two sets of state law claims: (1) breach of fiduciary duty for (i) disclosure
violations (Count I), (ii) failures to maintain internal controls (Count II), and (iii)
insider trading (Count IV), and (2) claims arising out of the alleged breaches of
fiduciary duty: (i) unjust enrichment (Count III), (ii) abuse of control (Count V), and
(iii) gross mismanagement (Count VI). All of plaintiffs' claims are asserted against
all defendants except the Count IV insider trading claim, which is asserted against
defendants Wilson and Day only.
Plaintiffs concede that no demand to institute these actions was made on
lululemon's Board of Directors; instead, plaintiffs allege demand is futile and
excused. (See Am. CompI.
,r 208.)
Plaintiffs further concede that, because the
Board consisted of the eleven Director Defendants at the time these actions were
initiated
~),
plaintiffs must raise a reasonable doubt as to the disinterestedness or
16
independence of six directors in order to adequately plead demand futility.6 (Opp.
at 12.) Even assuming, without deciding, that demand is excused as to Wilson and
Day, plaintiffs fail to allege the kind of particularized allegations required by Rule
23.1 and Delaware law as to any (let alone four) Director Defendants.
Plaintiffs argue that demand is excused as to all Director Defendants for two
sets of reasons: (A) that the Director Defendants' "conscious inaction in the face of
Wilson's illicit trading is the result of a lack of independence and domination of
Wilson over the Board" (Opp. at 18); and (B) that the Director Defendants' face a
substantial likelihood of liability because they consciously or recklessly disregarded
"red flags" concerning lululemon's quality control issues Cid. at 20.)
These arguments are without merit.
A.
Control and Domination by Wilson
Plaintiffs argue that the allegations in the Amended Complaint as to Wilson's
stock sales, their timing, and the Board's knowledge of those sales, coupled with
more general allegations about Wilson's control and influence over the Board, are
sufficient to plead demand futility as to all Director Defendants. CId. at 18-19.)
According to plaintiffs, "the only reasonable, common sense, pragmatic inference
fairly drawn from the facts is that the Board cannot act independently or with
disinterest here." ilil at 19.) At oral argument, plaintiffs' counsel articulated this
argument more bluntly: demand is excused as to at least the four Director
Defendants who were members of the Audit Committee because they failed to take
6 Non-Director Defendants Currie and Waterson are not relevant to determining whether demand is
futile. See In re Forest Labs.. Inc. Derivative Litig., 450 F. Supp. 2d 379, 381 (S.D.N.Y. 2006).
17
any punitive action toward Wilson after learning of his June 2013 trading, and that
this failure shows both domination and control by Wilson and a substantial
likelihood of liability for these Director Defendants. 7 (See 4/4114 Tr. at 59-66.)
The Court disagrees with both formulations of plaintiffs' argument. Under
Delaware law, plaintiffs "must plead facts that would support the inference that
because of the nature of a relationship or additional circumstances ... the noninterested director would be more willing to risk his or her reputation than risk the
relationship with the interested director." Beam, 845 A.2d at 1052. Whether
plaintiffs have pled sufficient facts must be resolved on a director-by-director basis
through an analysis of the particularized factual allegations. Khallna v. McMinn,
No. Civ. A. 20545-NC, 2006 WL 1388744, at *15 (Del. Ch. May 9, 2006).
The allegations in the Amended Complaint fall far short of this standard.
Plaintiffs fail to plead particularized allegations as to the disinterestedness or
independence of any of the Director Defendants as it relates to \Vilson and his June
2013 trading. Plaintiffs primarily rely on an argument that Wilson allegedly
engaged in insider tl'ading prior to Day's resignation announcement on June 10,
2013, that the Director Defendants knew it at that time or very shortly thereafter,
and by doing nothing, demonstrated their lack of independence. The allegations in
7 Plaintiffs' assertion that demand is excused because the Director Defendants faced a substantial
likelihood of liability is discussed more fully in Section III.B infra. Though plaintiffs' counsel
suggested at oral argument that this liability was for aiding and abetting Wilson's alleged insider
trading
4/4/14 Tr. at 62), no such claim is asserted against the Director Defendants in the
Amended Complaint. (Count IV, for state law insider trading, is asserted against Wilson and Day
only.) Further, any breach of fiduciary duty claim premised on the Director Defendants' conduct
related to Wilson's June 2013 trading fails for the same reasons set forth herein-plaintiffs do not
plead particularized facts as to the knowledge of any Director Defendants that Wilson's trading was
inconsistent with his trading plan, and instead ask the Court to make unreasonable inferences as to
their motivations for alleged inaction.
18
Amended Complaint do not support this story or the inferences plaintiffs urge this
Court to make.
First, though plaintiffs allege that the Director Defendants knew of Day's
resignation no later than June 7, 2013
Am. CompI. , 198), they do not allege
any facts as to the Director Defendants' knowledge of Wilson's trading during the
period June 4-7,2013. Second, though plaintiffs allege that Wilson's stock sales
were made pursuant to a trading plan that was executed in December 2012 and
permitted stock sales on a semi-regular basis
id.
,~
32 n.6, 195), they do not
allege any facts that show vVilson's trading was inconsistent with that plan. s Third,
though plaintiffs allege that both \Vilson's trading and the fact that he had a
trading plan were public knowledge
4/4/14 Tr. at 59-61; Am. Compi.
~~
33,
198), they do not allege any facts that tend to show that the Director Defendants
knew Wilson's trading was inconsistent with that plan.
Instead, plaintiffs ask this Court to infer that the Director Defendants were
under such domination and control by Wilson that they deliberately exposed
themselves to the risk of individual liability related to Wilson's June 2013 trading,
which they believed to be improper, rather than resigning from the Board. Though
Wilson may have exercised significant influence over the Board and the company's
Though Wilson's trading plan is explicitly referenced in the Amended Complaint, the plan itself has
not been submitted in connection with the instant motions. Wilson's trading plan was filed under
seal as an exhibit in support oflululemon's motion to dismiss in the related securities class action.
See In re Lululemon Sec. Litig., No. 13 Civ. 4596 (KBF), ECF No. 52-1 (S.D.N.Y. Feb. 18,2014). The
Court need not reach the issue of whether Wilson's trading plan is properly considered on the instant
motion to dismiss because, even accepting plaintiffs' allegations about Wilson's trading and his
trading plan as true, plaintiffs fail to allege facts sufficient to excuse demand on this basis.
8
19
culture, there are no particularized allegations in the Amended Complaint that
credibly suggest such a conclusion.
Plaintiffs also fail to allege particularized facts that tend to show Wilson
controlled and dominated the Director Defendants because they supposedly
"facilitated" Wilson's re-election to the Board by not disclosing "internal turmoil" at
lululemon. (Opp. at 18-19; Am. CompI.
~
236.) As is discussed in Section III.B.1
plaintiffs fail to allege particularized facts that tend to show that the 2013
Proxy associated with this election was materially false or misleading at the time it
was issued. Plaintiffs fail to allege any particularized facts that tend to show that
the Director Defendants prepared or were directly responsible for these disclosures;
in fact, the general allegations that the Director Defendants caused or allowed
lululemon to issue certain statements (see Am CompI. ,; 211) are the kind of
allegations that courts often find insufficient for the purpose of excusing demand.9
See Citigroup, 964 A.2d at 133 n.88, 134; see also In re Goldman Sachs Mortg.
Servicing S'holder Derivative Litig., No. 11 Civ. 4544 (WHP), 2012 WL 3293506, at
*9 (S.D.N.Y. Aug. 14, 2012) (citing Citigroup, 964 A.2d at 132-34).
In sum, plaintiffs' allegations concerning Wilson's stock sales, as they relate
to the Director Defendants, are general and conclusory rather than factual and
specific, and thus fail to overcome the presumption of directorial independence and
to excuse demand.
The Court notes that plaintiffs did not respond to this argument in either their opposition papers or
at oral argument in any meaningful way.
9
20
B.
Substantial Likelihood of Liability
Plaintiffs next argue, in substance, that the Director Defendants face a
substantial likelihood of liability, so as to excuse demand, because they were on
notice of red flags concerning quality control issues at lululemon and failed to act in
order to correct them. (Opp. at 20-22.) This argument, viewed in context of each of
the claims alleged in the Amended Complaint against the Director Defendants, 10 is
without merit. Plaintiffs fail to allege a substantial likelihood of liability for any of
the Director Defendants as to any of these claims.
1.
Section 14(a) of the Securities Exchange Act (Count VIn
Liability under Section 14(a) and Rule 14a-9 thereunder requires, inter alia,
a materially false or misleading statement in a proxy statement. See 17 C.F.R. §
240.14a-9 ("[n]o solicitation subject to this regulation shall be made by means of any
proxy statement ... containing any statement which ... is false or misleading"); In
re J.P. Morgan Chase Sec. Litig., 363 F. Supp. 2d 595, 636 (S.D.N.Y. 2005)
(requiring "a material misrepresentation or omission"); see also Koppel v. 4987
Corp., 167 F.3d 125, 131 (2d Cir. 1999). Additionally, the Private Securities
Litigation Reform Act requires that plaintiffs "shall specifY each statement alleged
to have been misleading, the reason or reasons why the statement is misleading,
and, if an allegation regarding the statement or omission is made on information
and belief, the complaint shall state with particularity all facts on which that belief
is formed." 15 U.S.C. § 78u-4(b)(1).
10 As noted above, plaintiffs assert all claims against Director Defendants except for the Count IV
state law insider trading claim, which is asserted against Wilson and Day only.
21
The basis for plaintiffs' Section 14(a) claim is that the statements in the 2013
Proxy were "false and misleading" when they were made because they "facilitated
Defendant \Vilson's re-election to the Board" by not disclosing "internal turmoil at
Lululemon that would result in Defendant Day either stepping down or being
effectively fired after the close of business on June 10, 2013." (Am. CompI.
~
236.)
As described in Section LD infra, the 2013 Proxy, as excerpted in the
Amended Complaint, contains two paragraphs related Day and Wilson. The 2013
Proxy contains factual statements about Day's history with the company, her prior
wor k history, her service on other boards of directors, and her educational
background. (Id.
~
204.) It further states that Day was selected as a directol'
because of this extensive experience. (Id.) With respect to Wilson, the 2013 Proxy
states that Wilson is the Chairman of the Board, and that the Board "believes that
Mr. Wilson, as the founder oflululemon, is in a unique position to support
continuity in both the product vision and the cultural values of our company that
have been an integral part of our success, and his role as Chairman of the Board
enables him to be more effective in this role." (Id.)
Plaintiffs fail to allege that any of the assertions in the 2013 Proxy contained
material misrepresentations or omissions when made. Plaintiffs do not allege that
any of the factual statements about Day and \Vilson were inaccurate. Further,
plaintiffs do not allege particularized facts that indicate the Director Defendants
did not believe that Day was selected as a director because of her experience, or did
not believe that Wilson was not in the "unique position" so described. This is due,
22
in large part, to the fact that plaintiffs allege no particularized facts that any of the
Director Defendants had knowledge or believed that Day's resignation was
"imminent," or that she would announce her resignation in June 2013, as of April
30, 2013. The failure to disclose unspecified "internal turmoil" in the 2013 Proxy
thus does not constitute an actionable omission. The allegations in the Amended
Complaint thus fail to create a substantial likelihood of liability as to any of the
Director Defendants under Section 14(a) as a result of the 2013 Proxy.
2.
Breach of Fiduciary Duty: Disclosure Violations (Count
n
To the extent plaintiffs allege that the Director Defendants face a substantial
likelihood of liability with respect to state law disclosure violations for other false
and misleading statements not made in connection with a request for shareholder
action, plaintiffs must allege that the Director Defendants deliberately misinformed
shareholders or knowingly disseminated false information. See In re Nine Sys.
Corp. S'holders Litig., Consol. C.A. No. 3940-VCN, 2013 WL 771897, at *9 (Del. Ch.
Feb. 29, 2013); Citigroup, 964 A.2d at 132 (quoting Malone v. Brincat, 722 A.2d 5,
14 (Del. 1998». Plaintiffs fail to do so for any of the Director Defendants with the
required particularity. At most, the Amended Complaint alleges that the Director
Defendants "caused" or "filed" certain financial reports with the SEC, or issued
certain press releases, that include statements as to the quality oflululemon's
products. (See Am. CompI.
~~1145,
149, 157, 161-64, 172-73.) Nevertheless, as
defendants note, (1) the execution of "financial reports, without more, is insufficient
to create an inference that the directors had actual or constructive notice of any
23
------------
.
illegality," Wood, 953 A.2d at 142; and (2) as is discussed in Section lILA, supra,
plaintiffs fail to allege any particularized facts suggesting that the Director
Defendants prepared or were directly responsible for these statements such that
demand would be excused.
3.
Breach of Fiduciary Dutv: Failure to "Maintain Internal
Controls" (Count II)
Plaintiffs allege that the Director Defendants face a substantial likelihood of
liability with respect to Count II because they "willfully ignored the obvious and
pervasive problems with Lululemon's internal control practices and procedures and
failed to make a good faith effort to correct the problems or prevent their
recurrence." (Am. CompI.
~r
215.) Plaintiffs expressly disclaim that either Count II
or the other Counts in the Amended Complaint allege a duty of care claim based on
In re Caremark International Derivative Litigation, 698 A.2d 959 (DeL Ch. 1996).
(See Opp. at 22 n.19.)1l
Plaintiffs argue that the factual basis for this claim is three "widely
publicized 'red flags': (1) in 2007 ... the Company was forced to withdraw claims
that its clothing incorporating seaweed fiber provided health benefits ([Am. CompL]
~r~
186-88); (2) in December 2010, it was revealed that the Company ... had
11 To the extent any such claim is embedded in Count II or any of the other Counts, the Court finds
that it also does not serve as a basis to excuse demand. Lululemon's shareholders have adopted an
amendment to the company's certificate incorporation which, inter
eliminates director liability
"[t]o the fullest extent permitted" by Delaware law (Allerhand Dec!. Ex. A, Art. IX, § 9.1, ECF No.
23), which, under Del. Code Ann. tit. 8, § 102(b)(7), "authorizes Delaware corporations ... to
exculpate their directors from monetary damage liability for a breach of the duty of care." In re Walt
Disney Co. Derivative Litig., 906 A.2d 27, 65 (Del. 2006). Courts consider similar exculpatory
provisions to that contained in the lululemon certificate of incorporation in determining whether
plaintiffs have alleged facts showing a substantial likelihood of liability that would excuse demand.
Wood, 953 A.2d at 141; Citigroup, 964 A.2d at 124-25.
24
shipped and distributed shopping bags that were printed using ink that contained
high levels of lead ([id.J
'r~
189-90); and ... (3) in late 2011, and early 2012,
numerous Lululemon customers complained that Lululemon's garments were
defective (including garments that contained luon) because their colors bled ... or
became sheer ([id.]
~'f
191-92)." (Opp. at 21.)
At most, these instances reflect three quality control issues faced by the
company since 2007, two of which had nothing to do with luon pants. Plaintiffs fail,
however, to allege what if anything the Director Defendants did or failed to do in
response to these alleged red flags, including whether or not the Director
Defendants consulted management or otherwise investigated these issues. See
Citigroup, 964 A.2d at 128-29; see also La. Mun. Police Emps. Ret. Sys. v. Pandit,
No. 08 Civ. 7389 (LTS), 2009 'VL 2902587, at *8 (S.D.N.Y. Sept. 10,2009).
Accordingly, plaintiffs fail to allege with particularity a substantial likelihood of
liability as to Count II as would excuse demand on the Director Defendants. 12
4.
Claims Arising Out of Alleged Breaches of Fiduciary Duties
(Counts III, V, and VI)
Plaintiffs' claims for unjust enrichment, abuse of control, and gross
mismanagement against the Director Defendants are premised on the same alleged
breaches of fiduciary duty described above
Am. CompI.
~~
218, 226, 231-33),
and which the Court has found fail to create a substantial likelihood of liability for
12 Plaintiffs also fail to plead particularized allegations giving rise to a substantial likelihood of
liability as to any of the Director Defendants arising out of Wilson's June 2013 trading. See Section
lILA, supra.
25
the Director Defendants so as to excuse demand. Demand is thus also not excused
on the basis of these claims.
IV.
CONCLUSION
For the reasons set forth above, defendants' motion to dismiss the Amended
Complaint pursuant to Rule 23.1 is GRANTED, because plaintiffs have failed to
adequately allege particularized facts showing demand on lululemon's Board of
Directors was excused. The Court thus DISMISSES the complaint without
prejudice, in the event plaintiffs seek to pursue these claims after making a demand
on the Board.
Accordingly, the pending motions to intervene by the Laborers' District
Council Construction Industry Pension Fund and the Hallandale Beach Police
Officers and Firefighters' Personnel Retirement Fund are DENIED as moot.
The Clerk of Court is directed to close the motions at ECF Nos. 21, 36, and 43
in 13 Civ. 5629, and ECF Nos. 22, 37, and 44 in 13 Civ. 5977. The Clerk of Court is
also directed to close both actions.
SO ORDERED.
Dated:
New York, New York
April~, 2014
KATHERINE B. FORREST
United States District Judge
26
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