Freuler v. Parker et al
Filing
36
OPINION AND ORDER granting without prejudice #17 Motion to Dismiss; granting without prejudice #18 Motion to Dismiss; granting without prejudice #19 Motion to Dismiss; granting without prejudice #20 Motion to Dismiss; granting without prejudice #22 Motion to Dismiss. Plaintiff is GRANTED LEAVE to file an amended complaint witin 20 days if he can meet the pleading requirements set out in this opinion or he shall inform theCourt that he does not with to pursue this suit. If an amended pleading is filed, defts shall file a timely response.(Signed by Judge Melinda Harmon) Parties notified.(htippen, )
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
DOUGLAS FREULER, derivatively on§
behalf of Parker Drilling
§
Company,
§
§
Plaintiff,
§
§
VS.
§
§
ROBERT L. PARKER, JR., ROBERT
§
L. PARKER, JOHN W. GIBSON, ROGER§
B. PLANK, R. RUDOLPH REINFRANK, §
ROBERT E. MCKEE, III, GEORGE J. §
DONNELLY, ROBERT W. GOLDMAN,
§
GARY R. KING, DAVID C. MANNON, §
JAMES W. WHALEN, W. KIRK
§
BRASSFIELD, LYNN G. CULLOM, and §
DIES 1 through 20, inclusive,
§
§
Defendants,
§
§
-and§
§
PARKER DRILLING COMPANY,
§
a Delaware corporation,
§
§
Defendants.
§
CIVIL ACTION H-10-3148
OPINION AND ORDER
Plaintiff Douglas Freuler, derivatively on behalf of Parker
Drilling Company (“Parker Drilling” or the “Company”), alleges that
Individual Defendants, all of whom are officers and Directors of
Parker Drilling, failed to adequately oversee corporate compliance
activities that were (1) in violation of the Foreign Corrupt
-1-
Practices Act of 1977 (“FCPA”), 15 U.S.C. Sec. 78dd-1 et seq.,1
and, indeed, even authorized improper payments to the Company’s
employees, representatives, agents and/or contractors to allow them
to participate in such illegal activities; and (2) in violation of
the reporting requirements of the Securities Exchange of 1934, 15
U.S.C. § 78m(b)(2)(A-B),2 by causing or allowing the Company to
file false and misleading statements with the U.S. Securities and
1
Under the FCPA, it is unlawful for United States issuers of
United States-registered securities, or anyone acting on their
behalf to bribe any foreign official in order to obtain or retain
business. 15 U.S.C. Sec. 78 dd-1. Shareholder Plaintiff Douglas
Freuler, derivatively on behalf of Parker Drilling, states in his
complaint that Parker Drilling stock is traded on the New York
Stock Exchange under the symbol “PKD” and that as an issuer of
United States-registered securities; thus it is subject to the
FCPA.
2
Section 78m(b)(2)(A-B) requires every issuer that has a
class of securities registered pursuant to section 78/ of this
title and every issuer which is required to file reports pursuant
to 78o(d) of this title to
(A) make and keep books, records, and accounts, which, in
reasonable detail accurately and fairly reflect the
transactions and dispositions of the assets of the
issuer;
(B) devise and maintain a system of internal accounting
controls sufficient to provide reasonable assurance that(i) transactions are executed in accordance
management’s general or specific authorization;
with
(ii) transactions are recorded as necessary (I) to permit
preparation of financial statements in conformity with
generally accepted accounting principles or any other
criteria applicable to such statements, and (II) to
maintain accountability for assets . . . .
-2-
Exchange Commission (“SEC”), which failed to reflect the amount and
purpose of payments made in violation of the FCPA. Plaintiff seeks
to recover damages against Individual Defendants for breaches of
fiduciary duties, abuse of control, gross mismanagement, waste of
corporate assets, and unjust enrichment.3
Pending before the Court are the following motions:
(1) Nominal Defendant Parker Drilling’s motion to dismiss
for failure to make demand upon the Board of Directors of
Parker Drilling Company, pursuant to Federal Rules of
Civil Procedure 12(b)(6) and 23.1 (instrument #17),
joined
by
Defendants
Robert
W.
Goldman,
George
J.
Donnelly, and Gary R. King’s motion (#20);
(2) Defendants David C. Mannon, James W. Whalen, W. Kirk
Brassfield, and Lynn G. Cullon’s (collectively, “Moving
Defendants’”) motion to dismiss (#18) for failure to make
demand upon the Board of Directors before filing the
Amended Complaint;
(3) Defendants John W. Gibson, Jr., Robert E. McKee, III,
Roger B. Plank, and R. Rudolph Reinfrank’s (collectively,
3
The Court notes that claims for abuse of control, gross
mismanagement, and waste of corporate assets all arise from the
alleged breach of fiduciary duties and have been viewed as merely
repackaging the same issue under different causes of action rather
than as separate torts. Clark v. Lacy, 376 F.3d 682, 686-87 (7th
Cir. 2004)(applying Delaware law); In re Zoran Corp. Deriv. Litig.,
511 F. Supp. 2d 986, 1019 (N.D. Cal. 2007).
-3-
the “Director Defendants’”) motion to dismiss (#19) under
Rules 12(b)(6) and 23.1 and substantive Delaware law; and
(4) Robert L. Parker, Sr. and Robert L. Parker, Jr.’s
(also
collectively,
“Moving
Defendants’”)
motion
to
dismiss (#22) for failure to make demand upon Parker
Drilling Company’s Board of Directors.
Standard of Review
Procedural Rules
Federal Rule of Civil Procedure 8(a)(2) provides, “A pleading
that states a claim for relief must contain . . . a short and plain
statement of the claim showing that the pleader is entitled to
relief.”
pursuant
When a district court reviews a motion to dismiss
to
Fed.
R.
Civ.
P.
12(b)(6),
it
must
construe
the
complaint in favor of the plaintiff and take all well-pleaded facts
as true. Randall D. Wolcott, MD, PA v. Sebelius, 635 F.3d 757, 763
(5th Cir. 2011), citing Gonzalez v. Kay, 577 F.3d 600, 603 (5th Cir.
2009).
“While a complaint attacked by a Rule 12(b)(6) motion to
dismiss does not need detailed factual allegations, . . . a
plaintiff’s
obligation
‘entitle[ment]
to
to
relief’
provide
the
‘grounds’
requires
more
than
of
his
labels
and
conclusions, and a formulaic recitation of the elements of a cause
of action will not do . . . .”
S.
Ct.
1955,
1964-65
Bell Atlantic Corp. v. Twombly, 127
(2007)(citations
-4-
omitted).
“Factual
allegations must be enough to raise a right to relief above the
speculative level.”
Federal
Practice
Id. at 1965, citing 5 C. Wright & A. Miller,
and
Procedure
§
1216,
pp.
235-236
(3d
ed.
2004)(“[T]he pleading must contain something more . . . than . . .
a statement of facts that merely creates a suspicion [of] a legally
cognizable right of action”).
“Twombly jettisoned the minimum
notice pleading requirement of Conley v. Gibson, 355 U.S. 41 . . .
(1957)[“a complaint should not be dismissed for failure to state a
claim unless it appears beyond doubt that the plaintiff can prove
no set of facts in support of his claim which would entitle him to
relief”], and instead required that a complaint allege enough facts
to state a claim that is plausible on its face.”
St. Germain v.
Howard,556 F.3d 261, 263 n.2 (5th Cir. 2009), citing In re Katrina
Canal Breaches Litig., 495 F.3d 191, 205 (5th Cir. 2007)(“To survive
a Rule 12(b)(6) motion to dismiss, the plaintiff must plead ‘enough
facts to state a claim to relief that is plausible on its face.’”),
citing Twombly, 127 S. Ct. at 1974).
See also Alpert v. Riley, No.
H-04-CV-3774, 2008 WL 304742, *14 (S.D. Tex. Jan. 31, 2008).
“‘A
claim has facial plausibility when the pleaded factual content
allows
the
court
to
draw
the
reasonable
inference
that
the
defendant is liable for the misconduct alleged.’” Montoya v. FedEx
Ground Package System, Inc., 614 F.3d 145, 148 (5th Cir. 2010),
quoting Ashcroft v. Iqbal, 129 S. Ct. 1937, 1940 (2009). Dismissal
is appropriate when the plaintiff fails to allege “‘enough facts to
-5-
state a claim to relief that is plausible on its face’” and
therefore fails to “‘raise a right to relief above the speculative
level.’”
Montoya, 614 F.3d at 148, quoting Twombly, 550 U.S. at
555, 570.
Federal Rule of Civil Procedure 23.1(b), addressing pleading
requirements for derivative actions, imposes a higher pleading
standard than Rule 12(b)(6) and requires that
[t]he complaint must be verified and must
(1) allege that the plaintiff was a shareholder or member
at the time of the transaction complained of, or that the
plaintiff’s share or membership later devolved on it by
operation of law;
(2) allege that the action is not a collusive one to
confer jurisdiction that the court would otherwise lack,
and
(3) state with particularity:
(A) any effort by the plaintiff to obtain the
desired
action
from
the
directors
or
comparable authority and, if necessary, from
the shareholders or members; and
(B) the reasons for not obtaining the action
or not making the effort. [emphasis added by
the Court]
When a plaintiff’s complaint fails to state a claim, the court
should generally give the plaintiff at least one chance to amend
the complaint under Rule 15(a) before dismissing the action with
prejudice.
Great Plains Trust Co v. Morgan Stanley Dean Witter &
Co., 313 F.3d 305, 329 (5th Cir. 2002)(“District courts often afford
plaintiffs at least one opportunity to cure pleading deficiencies
-6-
before dismissing a case, unless it is clear that the defects are
incurable
or
the
plaintiffs
unwilling
or
unable
to
advise
amend
in
the
a
court
manner
that
that
they
will
are
avoid
dismissal.”); United States ex rel. Adrian v. Regents of the Univ.
of Cal., 363 F.3d 398, 403 (5th Cir. 2004)(“Leave to amend should
be freely given, and outright refusal to grant leave to amend
without a justification . . . is considered an abuse of discretion.
[citations omitted]”).4
Federal Rule of Civil Procedure 15(a) provides in relevant
part,
A party may amend the party’s pleading once as a matter
of course at any time before a responsive pleading is
served or, if the pleading is one to which no responsive
pleading is permitted and the action has not been placed
upon the trial calendar, the party may so amend it at any
time within 20 days after it is served.
Otherwise a
party may amend the party’s pleading only by leave of
court or by written consent of the adverse party; and
leave shall be freely given when justice so requires.
A court has discretion in deciding whether to grant leave to amend.
Foman v. Davis, 371 U.S. 178, 181 (1962).
Since the language of
the rule “‘evinces a bias in favor of granting leave to amend,” the
court must find a “substantial reason” to deny such a request.
Ambulatory Infusion Therapy Specialists, Inc. v. Aetna Life Ins.
Co., Civ. A. No. H-05-4389, 2006 WL 2521411, *3 (S.D. Tex. Aug. 29,
2006), quoting Smith v. EMC Corp., 393 F.3d 590, 595 (5th Cir.
4
Here Plaintiff filed his amended complaint before any
responsive pleadings to his original complaint had been filed, so
he did not have the benefit of input from Defendants or the Court.
-7-
2004), and Mayeaux v. La. Health Serv. & Indem. Co., 376 F.3d 420,
425
(5th
Cir.
2004).
Factors
for
the
court
to
consider
in
determining whether a substantial reason to deny a motion for leave
to amend include “undue delay, bad faith or dilatory motive on the
part of the movant, repeated failure to cure deficiencies by
amendments previously allowed, undue prejudice to the opposing
party, and futility of amendment.”
Wimm v. Jack Eckerd Corp., 3
F.3d 137, 139 (5th Cir. 1993).
Substantive Law
In a stockholder derivative suit, a stockholder pursues a
cause of action that belongs to the corporation. Aronson v. Lewis,
473 A.2d 805, 811 (Del. 1985), overruled on other grounds, Brehm v.
Eisner, 746 A.2d 244 (Del. 2000). Parker Drilling is a Delaware
corporation. Because Federal Rule of Civil Procedure 23.1 does not
identify applicable substantive standards, the particularity of a
plaintiff’s pleadings is governed by the standards of the state of
incorporation, here, Delaware.
Midwestern Teamsters Pension Trust
Fund v. Baker Hughes, Inc., Civ. A. No. H-08-1809, 2009 WL 6799492,
*4 ((S.D. Tex. May 7, 2009))citing Kamen v. Kemper Fin. Servs.,
Inc., 500 U.S. 90, 92-99 (1991)), adopted, 2010 WL 3359560 (S.D.
Tex. May 26, 2010).
In Delaware “[t]he decision whether to initiate or pursue a
lawsuit on behalf of the corporation is generally within the power
and responsibility of the board of directors.
-8-
This follows from
the ‘cardinal precept of the General Corporation law of the State
of Delaware . . . that directors, rather than shareholders, manage
the business and affairs of the corporation.’”
In re Citigroup
Inc. Shareholder Deriv. Litig., 964 A.2d 106, 120 (Del. Ch. 2009),
citing Aronson, 473 A.2d at 811.
Under Delaware law, “[b]ecause
directors are empowered to manage, or direct the management of, the
business and affairs of the corporation, 8 Del. C. Sec. 141(a), the
right of a stockholder to prosecute a derivative suit is limited to
situations where the stockholder has demanded that the directors
pursue the corporate claim and they have wrongfully refused to do
so or where demand is excused because the directors are incapable
of making an impartial decision regarding such litigation.”
v. Blasband, 634 A.2d 927, 932 (Del. 1993).
Rales
See also Citigroup,
964 A.2d at 120 (“to cause the corporation to pursue litigation, a
shareholder must either (1) make a pre-suit demand by presenting
the allegations to the corporation’s directors, requesting that
they bring suit, and showing that they wrongfully refused to do so,
or (2) plead facts showing that demand upon the board would have
been futile.
Where, as here, a plaintiff does not make a pre-suit
demand of the board of directors, the complaint must plead with
particularity
futile.”).5
facts
showing
that
a
demand
would
have
been
Federal Rule of Civil Procedure 23.1 is the procedural
5
Usually derivative suits are used “to redress harm to a
corporation allegedly resulting from misconduct by its directors.”
Id. at 933.
“Devised as a suit in equity, the purpose of the
-9-
embodiment
of
this
substantive
principle
of
corporation
law.
Rales, 634 A.2d at 932.
Under Delaware law, directors are entitled to the presumption
that they were faithful to their fiduciary duties.
Beam ex rel.
Martha Stewart Living Omnimedia v. Stewart, 845 A.2d 1040, 1048
(Del. 2004).
the
burden
In the context of a pre-suit demand, plaintiff bears
of
rebutting
that
presumption
in
a
shareholder
derivative action by pleading particularized facts as to each
director creating a reasonable doubt about the independence of the
majority of the board of directors.
Id. at 1048-49.
Where the plaintiff challenges a decision of the board, to
determine whether a demand on the Board should be excused as
futile, the court must apply a test established in Aronson v. Lewis
[the “Aronson test”], 473 A.2d 805, 814 (Del 1984), overruled on
other grounds, Brehm v. Eisner, 746 A.2d 244 (Del. 2000): “whether
under the particularized facts alleged, a reasonable doubt is
created that:
(1) the directors are disinterested and independent
[or] (2) the challenged transaction was otherwise the product of a
derivative action was to place in the hands of the individual
shareholder a means to protect the interests of the corporation
from the misfeasance and malfeasance of ‘faithless directors and
managers.’” Kamen v. Kemper Fin. Sys., Inc., 500 U.S. 90, 95
(1991), quoting Cohen v. Beneficial Loan Corp., 337 U.S. 541, 548
(1949). “To prevent abuse of this remedy, however, equity courts
established as a precondition ‘for the suit’ that the shareholder
demonstrate ‘that the corporation itself had refused to proceed
after
suitable
demand,
unless
excused
by
extraordinary
circumstances.’” Id., quoting Ross v. Bernhard, 396 U.S. 531, 534
(1970).
-10-
valid exercise of business judgment.”
citing Aronson, 473 A.2d at 814.
Rales, 634 A.2d at 933,
Demand is futile, and thus
excused, only if the majority of the directors have so personal a
stake in the matter at issue of the proposed litigation that they
would be unable to make a proper business judgment if a demand is
made.
Aronson, 473 A.2d at 814.
See also Beam v. Stewart, 845
A.2d 1040, 1046 (Del. 2004)(“Demand is excused where a board is
evenly divided between interested and disinterested directors.”).
“‘Directorial
interest
exists
whenever
divided
loyalties
are
present, or a director has received or is entitled to receive, a
personal financial benefit from the challenged transaction which is
not equally shared by the stockholders.’”
Rales, 634 A.2d at 933,
quoting Pogostin v. Rice, 480 A.2d 619, 624 (1984)(emphasis in
original).
See
also
Aronson,
473
A.2d
at
812
(defining
“disinterested” as “directors can neither appear on both sides of
a transaction nor expect to derive any personal financial benefit
from it in the sense of self-dealing, as opposed to a benefit which
devolves upon the corporation or all stockholders generally.”).
“The question of independence flows from an analysis of the factual
allegations
pertaining
to
the
influences
upon
the
directors’
performance of their duties generally, and more specifically in
respect
to
the
challenged
transaction.”
Id.,
quoting
id.
“Independence means that a director’s decision is based on the
corporate merits of the subject before the board rather than
-11-
extraneous considerations or influences.”
816.
Aronson, 473 A.2d at
The second prong of the Aronson test, the business judgment
inquiry, “focuses on the substantive nature of the challenged
transaction and the board’s approval thereof.”
Rales, 634 A.2d at
933, citing Pogostin v. Rice, 480 A.2d 619, 624 (Del. 1984),
overruled on other grounds, Brehm, 746 A.2d 244.
If a derivative
action challenges decisions made by the directors pursuant to their
managerial authority, the plaintiffs “must overcome the powerful
presumptions of the business judgment rule6 before they will be
permitted to pursue the derivative claim.” Rales, 634 A.2d at 932.
“These prongs [of the
Aronson
test] are in the disjunctive.
Therefore, if either prong is satisfied, demand is excused.”
Brehm, 746 A.2d at 256.
Nevertheless, “[n]ot all derivative suits fall into [this]
paradigm.”
Rales, 634 A.2d at 933.
“Where there is no conscious
decision by directors to act or refrain from acting, the business
judgment rule has no application.”
at 813.
Id., citing Aronson, 473 A.2d
In such a circumstance the court must apply what is known
“Rales test” and “determine whether or not the particularized
6
The business judgment rule presumes that “in making a
business decision the directors of a corporation acted on an
informed basis, in good faith, and in the honest belief that the
action taken was in the best interest of the company.” Aronson,
473 A.2d at 812.
“[W]here the business judgment [rule]
presumptions are applicable, the board’s decision will be upheld
unless it cannot be attributed to any rational purpose.” In re
Walt Disney Co. Deriv. Litig., 906 A.2d 27, 74 (Del. 2006).
-12-
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.
If
the derivative plaintiff satisfies this burden, then demand will be
excused as futile.”
Id. at 934 (in essence eliminating the second
prong of the Aronson test).
See also Citigroup, 964 A.2d at 120
(Where “plaintiffs complain of board inaction and do not challenge
a
specific
decision
of
the
board,
there
is
no
‘challenged
transaction,’ and the ordinary Aronson [two-prong] analysis does
not apply.
Instead to show demand futility where the subject of
the derivative suit is not a business decision of the board, the
plaintiff
must
allege
particularized
facts
that
‘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.”),
citing Rales, 634 A.2d at 934.
To adequately plead a derivative suit, a plaintiff must meet
stringent
requirements
particularity;
conclusory
statements and mere notice pleading are insufficient.
Brehm, 746
A.2d at 254.
of
factual
The “pleader must set forth . . . particularized
factual statements that are essential to the claim. Such facts are
sometimes referred to as ‘ultimate facts,’ ‘principal facts’ or
-13-
‘elemental facts.’” Id.
evidence.
The plaintiff is not required to plead
Id.
Failure to make a demand is not excused merely because
directors would have to sue themselves.
121.
Citigroup, 964 A.2d at
Instead, “demand will be excused based on a possibility of
personal director liability only in the rare case when a plaintiff
is able to show director conduct that is ‘so egregious on its face
that board approval cannot meet the test of business judgment, and
a substantial likelihood of director liability therefore exists,’”
and not just a mere threat.
Id., citing Aronson, 473 A.2d at 815.
The shareholder plaintiff must plead futility of a demand for a
majority of the director defendants, with individual allegations
for each director.
Id. at 121 & n.36.
In In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959,
967 (Del. Ch. 1996)(emphasis in original), the court distinguished
two different contexts for a breach of duty to exercise appropriate
attention or oversight: (1) “a board decision that results in a
loss because the decision was ill advised or ‘negligent’” and (2)
an “unconsidered failure of the board to act in circumstances in
which due attention would, arguably, have prevented the loss.”
“The first class of cases will typically be subject to review under
the director-protective business judgment rule, assuming that the
decision
made
was
the
product
of
a
process
that
was
either
deliberately considered in good faith or was otherwise rational.”
-14-
Id.
For the second type, oversight liability results “not from a
decision but from unconsidered action.”
type at issue in the instant action.
Id. at 968.
That is the
A “breach of [directors’]
duty of attention or care in connection with the on-going operation
of the corporation’s business . . . is possibly the most difficult
theory in corporation law upon which a plaintiff might hope to win
a judgment.”
Id. at 967.
The Caremark court cited Graham v.
Allis-Chalmers Mfg. Co., 41 Del. Ch. 78, 188 A.2d 125 (1963), in
which the Delaware Supreme Court examined the potential liability
of board members for losses by the corporation resulting from the
corporation’s violations of antitrust laws where no one claimed
that the directors knew about the behavior of subordinate employees
that caused the problem.
Id. at 969.
Instead the claim was that
the directors ought to have known of it, and if they had known,
they had a duty to bring the corporation into compliance with the
law and avoided the loss.
Id.
The Delaware Supreme Court held
that “‘absent cause for suspicion there is no duty upon the
directors to install and operate a corporate system of espionage to
ferret
out
exists.’”
wrongdoing
Id.
which
they
have
no
reason
to
suspect
The absence of grounds for suspicion in that case
led the justices to conclude that the directors were “blamelessly
unaware
of
the
conduct
leading
to
corporate
liability”
and
therefore there was no basis to find that they “breached a duty to
be informed of the ongoing operations of the firm.”
-15-
Id., citing
Graham, 188 A.2d at 130.
The Caremark
court concluded that today
the Graham holding would be “narrowly interpreted” to be “absent
grounds to suspect deception, neither corporate boards nor senior
officers can be charged with wrongdoing simply for assuming the
integrity of employees and the honesty of their dealings on the
company’s behalf.”
Caremark, 698 A. 2d at 969-70.
The Caremark
Court would require that the board establish an information and
reporting
system
“reasonably
designed
to
provide
to
senior
management and to the board itself timely, accurate information
sufficient to allow management and the board, each within its
scope,
to
reach
informed
judgments
concerning
both
the
corporation’s compliance with law and its business performance,”
but it left the details of such a system to the good faith business
judgment of the directors.
Id. at 970.7
7
In In re Lear Corp. Shareholder Litig., 967 A.2d 640, 653-54
(Del. Ch. 2008), the court discussed the line of cases from Graham
and Caremark to the present in addressing
what is arguably the hardest question in corporation law:
what is the standard of liability to apply to independent
directors with no motive to injure the corporation when
they are accused of indolence in monitoring the
corporation’s compliance with its legal responsibilities?
The question is difficult for many reasons, including the
reality that even the most diligent board cannot
guarantee that an entire organization will always comply
with the law. But it must be answered because one of the
central justifications for the use of independent
directors is that they are well positioned to oversee
management, particularly by monitoring the processes used
by the corporation to accurately account for its
financial affairs and comply with applicable laws. When
a fiduciary takes on a paying role, her duty of loyalty
-16-
In Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d
362, 370 (Del. 2006), the Delaware Supreme Court approved of the
Caremark standard for oversight liability, which is based on the
concept of good faith and embedded in the fiduciary duty of
loyalty:
Caremark articulates the necessary conditions predicate
for director oversight liability:
(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 operation thus disabling themselves from
being informed of risks or problems requiring their
attention.
In either case, imposition of liability
requires a showing that the directors knew that they were
not discharging their fiduciary obligations.
Where
directors fail to act in the face of a known duty to act,
thereby demonstrating a conscious disregard for their
responsibilities, they breach their duty of loyalty by
failing to discharge that fiduciary obligation in good
faith.
requires that she make a good faith effort to carry out
those duties. Although everyone has off days, fidelity
to one’s duty is inconsistent with persistent shirking
and conscious inattention to duty.
For this reason,
Caremark and its progeny have held that directors can be
held culpable in the monitoring context if they breach
their duty of loyalty by “a sustained or systematic
failure .. . to exercise oversight, or were conscious of
the fact that they were not doing their jobs [as
monitors].” More generally, our Supreme Court has held
that to hold a disinterested director liable for a breach
of the fiduciary duty of loyalty for acting in bad faith,
a strong showing of misconduct must be made. Thus in its
[In re the Walt Disney Co. Deriv. Litig., 906 A.2d 27
(Del. 2006)], the Supreme Court enumerated examples that
all depended on purposeful wrongdoing, such as
intentionally acting “with a purpose other than that of
advancing the best interests of the corporation,” acting
“with the intent to violate applicable positive law,” or
“intentionally fail[ing] to act in the face of a known
duty to act.” (footnotes omitted)
-17-
Thus to establish oversight liability a plaintiff must show
with particularized facts that the directors knew they were not
discharging their fiduciary obligations or that the directors
demonstrated a conscious disregard for their responsibilities such
as failing to act in the face of a known duty to act.
698 A.2d at 971.
Caremark,
The test in rooted in concepts of bad faith;
indeed a showing of bad faith is a necessary condition to director
oversight liability.
Id.
Under Delaware law, the mere fact that
a violation occurred does not demonstrate that the board acted in
bad faith.
Stone, 911 A.2d at 373.
See also Desimone v. Barrows,
924 A.2d 908, 940 (Del. Ch. 2007)(“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.”); In re IAC/InterActiveCorp., 478 F. Supp. 2d 574, 605
(S.D.N.Y. 2007)(“Delaware courts recognize that no rationally
designed system of information and reporting ‘will remove the
possibility
that
the
corporation
will
violate
regulations.’”)(quoting Caremark, 698 A.2d at 970).
laws
or
Moreover,
while to excuse demand, a derivative action plaintiff need only
raise a reasonable doubt about the board’s ability to impartially
consider the demand, Rales, 634 A.2d at 934, where the plaintiff
alleges the board cannot because it faces potential liability, the
plaintiff needs to show “a substantial likelihood of personal
-18-
liability
exists
insufficient.”
since
the
mere
threat
of
liability
is
Aronson, 743 A.2d at 814.
Delaware law imposes a stringent standard for corporate waste
and mandates that the plaintiff plead “‘facts showing that no
person of ordinary sound business judgment could view the benefits
received
in
the
transaction
as
a
fair
consideration paid by the corporation.’”
exchange
for
the
Lear Corp., 967 A.2d at
656, quoting Harbor Fin. Partners v. Huizenga, 751 A.2d 879, 892
(Del. Ch. 1999).
Moreover if any reasonable person reviewing the
facts alleged in the complaint might conclude that the transaction
“‘made sense, the judicial inquiry ends.’”
Id., quoting id.
Allegations of Plaintiff’s Amended Complaint (#13)
Plaintiff Douglas Freuler (“Freuler”), at all relevant times
a shareholder of Parker Drilling, a major provider of on-land and
offshore drilling worldwide, including drilling rigs, project
management, and rental tools to the energy industry with a strong
focus
on
international
drilling,8
complains
that
Individual
Defendants caused Parker Drilling to operate in Kazakhstan and
Nigeria, where corruption and bribery were rampant.
Defendants
purportedly knew of the high probability that its employees,
8
The Amended Complaint states that in 2009 Parker Drilling
received approximately 50% of its revenue from foreign operations
and that its annual revenues from international drilling were more
than $200 million between 2007 and 2009. As of December 31, 2009
the Company placed eight of its fleet of forty-three drilling rigs
in Kazakhstan.
-19-
representatives, agents, and/or contractors paid bribes to the
government officials to obtain or retain business for the Company,
but nevertheless authorized improper payments to these employees,
representatives agents and/or contractors to be able to do so. The
complaint further charges that Individual Defendants failed to
establish and maintain internal controls to ensure compliance with
the FCPA, federal securities laws, and accounting regulations,
failed to enforce Parker Drilling’s existing policies and programs
designed to prevent violations of federal laws and regulations, and
failed to adequately train Parker Drilling’s employees, agents,
representatives and/or contractors to comply with the FCPA.
In addition, in violation of the reporting requirements under
the Securities Exchange Act of 1934, Individual Defendants caused
or permitted the Company to file false and misleading statements
with the U.S. Securities and Exchange Commission (“SEC”) that did
not
reflect
the
amount
and
purpose
of
the
payments
made
in
violation of the FCPA.
Nevertheless some Individual Defendants signed certifications
pursuant to the Sarbanes Oxley Act of 2002 (“SOX”), misrepresenting
that the financial statements accurately reflected in all material
respects the financial condition of the Company.9
9
The Court notes that in Guitierrez v. Cornell Companies, No.
Civ. A. H-02-1812, 2005 WL 2121554, *9-10 (S.D. Tex. Aug. 31,
2005), Judge Sim Lake examined a claim in a shareholders derivative
action that five members of the audit committee faced a substantial
likelihood of liability for breaching their fiduciary duties
-20-
The complaint charges that Individual Defendants caused or
allowed Parker Drilling to pay bribes and kickbacks solely in order
to increase the company’s multi-million dollar annual revenues
generated from Kazakhstan and Nigeria, which they judged to be
worth more than the risk of any fines for FCPA violations.
because they were “responsible for monitoring the quality and
integrity of the company’s financial reporting process and systems
of internal controls regarding finance, accounting compliance,” but
that they instead recommended to the board that improper financial
statements be included in the company’s annual report filed with
the SEC on Form 10-K for two fiscal years. The complaint alleged
that they breached their fiduciary “duties by causing or allowing
the improper financials . . . . These filings were admittedly
erroneous, as the [c]ompany had to ultimately restate seven
quarters of financial statements . . . . Further, these five
[d]efendants also signed the false and misleading [r]egistration
[s]tatement.”
Judge Lake held that “[t]hese conclusory allegations are
insufficient to raise an inference that a majority of Cornell’s
directors face a substantial likelihood of liability for breach of
fiduciary duty.”
2005 WL 2121554 at *9.
Quoting Caremark, he
opined that
where a claim of directorial liability for corporate loss
is predicated upon ignorance of liability creating
activities within the corporation . . . only sustained
or systematic failure of the board to exercise
oversight–-such as utter failure to attempt to assure a
reasonable information and reporting system exists--will
establish the lack of good faith that is a necessary
condition to liability. Such a test of liability--lack
of good faith as evidenced by sustained or systematic
failure of a director to exercise reasonable oversight-is quite high.
Id. at 10, citing Caremark, 698 A.2d at 971. Judge Lake pointed
out that plaintiff failed to allege any facts demonstrating that
the defendants knew that management had misrepresented the
company’s financial condition or that the directors faced a
substantial likelihood of liability for breaching their fiduciary
duty of due care. Id. at 10.
-21-
The Company’s illegal bribery activities were investigated by
federal authorities.
On March 3, 2010 the Individual Defendants
caused Parker Drilling to state in its Annual Report that the U.S.
Department of Justice (“DOJ”) and the SEC (“SEC”) had “identified
issues relating to potential noncompliance with applicable laws and
regulations, including the FCPA, with respect to operations in
Kazakhstan and Nigeria.”
The complaint charges that Individual
Defendants wrongfully abdicated their fiduciary duties to Parker
Drilling, failed to ensure compliance with Parker Drilling’s Code
of
Conduct,
the
FCPA,
and
other
laws,
failed
to
establish,
maintain, and enforce adequate oversight and internal controls over
the Company’s operations in Kazakhstan and Nigeria, failed to
adequately train its employees, representatives, agents, and/or
contractors about compliance with the FCPA, and breached their
fiduciary
duties
to
Parker
Drilling
by
not
directing
Parker
Drilling to sue the directors and officers for causing and/or
allowing it to engage in violations of the FCPA.
The Individual
Defendants have caused Parker Drilling to acknowledge that the
situation
in
Kazakhstan
could
negatively
impact
some
of
its
business operations in that country and have a material adverse
impact on the entire company, including its operations, financial
condition, and liquidity.
The Company’s Code of Conduct stated,
“Failure by any director, officer, employee or other representative
to observe the letter and the spirit of our code of conduct may
-22-
result in serious damage to our business–-including the possibility
of legal prosecution, monetary losses and, of great importance,
harm to [Parker Drilling’s] strong reputation.”
In addition to the damage to its goodwill and reputation, the
complaint
asserts
that
Parker
Drilling
has
also
incurred
significant expenses, over $20 million, in investigating such
illegal activities.
The complaint divides Parker Drilling’s director and officer
Defendants
into
two
overlapping
groups:
(1)
“Individual
Defendants,” comprised of Parker Drilling’s directors and officers
Robert L. Parker, Jr.,10 Robert L. Parker, Sr.,11 John W. Gibson,12
Robert B. Plank,13 R. Rudolph Reinfrank,14 Robert E. McKee, III,15
10
Parker, Jr. has been director of Parker Drilling since 1973
and the Board’s Executive Chairman. He was chief executive officer
from 1991-2009. The complaint states that he “is a control person
of Parker Drilling because he has the power to direct or cause the
direction of the Company’s management and policy.”
11
Parker, Sr. has been a director since 1969 and Chairman
Emeritus since 2006, and served as president from 1969-2006. He,
too, purportedly is a “control person” for the same reason.
12
Gibson has been a director since 2001, is a member of the
Audit Committee, and is also dubbed a “control person.”
13
Plank has been a director since May 2004, is Chairman of the
Audit Committee, and a “control person.”
14
Reinfrank has been a director since 1993 and is a “control
person.”
15
McKee has been a director since 2005 and is a “control
person.”
-23-
George J. Donnelly,16 Robert W. Goldman,17 Gary R. King,18 David C.
Mannon,19 James W. Whalen,20 W. Kirk Brassfield,21 and Lynn G.
Cullom22;
and
(2)
“Audit
Committee
Defendants,”
Defendants Plank, Donnelly, Gibson and King.
composed
of
In addition, Parker
Drilling is named as Nominal Defendant. The true names of the John
Does are not yet known to Plaintiff, who will seek to amend to add
the true names and capacities when they are ascertained.
Individual Defendants owe fiduciary duties of candor, good
faith, and loyalty to the Company and to its shareholders. Because
of
their
exercised
complaint.
positions
of
control
over
control
the
and
authority,
wrongful
acts
they
allegedly
described
in
the
Because of their executive and directorial positions,
16
Donnelly has been a director since October 2005, is a member
of the Audit Committee, and is a “control person.”
17
Goldman has been a director since October 2005.
18
King has been a director since September 2008, is a member
of the Audit Committee, and is a “control person.”
19
Mannon has been President, Chief Executive Officer, and a
director since October 2009. From July 2007 to October 2009 he was
President and Chief Operating Officer, and from December 2004 to
July 2007 he served as Senior Vice President and Chief Operating
Officer. He, too, is a “control person.”
20
Whalen was the Board’s Vice Chairman from 2005-2009 and is
a “control person” of the Company.
21
Brassfield has been Chief Financial Officer since October
2005 and is a “control person.”
22
Cullon was Corporate Controller between March 2005 and
September 2009 and is a “control person.”
-24-
each Individual Defendant knew or should have know that doing
business in countries like Kazakhstan and Nigeria involved a high
risk of corruption and that Parker Driller was doing business there
without establishing and maintaining a FCPA compliance program
designed to detect, deter, and ultimately prevent improper payments
to foreign officials and other third parties. The complaint quotes
a statement from President and Chief Executive Officer to the
Company’s directors, officers and other representatives urging
integrity (doing “the right thing--in all of our actions”), which
“is the foundation supporting the four pillars of our business:
safety, training, technology and performance,” and meeting the
“highest ethical and business standards,” which requires more than
compliance
with
the
law.
The
complaint
charges
Individual
Defendants with breaching their duties of loyalty and good faith in
failing to maintain adequate internal controls in compliance with
FCPA or its underlying directives regarding books, records, and
accounting, designed to uncover the type of improper payments made
by Parker Drilling.
Individual Defendants because of their positions exercised
control over Parker Drilling with regard to the illegal acts, the
public
statements
issued
by
the
statements it filed with the SEC.
Company,
and
the
financial
They also had access to non-
public information about the company’s financial condition and
operations and its use of customs agencies in Kazakhstan and
-25-
Nigeria. They failed to establish internal controls and accounting
systems adequate to detect or deter improper payments violating the
FCPA, which violations they knew about from those controls the
Company did have in place.
The Audit Committee Charter indicates that Defendants Plank,
Donnelly, Gibson and King are responsible for assisting the Board
in overseeing the performance of the Company’s internal audit
function and the Company’s compliance with legal and regulatory
requirements, including reviewing the appointment and replacement
of the director of internal auditing, reviewing significant reports
prepared
by
the
internal
auditing
department
and
management
responses, and discussing with the independent accountant and
management the internal audit department responsibilities, budget
and staffing, and any recommended changes in the planned scope of
the internal audits.
Regarding oversight of compliance, Audit
Committee Defendants are required to obtain from the independent
accountant assurance that Section 10A(b) of the Exchange Act has
not been triggered based on information discovered during the
audit; to obtain an annual report from management that the Company
and its subsidiary/foreign affiliated entities are in conformity
with applicable legal requirements and the Company’s Code of
Corporate Conduct based on annual compliance statements received
from employees and agents; to review reports and disclosures of
insider and affiliated and related-party transactions; to advise
-26-
the Board with respect to the Company’s policies and procedures
regarding compliance with applicable laws and regulations and the
Company’s Code of Corporate Conduct; to establish procedures for
the receipt, retention and treatment of complaints received by the
Company regarding accounting, internal accounting controls or
auditing matters, and the confidential anonymous submission by
employees of concerns regarding questionable accounting or auditing
matters; to discuss with management and the independent accountant
any correspondence with regulators or governmental agencies and any
published
reports
which
raise
material
issues
regarding
the
Company’s financial statements or accounting policies; and to
discuss with the Company’s counsel legal matters that may have a
material impact on the financial statements or the Company’s
compliance policies and internal controls.
The complaint asserts
that the Audit Committee Defendants failed to carry out their
obligations with respect to internal audit and compliance oversight
and created an environment at Parker Drilling that permitted
violations of the FCPA to occur without detection.
As noted, the FCPA bars U.S. issuers or anyone acting on their
behalf from giving bribes or kickbacks to any foreign official to
obtain
or
retain
business.
It
imposes
accounting
control
requirements that the issuer (a) make and keep books, records and
accounts, which in reasonable detail accurately and fairly reflect
the transactions and dispositions of the assets of the issuer; and
-27-
(b) devise and maintain a system of internal accounting controls
sufficient to provide reasonable assurances that: (i) transactions
are executed in accordance with management’s general or specific
authorization; and (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with
Generally Accepted Accounting Principles (“GAAP”) or any other
criteria
applicable
to
such
accountability for assets.
with
the
assistance
of
statements,
and
to
maintain
Under state fiduciary law, the Board,
the
Audit
Committee,
is
ultimately
responsible for establishing and maintaining these FCPA-compliant
programs.
The complaint claims that Defendants failed to ensure
that Parker Drilling complied with the FCPA’s requirements.
On May 12, 2008 Individual Defendants caused Parker Drilling
to file its Quarterly Report on Form 10-Q for the period ending
March 31, 2008 with the SEC.
In that 10-Q Parker Drilling
summarily stated that the DOJ and the SEC had opened investigations
on possible violations of the FCPA by Parker Drilling, including in
Kazakhstan and Nigeria.
Parker Drilling provided no additional
information in the next 20 months, but continued to make similar
boilerplate disclosures about the investigations, so that its
shareholders were unable to obtain more information about the
nature and scope of these investigations.
On March 3, 2010, the
Individual Defendants caused Parker Drilling to file its annual
Form
10-K
with
the
SEC,
in
which
-28-
it
disclosed
that
the
investigations by the DOJ and the SEC had “identified issues
relating
to
potential
regulations,
noncompliance
including
the
FCPA,
with
with
applicable
respect
Drilling’s] operations in Kazakhstan and Nigeria.”
laws
to
and
[Parker
Individual
Defendants also disclosed that potentially illegal payments had
been made to a government official in Kazakhstan via a joint
venture
arrangement
subcontractor.
between
Parker
Drilling
and
a
foreign
They also revealed that the possible violations
could have a material adverse impact on all of Parker Drilling’s
business.
On May 7, 2010, Individual Defendant caused Parker Drilling to
repeat
those
consequences,
statements
and
to
warn
including
injunctions,
of
serious
adverse
disgorgement,
fines,
penalties, modifications to business practices and compliance
programs, deferred prosecution agreements, guilty pleas, retention
of a monitor to oversee Parker Drilling’s compliance with the FCPA,
ending or modifying existing business relationships, and other
sanctions, as a result of the discovery of the illegal activities.
An April 2009 news report stated that Kazakhstan’s State
Agency for the Control of Economic and Corruption Crimes was
investigating Parker Drilling for possible criminal tax evasion.
The complaint claims that these reports show that Individual
Defendants failed to establish and maintain adequate internal
controls to ensure compliance with the FCPA, federal securities
-29-
laws and accounting regulations; to enforce the Company’s policies
and programs that were designed to prevent violations of existing
federal laws, regulations, policies and programs; and to adequately
train the Company’s employees representatives, agents, and/or
contractors to comply with the FCPA, or establish a monitoring
program for its foreign agents and distributors to comply with the
FCPA. Individual Defendants purportedly “made no effort to enforce
the company’s own anti-bribery policies and turned a willful and
blind eye to the kickbacks and bribes funded and paid by Parker
Drilling.” These failures caused Parker Drilling to hire Panalpina
World Transport (Holding) Ltd. and its subsidiaries (collectively,
“Panalpina”).
Panalpina
recently
settled
charges
of
FCPA
violations in several countries, including Kazakhstan and Nigeria,
by paying more than $11 million in disgorgement and $70 million in
criminal fines.
The complaint also asserts that Parker Drilling’s employees,
representatives,
agents,
and/or
contractors,
authorized
by
Individual Defendants as well as by Parker Drilling’s accountants
and auditors, paid or offered to pay bribes to foreign officials in
Kazakhstan and Nigeria in order to enrich themselves and advance
Parker Drilling’s business interests.
The complaint contends that
the bribes were not accurately described in the Company’s books and
records.
-30-
In the Company’s March 3, 2010 Form 10-K, signed by Parker,
Jr., Mannon, Brassfield, Donnelly, Gibson, Goldman, King, McKee,
Plank, and Reinfrank, the Individual Defendants caused the Company
to identify “solicitation by government officials for improper
payments
or
international
other
forms
of
operations.
The
corruption”
complaint
as
one
risk
complains
of
of
its
Parker
Drilling’s ongoing operational issues with Kazakh customs. Freuler
identifies as an example, in July 2004, when then Chief Executive
Officer Robert L. Parker, Jr. became involved in trying to obtain
the
release
of
Parker
Drilling’s
Rig
platform, seized by the Kazakh customs.23
257
“Sunkar”
drilling
It conclusorily repeats
Individual Defendants allegedly knew or should have known that
doing business in countries like Kazakhstan and Nigeria involves a
high risk of corruption, but nevertheless they did not establish
and maintain a FCPA compliance program designed to detect, deter,
and prevent improper payments to foreign officials and other third
parties or directives regarding books, records and accounting
designed to ferret out and prevent the type of improper payments
made by Parker Drilling.
23
The complaint states that the rig was seized because Parker
Drilling refused to pay $4.26 in customs duties and a $1.7 million
fine.
Parker Drilling on July 2, 2004 stated that it was
“cooperating with the governmental authorities to the fullest
extent, and believe[d] judicial review of the documentation we have
provided will result in the resolution of this dispute in our
favor,” indicating that the dispute was known to the Board and the
highest level of the Company’s management and was discussed by
Individual Defendants.
-31-
Arguing that making a demand upon the Board would be futile,
Plaintiff points out that Individual Defendants have refused to
take
action
responsible
Nigeria
and
against
for
for
Parker
those,
including
Drilling’s
failing
to
themselves,
business
establish,
in
who
Kazakhstan
maintain,
and
are
and
enforce
adequate internal controls for compliance with the FCPA. They have
not sued themselves or their fellow directors and allies in the top
ranks of the Company for the violations of law, people with whom
they have professional relationships, who are friends, and with
whom they have entangling financial alliances and interests and
dependencies.24
Indeed to properly prosecute this action the
24
This Court observes that Delaware courts have made clear
that a plaintiff showing that demand would be futile must do more
that conclusorily assert entangling alliances.
Beam ex rel.
Stewart v. Stewart, 845 A.2d 1040, 1050 (Del. 2004)(“A variety of
motivations, including friendship, may influence the demand
futility inquiry.
But to render a director unable to consider
demand, a relationship must be of a bias-producing nature.
Allegations of mere personal friendship or mere outside business
relations, standing alone, are insufficient to raise a reasonable
doubt about a director’s independence.”). “Not all friendships, or
even most of them, rise to the level” of raising a reasonable doubt
whether a director can independently consider a demand, and a court
“cannot make a reasonable inference that a particular friendship
does so without specific factual allegations to support such a
conclusion.”
Id. (emphasis in original).
In Beam, the court
examined at length what it dubbed the “structural bias” argument,
which “presupposes that the professional and social relationships
that naturally develop among members of a board impede independent
decisionmaking.” Id. at 1050-52 (and cases cited therein). The
court rejected the plaintiff’s efforts to plead affinity beyond
mere friendship between Martha Stewart and the other directors of
her company as factually insufficient to demonstrate demand
futility. Without factual specificity, “[m]ere allegations that
they move in the same business and social circles, or a
characterization that they are close friends, is not enough to
-32-
Individual Defendants would have to sue a majority of themselves.
The complaint maintains that illegal payments made on behalf
of Parker Drilling did not appear on the Company’s books and
records, in violation of the FCPA, thereby demonstrating Individual
Defendants’ decision to deprive the Company of FCPA-compliant
internal controls.
The government investigations show that the
improper payments occurred over years.
The lack of internal
controls is highlighted by the fact that Parker Drilling operated
in
countries
with
rampant
corruption.
The
decision
not
to
implement such controls is not entitled to business judgment
protection, and thus demand on the Board would be futile and is
excused.
Moreover members of the Board have benefitted and continue to
benefit from the alleged wrongdoing and have engaged in such
conduct to preserve their positions of control and accompanying
perquisites.
Thus they are incapable of exercising independent,
objective judgment in deciding whether to bring this action.
They
also receive substantial remuneration from the Company, which is
negate independence for demand excusal purposes.” Id. at 1051-52.
“To create a reasonable doubt about an outside director’s
independence, a plaintiff must plead facts that would support the
inference that because of the nature of a relationship, or
additional circumstances other than the interested director’s stock
ownership or voting power, the non-interested director would be
more willing to risk his or her reputation than risk the
relationship with the interested director.” Id. at 1052.
-33-
increased by the wrongdoing resulting in economic benefits to
Parker Drilling.25
Individual Defendants also face substantial liability under
the Securities Exchange Act because the improper payments were not
properly reflected on the Company’s Forms 10-Q and 10-K financial
statements, filed with the SEC.
Individual Defendants, as control
persons under Section 20(a), 15 U.S.C. § 20(a), caused or allowed
these materially misleading forms to be filed by failing to
disclose the proper characterization, amount, and purpose of the
illegal payments.26
Individual Defendants also violated Section
25
This Court notes that in Midwestern Teamsters Pension Trust
fund v. Baker Hughes Inc., Civ. A. No. H-08-1809, 2009 WL 6799492,
*8 (S.D. Tex. May 7, 2009), adopted, 2010 WL 3359560 (S.D. Tex. May
26, 2010), the magistrate judge found identical allegations to
those in this paragraph to be factually deficient for the purpose
of excusing lack of demand:
Plaintiffs allege no facts to support those contentions,
See Rule 23.1. Plaintiffs do not, for instance, describe
how each individual Board member benefited from the FCPA
violations, or even identify the particular benefits at
issue. Nor do Plaintiffs allege specific Board decisions
that were designed to “preserve their positions of
control,” “conceal . . . wrongs.” or “waste . . .
valuable assets.”
Because Plaintiffs have failed to
state particularized facts to support their allegations,
they have not shown that demand is futile.
26
Nevertheless the Delaware Supreme Court has opined that
“execution of . . . financial reports, without more, is
insufficient to create an inference that the directors had actual
or constructive notice of any illegality.” Wood v. Baum, 953 A.2d
136, 142 (Del. 2008). See also Citigroup, 964 A.2d at 134 & n.92
(quoting above statement from Wood v. Baum)(“Plaintiffs do not
allege facts suggesting that the director defendants prepared the
financial statements or that they were directly responsible for the
misstatements or omissions.
The Complaint merely alleges that
-34-
13(a) of the Exchange Act and rules 12b-20, 13a-1, and 13a-13
requiring covered companies to file annual and periodic reports
disclosing specific information necessary to make the required
statements, in light of the circumstances under which they are
made, not misleading and face potential liability, again making a
demand upon the Board futile.
maintain
a
system
of
So did their failure to devise and
internal
accounting
control
to
provide
reasonable assurances that transactions in Kazakhstan and Nigeria
were accurately and properly reported, in conformity with such
standards as GAAP.
The
(including
complaint
also
Brassfield,
asserts
Mannon,
that
and
Individual
Parker,
Jr.)
Defendants
are
also
potentially liable for signing the SOX certifications, making them
responsible for establishing and maintaining disclosure controls
and internal controls over financial reporting, for each of the
Forms 10-Q and 10-K from December 31, 2005 through September 10,
2009, making demand futile.
Because the certifications were known
to the Audit Defendants and the Individual Defendants had access to
review them, each of the Individual Defendants knew about the
deficiencies in the financial reporting of the payments made in
Citigroup’s financial statements contained false statements and
material omissions and that the director defendants reviewed the
financial statements pursuant to their responsibilities under the
ARM Committee charter. Thus I am unable to reasonably conclude
that the director defendants face a substantial likelihood of
liability.”).
-35-
violation
of
Individual
FCPA.
The
Defendants
certifications
directly
or
demonstrate
indirectly
that
participated
the
in
managing, implementing and supervising Parker Drilling’s compliance
program and were systematically and although repeatedly informed
about
violations
of
applicable
laws,
in
violation
of
their
fiduciary duties ignored the information presented to or available
to them as directors and/or officers of the Company.
Finally the complaint alleges that the Individual Defendants
are
not
disinterested
based
on
the
“insured
versus
insured”
exclusion in the directors’ and officers’ liability insurance,
which they caused Parker Drilling to purchase for their protection
with corporate funds, i.e., monies belong to its stockholders. Due
to
changes
according
in
to
the
the
policy’s
complaint,
language
in
an
in
the
“insured
last
few
versus
years,
insured
exclusion” the policy now eliminates coverage for any action
brought directly by Parker Drilling against these Defendants (the
“insured versus insured exclusion for actions by the Board against
its members). If a suit is brought derivatively, however, coverage
would exist and provide a basis for Parker Drilling to effectuate
a recovery.
The complaint alleges five counts, each against all Individual
Defendants:
(1) Count One for intentional breach or reckless
disregard of their fiduciary duties; (2) Count
Two for abuse of
their abilities to control and influence Parker Drilling; (3) Count
-36-
Three for Gross Mismanagement of Parker Drilling’s business and
affairs; (4) Count Four for waste of corporate assets; and (5)
Count Five for unjust enrichment as a result of the compensation
and director remuneration they received while breaching their
fiduciary duties to Parker Drilling.
Defendants’ Motions to Dismiss for Failure to Make Demand Upon
the Board and Failure to Show Demand Would Be Futile
Defendants, who join the motions and incorporate the motions
of each other, make the same basic arguments, although they cite
different authority.
They contend that because Plaintiff did not
make a demand on the Board before filing this derivative action,
the
focal
issue
here
is
whether
he
has
shown
exceptional
circumstances that excuse him from having to do so.
They argue
that he fails to make the requisite particularized pleading with
respect to each of the thirteen Individual Defendants to show
futility.
Desimone v. Barrows, 924 A.2d 908, 943 (Del. Ch.
2007)(“Delaware law does not permit the wholesale imputation of one
director’s knowledge to every other for demand excusal purposes.
Rather, 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 the
demand.”); Khanna v. McMinn, No. 20545-NC, 2006 WL 1388744, *14
(Del. Ch. May 9, 2006)(demand futility analysis “is fact-intensive
and proceeds director-by-director and transaction-by-transaction”);
-37-
In re Emerging Communications, Inc. Shareholders Litig., No. Civ.
A. 16415, 2004 WL 1305745, *38 (Del Ch. May 3, 2004)(“The liability
of the directors must be determined on an individual basis because
the nature of their breach of duty (if any), and whether they are
exculpated from liability for that breach, can vary for each
director.”).
Furthermore the analysis must be for each claim
asserted. See, e.g., Beam ex rel. Martha Stewart Living Omnimedia,
Inc. v. Stewart, 833 A.2d 961, 977 n.48 (Del. Ch. 2003)(“Demand
futility analysis is conducted on a claim-by-claim basis”), aff’d,
845 A.2d 1040 (Del. 2004).
Because the most comprehensive of the motions to dismiss is
Nominal Defendant Parker Drilling’s, the Court addresses it rather
than summarize each Defendant’s separately.
Nominal Defendant
argues that the “Amended Complaint is a mishmash of claims pleaded
against every defendant, even when it is unclear the claim can be
made against all of them.”
#17 at 10.
Moreover the Board’s
composition changed over the years but Plaintiff fails to allege
that the majority of directors were members when the alleged
violations occurred.
Even the claims against the Audit Committee
are not particularized to any director or claim.
Nominal Defendant maintains that Plaintiff fails to plead
particularized facts creating a reasonable doubt that a majority of
the current directors are disinterested and independent for his
claim excusing demand based on the directors’ oversight duties.
-38-
Rales, 634 A.2d at 934.
As noted by this Court, Delaware law
requires a plaintiff pleading director oversight liability to
provide facts creating a “substantial likelihood of liability” and
make a showing that the directors had actual knowledge that they
were not discharging their fiduciary duties.
Stone, 911 A.2d at
370 (for director oversight liability plaintiff must show that (1)
directors failed to implement any reporting or information system
or controls, or if they did, they consciously failed to monitor or
oversee its operations; plaintiff must show that the directors knew
they were not discharging their fiduciary obligations).
Here
Plaintiff assumes that because a FCPA investigation of potential
non-compliance is ongoing, Parker Drilling must be culpable, but no
conclusions of wrongdoing have been reached. Even where wrongdoing
can be shown, it must still be known to and ignored by the
directors before an oversight claim is actionable.
Midwestern
Teamsters Pension Trust Fund, Inc. v. Baker Hughes, Inc., Civ. A.
No. H-08-1809, 2009 WL 679492, *6, 8 (S.D. Tex. May 7, 2009),
adopted, 2010 WL 3359560 (S.D. Tex. May 26, 2010); Desimone, 924
A.2d at 940. Instead Plaintiff’s pleadings in essence are based on
a legally improper inference-–problems occurred, therefore they
were known, and they were not addressed.
679492,
*6
allegation
(“Delaware
that
courts
because
routinely
illegal
Baker Hughes, 2009 WL
reject
behavior
the
conclusory
occurred,
internal
controls must have been deficient, and the board must have known
-39-
so.”), quoting Desimone, 934 A.2d at 940.
Furthermore, “[n]o
rationally designed system of . . . reporting will remove the
possibility that the corporation will violate laws or regulations.”
Id.
Nominal Defendant discusses two Delaware cases with more
specificity in pleading than that in the instant action, but which
were
still
dismissed
by
Delaware
courts
for
insufficient
particularized pleading in order to show that courts, applying
Delaware law, view oversight liability very narrowly.
In
Guttman
v.
Huang,
823
A.2d
492,
493
(Del.
2003),
a
shareholders derivative suit against all directors alleging they
were liable for insider trading for personal advantage (identifying
how much stock each sold on what date for what amount) while in
possession of material, non-public information and/or failure to
prevent accounting irregularities that led to a restatement of its
financial statements for the period when the stock sales occurred,
the plaintiff alleged that the directors faced a substantial
likelihood of liability.
Of the seven-member board, the court
found at most that allegations against only two provided facts that
might show compromised independence and a substantial likelihood of
liability. “[T]he mere fact that two of the directors sold large
portions of their stock does not . . . support the conclusion that
those two directors face a real threat of liability.”
504.
823 A.2d at
The court found to be only conclusory the allegations that
-40-
the other five directors had reason to know that the company’s
financial statements were misstated, with no facts detailing the
precise roles that they played at the company, what information
would
have
come
to
their
attention
in
those
roles,
and
any
indication as to why they would have perceived the accounting
irregularities. Though the directors received substantial proceeds
from
their
stock
sales,
there
were
no
particularized
facts
supporting an inference of insider trading; the timing of the
trades was disparate, with the only common pattern being that they
followed the filing of a certified financial statements and that
pattern was consistent with the possibility that the company
allowed stock sales at such times because it lessened the chance
that insiders could exploit outside market buyers.
While the
complaint asserted that the trades were inconsistent with these
same defendants’ trading practices the prior year, it did not
identify what trades, if any, these defendants had made the prior
year.
Nor did it reveal whether these defendants traded because
their options were expiring or because IPO-related restrictions on
liquidity
recently
ended.
The
judge
further
opined
that
plaintiffs should have obtained access to the company’s books and
records under 8 Del. C. § 220 before they filed suit so that they
could plead the requisite particularized facts to meet the legally
required pleading standard.
As for the pleading standard for
liability for failures of oversight under Caremark, the court found
-41-
plaintiffs did not come close; they should have detailed how often
and for how long the audit committee met, whether it was comprised
of independent directors and how they could tell, how they got
notice
of
the
alleged
accounting
irregularities,
and
what
constituted red flags and showed the majority of the board faced a
sufficient threat of liability to compromise their ability to act
impartially on a demand under Rales.
demand
was
not
excused
because,
The court concluded that
given
the
failure
to
plead
particularized facts, it “was impossible to tell anything about the
financial compliance system in place” and it could only speculate
about the adequacy of the company’s oversight program.
In the second case, Baker Hughes, 2009 WL 6799492,, adopted,
2010 WL 3359560 (S.D. Tex. May 26, 2010), the shareholders complain
of a failure of oversight by directors that led to a $44 million
fine and a guilty plea by a subsidiary of the company.
They
pointed out that previously Baker Hughes had admitted to FCPA
problems. The United States Magistrate Judge refused to find these
allegations sufficient to show that the board knew of, but failed
to address, FCPA compliance concerns; she recommended dismissal of
the complaint, explaining that “Plaintiff’s conclusory allegations
leave one free to imagine that either Baker Hughes had the most
comprehensive compliance program in the industry, or the most
deficient.”
Id.
at
*8.
The
-42-
district
court
adopted
her
recommendation and dismissed the complaint.
2010 WL 3359560 (S.D.
Tex. May 26, 2010).
Nominal
Defendant
insists
that
in
the
case
sub
judice,
Plaintiff lacks even the bare facts alleged in Guttman and Baker
Hughes.
For example, it fails to identify the reports allegedly
prepared
by
accountants
Individual
the
internal
auditing
and
reviewed
by
Defendant
knew
the
the
department
Audit
Company
and
independent
Committee,
was
violating
how
each
internal
controls it had in place for compliance with the FCPA and how and
why they were inadequate, what controls were violated, when, how
and by whom, how the Directors gained this knowledge, what they
should have done to the controls to make them more effective, etc.
Plaintiff further pleads that demand should be excused because
of the Board’s potential liability for various vague and unclear
affirmative actions such as allowing the Company to operate and use
custom agents in Kazakhstan and Nigeria without first establishing
adequate and effective controls and account systems.
If Plaintiff
is challenging an improper act of the Board, he must satisfy the
Aronson test, but has not.
Regarding the first prong, requiring
specific facts to create a reasonable doubt that directors could
impartially
evaluate
a
demand,
“directors
are
entitled
to
presumption that they were faithful to their fiduciary duties,
a
In
the context of presuit demand, the burden is upon the plaintiff in
a derivative suit to overcome that presumption.
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Beam ex rel.
Martha Stewart Living Omnimedia, 845 A.2d at 1048-49; see also
Levine v. Smith, 591 A.2d 194, 207 (Del. 1991)(“When the challenged
transaction is approved by [the] board, the majority of whom are
outside,
non-management
directors,
‘a
heavy
burden
falls
on
[plaintiffs] to avoid presuit demand.’”), quoting Grobow v. Perot,
539 A.2d 180. 190 (Del. 1988), overruled on other grounds, Brehm v.
Eisner, 746 A.2d 244 (Del. 2000).
Plaintiff has not overcome such
a presumption.
The complaint states very little about the Board’s purported
improper actions. Asserting corporate waste, it says nothing about
what a majority of directors did that constituted waste, what they
actually knew about the action, or how they damaged the company.
The claim for unjust enrichment is similarly conclusory, with only
a vague reference to compensation and director remuneration. There
is no specific allegation as to what they each did that abused
their
control,
what
misrepresentations
they
each
made
to
shareholders nor why the misrepresentations were material nor how
they misled shareholders nor what they should have disclosed nor
how they knew the statements were misleading.27
27
To allege an
The Court observes that to state a claim for unjust
enrichment under Delaware law, a plaintiff must allege (1) an
enrichment, (2) an impoverishment, (3) a relation between the
enrichment
and
the
impoverishment,
(4)
the
absence
of
justification, and (5) the absence of a remedy provided by law. In
re Accuray, Inc. Shareholder Deriv. Litig.,757 F. Supp. 2d 919, 935
(N.D. Cal. 2010), citing Jackson v. Nat’l Life Ins. Co. v. Kennedy,
741 A.2d 377, 393 (Del. Ch. 1999).
In an allegation virtually
identical to that asserted by Plaintiff here, the plaintiffs in
-44-
improper action by the Board Plaintiff must also overcome the
presumption of the business judgment rule with particularized facts
showing that the Board could not make a decision fairly and
independently in the best interests of the Company, but does not do
so here. While Plaintiff also claims that the directors benefitted
from their wrongdoing, he also fails to describe these benefits or
perquisites or plead that they are material to the directors.
As
for his argument that demand should be excused because directors
have not filed a similar lawsuit, it is not only unsupported by
facts, but it has been soundly rejected by courts.
See, e.g.,
Richardson v. Graves, No. C.A. 6617, 1983 WL 21109, *3 (Del Ch.
June 17, 1983).
Last of all the insured v. insured clause exclusion argument
has been regularly rejected by courts.
See, e.g., Carauna v.
Saligman, Civ. A. No. 11135, 1990 WL 212304, *4 (Del. Ch. Dec. 21,
1990); Stoner v. Walsh, 772 F. Supp. 790, 805 (S.D.N.Y. 1991).
Defendants Gibson, Mckee, Plank and Reinfrank cite In re AIG, Inc.
Deriv. Litig., 700 F. Supp. 2d 419, 433 (S.D.N.Y. 2010)(“[Demand
futility based on the existence of an ‘insured vs. insured’
exclusion in the Company’s directors’ and officers’ liability
Accuray conclusorily asserted that the defendants “were unjustly
enriched as a result of the compensation and director remuneration
they received while breaching the fiduciary duties owed to
Accuray.” Id. The court opined that the plaintiffs “failed to
allege how each Defendant was unjustly enriched at the expense of
Accuray” and dismissed the unjust enrichment claim. Id.
-45-
policies is an ‘argument [that] has been rejected repeatedly under
Delaware law.”), citing Ferre v. McGrath, No. 06 Civ. 1684, 2007 WL
1180650, *8 (S.D.N.Y. 2007); Kernaghan v. Franklin, No. 06 Civ.
1533, 2008 WL 4450268, *7 (S.D.N.Y. 2008); and Halpert Enterprises,
Inc. v. Harrison, 362 F. Supp. 2d 426, 433 (S.D.N.Y. 2005)..
Nominal Defendant closes its brief by stating that Plaintiff,
if he believes his suit has merit, should present his claim to the
Board for action. Because he has not done so, his complaint should
be dismissed with prejudice.
Court’s Decision
Noting that the enhanced pleading requirements for excuse from
making
a
demand
on
the
board
of
directors
in
a
shareholder
derivative action under Federal Rule of Civil Procedure 23.1 and
Delaware law have long been established, as is apparent from this
Court’s summary of the applicable law and the allegations in
Plaintiff’s
amended
complaint,
the
Court
fully
agrees
with
Defendants that Plaintiff has clearly not satisfied them here.
Moreover he has asserted claims against Individual Defendants
collectively and fails to distinguish their individual roles with
respect to all claims.
Accordingly the Court
ORDERS that Defendants’ motions to dismiss (#17, 18, 19, 20,
and 22) the amended complaint are GRANTED WITHOUT PREJUDICE.
Because the Court finds no “undue delay, bad faith or dilatory
-46-
motive
on
the
part
of
the
movant,
repeated
failure
to
cure
deficiencies by amendments previously allowed, undue prejudice to
the opposing party, and futility of amendment” under Federal Rule
of Civil Procedure 15(a) here, Plaintiff is GRANTED LEAVE to file
an amended complaint within twenty days of entry of this order if
he can meet the pleading requirements set out in this opinion or he
shall inform the Court that he does not wish to pursue this suit.
If an amended pleading is filed, Defendants shall file a timely
response.
SIGNED at Houston, Texas, this
30th
day of
June , 2011.
___________________________
MELINDA HARMON
UNITED STATES DISTRICT JUDGE
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