United States District Court, D. Arizona
G. Campbell United States District Judge.
Defendant First Solar, Inc. has filed a motion to dismiss
this derivative action for failure to make a pre-suit
litigation demand. Doc. 70. First Solar has also filed a
motion for judicial notice. Doc. 72. The motions are fully
briefed (Docs. 75, 76, 77, 78), and the Court heard oral
argument on June 21, 2016. For the reasons set forth below,
the Court will grant the motion to dismiss.
Solar is one of the world's largest producers of
photovoltaic solar panels. Its stock is publicly traded on
the NASDAQ Global Market. After going public in 2006, the
company experienced explosive growth. Between 2008 and the
beginning of 2012, however, the value of the company's
stock fell from nearly $300 per share to less than $50 per
share. This dramatic decline was due in part to the discovery
of two serious manufacturing defects which caused the company
to incur nearly $254 million in warranty and related charges.
Doc. 67, ¶ 6.
first of these defects - the Low Power Modules or LPM defect
- caused certain panels to experience power loss within
months of installation that was greater than warranted by the
company. First Solar learned of this issue in March 2009 upon
receiving a complaint from one of its German customers. A
task force organized to investigate the issue determined that
the defect was caused by a manufacturing process implemented
in June 2008. The company discontinued the process and agreed
to remediate affected panels. The company did not publicly
disclose the LPM defect or the associated remediation costs
until July 2010.
second defect - the hot climate defect - caused certain
panels to experience premature degradation in hot climates.
The board of directors learned of this issue in April 2011
when the Vice President of Technology, David Eaglesham, gave
a report showing that the panels were degrading at a rate of
11% in hot climates. The company did not disclose the defect
or its financial impact until February 2012. The company
ultimately spent $37.8 million to resolve this issue.
March 15, 2012, a group of shareholders who purchased First
Solar stock between April 2008 and February 2012 brought a
class action against the company and several of its officers,
asserting that the company's failure to disclose the LPM
and hot climate defects constituted securities fraud in
violation of Section 10(b) of the Securities Exchange Act of
1934 and Securities Exchange Commission ("SEC")
Rule 10b-5. See Smilovits v. First Solar Inc., No.
12-CV-00555-PHX-DGC. Less than one month later, Plaintiffs
filed this derivative action without making a litigation
demand on the First Solar Board of Directors. Doc. 1. The
Court stayed this action pending resolution of the securities
fraud case. Doc. 45.
August 11, 2015, the Court entered an order in the securities
fraud litigation granting in part and denying in part First
Solar's motion for summary judgment. Smilovits,
119 F.Supp. 3d 978. The Court held that the plaintiffs had
presented a triable issue as to whether defendants made
material misrepresentations of fact with scienter.
Id. at 1009. The Court explained:
Plaintiffs have . . . presented sufficient evidence for a
reasonable jury to conclude that Defendants (1) had a duty to
disclose the LPM defect to investors and failed to do so in
order to mislead investors, (2) concealed the scope of the
LPM defect with the intent to mislead investors, (3) had a
duty to disclose the hot climate degradation to investors and
failed to do so in order to mislead investors, and (4)
engaged in accounting fraud with respect to both defects with
intent to mislead investors.
Id. On the question of whether plaintiffs in the
securities fraud case could establish loss causation, the
Court found two irreconcilable lines of cases in the Ninth
Circuit. Because the Court found that the plaintiffs could
establish loss causation under one line of cases but not the
other, the Court certified the question for immediate
interlocutory appeal. Id. at 1000. The Ninth Circuit
accepted the appeal, and it is now pending.
this unexpected delay in concluding the securities fraud
litigation, the Court lifted the stay in this case so that
Plaintiffs could amend their complaint and Defendants could
file a motion to dismiss. Doc. 65. Plaintiffs filed their
second amended complaint on March 11, 2016. Doc. 67. The
complaint asserts claims for breach of fiduciary duty,
insider trading and misappropriation of information, and
unjust enrichment. ¶¶ 316-31.
fiduciary duty claim is brought against eight individuals who
were directors between April 30, 2008 and February 29, 2012 -
Michael Ahearn, Craig Kennedy, James Nolan, William Post, J.
Thomas Presby, Paul Stebbins, Michael Sweeney, and Jose
Villarreal. Ahearn was First Solar's CEO during part of
the relevant period and is a defendant in the securities
fraud litigation. The other seven directors, who will be
referred to in this order as "outside directors, "
are not employees of First Solar and have not been sued in
the securities fraud case. The fiduciary duty claim is also
brought against five individuals who were officers during the
same period - Robert J. Gillette, Mark R. Widmar, James Zhu,
Bruce Sohn, and David Eaglesham, all of whom are defendants
in the securities fraud litigation. ¶¶ 316-21.
Plaintiffs allege that these 13 Defendants breached their
fiduciary duties by "knowingly, recklessly, or
negligently sign[ing] or approv[ing] the issuance of false
annual and quarterly financial statements that misrepresented
and failed to disclose the full impact of the [LPM defect] on
the Company's earnings and the premature degradation of
modules in hot climates." ¶ 320. In other words,
the fiduciary duty claim is premised on the same wrong
alleged in the securities fraud case - failure to disclose
the LPM defect and hot climate problem in First Solar's
financial reports. In their opposition to the motion to
dismiss, Plaintiffs characterize this as a breach of
Defendants' fiduciary duty of candor. Doc. 75 at 10.
insider trading claim is brought against Directors Ahearn,
Nolan, Sweeney, and Presby, and Officers Meyerhoff, Sohn, and
Eaglesham. Doc. 67 ¶¶ 322-26. Plaintiffs allege
that these Defendants sold First Solar common stock on the
basis of proprietary, non-public information concerning the
manufacturing defects and their likely effect on the
company's financial condition. Id. The unjust
enrichment claim names the same defendants and alleges that
they "were unjustly enriched as a result of the insider
trading profits they received while breaching their fiduciary
duties owed to First Solar." ¶ 329.
shareholders purport to bring this action on behalf of First
Solar. Usually, the decision to initiate litigation on behalf
of a corporation is entrusted to the board of directors.
See Rosenbloom v. Pyott, 765 F.3d 1137, 1147-48 (9th
Cir. 2014) (citing Kamen v. Kemper Fin. Servs.,
Inc., 500 U.S. 90, 95 (1991)). But in cases where the
board cannot be trusted to represent the corporation's
interests faithfully, individual shareholders may bring
derivative claims on the corporation's behalf.
Fed.R.Civ.P. 23.1(a); see Rosenbloom, 765 F.3d at
the board is presumptively entitled to make the decision to
bring suit, shareholders seeking to bring such an action must
plead with particularity whether they demanded that the
directors bring the action, and, if not, why it would have
been futile to make such a demand. Fed.R.Civ.P. 23.1(b)(3).
This requirement allows the court to determine, at the outset
of the litigation, whether the board is capable of
representing the interests of the corporation faithfully, or
whether a majority of the directors has a conflict of
interest that justifies the plaintiff shareholders'
bypassing of the board. See Kamen, 500 U.S. at 102.
In determining whether plaintiffs have satisfied Rule
23.1's pleading requirement, courts accept the
allegations of the complaint as true, draw all reasonable
inferences in the plaintiffs' favor, and consider the
allegations in combination. See Rosenbloom, 765 F.3d
at 1155-56; In re Pfizer Inc. S'holder Derivative
Litig., 722 F.Supp.2d 453, 458 (S.D.N.Y. 2010).
Delaware Law of Demand Futility.
Rule 23.1 supplies the pleading standard for assessing
allegations of demand futility, 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." Rosenbloom, 765
F.3d at 1148 (citation and internal quotation marks omitted).
Because First Solar is a Delaware corporation, Delaware
substantive law applies.
courts have articulated two standards for evaluating demand
futility. The Aronson test applies to derivative
claims that challenge a specific board decision - "where
it is alleged that the directors made a conscious business
decision in breach of their fiduciary duties." Wood
v. Baum, 953 A.2d 136, 140 (Del. 2008). To establish
demand futility under Aronson, the plaintiff must
show either (1) a reason to doubt that the directors are
disinterested and independent, or (2) a reason to doubt that
the challenged transaction was the product of a valid
exercise of business judgment. Id. (citing
Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984)).
The Rales test applies when a specific business
decision is not challenged, but where plaintiffs allege a
violation of the board's oversight duties. Id.
To establish demand futility under Rales, the
plaintiff must show a reason to doubt that the board of
directors could have properly exercised its independent and
disinterested business judgment in responding to a demand.
Id. (citing Rales v. Blasband, 634 A.2d
927, 934 (Del. 1993)).
line between Aronson and Rales blurs when a
derivative claim alleges wrongdoing by a majority of the
board but does not challenge a specific board decision.
See Rosenbloom, 765 F.3d at 1150 (collecting cases).
For such hybrid claims, courts excuse demand if
"Plaintiffs' particularized allegations create a
reasonable doubt as to whether a majority of the board . . .
faces a substantial likelihood of personal liability."
Id.; see also In re Citigroup Inc. S'holder
Derivative Litig., 964 A.2d 106, 121 (Del. Ch. 2009)
("Demand is not excused solely because the directors
would be deciding to sue themselves. . . . Rather, demand
will be excused based on a possibility of personal director
liability only in the rare case when . . . ‘a
substantial likelihood of director liability . . .
exists.'") (quoting Aronson, 473 A.2d at
815); In re Pfizer, 722 F.Supp.2d at 460
(Rales and Aronson tests both met "by
the Complaint's particularized allegations that a
majority of the directors face a substantial threat of
personal liability arising from their alleged breach of their
non-exculpated fiduciary duties"). It is "a rare
case where the circumstances are so egregious that there is a
substantial likelihood of liability." In re Baxter
Int'l, Inc. Shareholders Litig., 654 A.2d 1268, 1271
(Del. Ch. 1995) (citing Aronson, 473 A.2d at 815).
law recognizes a presumption that directors act "on an
informed basis, in good faith and in the honest belief that
the action taken was in the best interests of the
company." Citigroup, 964 A.2d at 124 (citing
Aronson, 473 A.2d at 812). "The burden is on
plaintiffs, the party challenging the directors'
decision, to rebut this presumption." Id.
"Additionally, directors of Delaware corporations are
fully protected in relying in good faith on the reports of
officers and experts." Id. at 133 (citing 8
Del. Code § 141(e)).
directors are contractually or otherwise exculpated from
liability for certain conduct, then a serious threat of
liability may only be found to exist if the plaintiff pleads
a non-exculpated claim based on particularized facts."
Wood, 953 A.2d at 141. First Solar's Certificate
of Incorporation provides that the Company's directors
shall be exculpated to the maximum extent permitted by
Delaware law. Doc. 71-3 at 6. Delaware law recognizes the
validity of "[a] provision eliminating or limiting the
personal liability of a director to the corporation . . . for
monetary damages for breach of fiduciary duty as a director,
provided that such provision shall not eliminate or limit the
liability of a director: (i) For any breach of the
director's duty of loyalty to the corporation or its
stockholders; (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation
of law; . . . or (iv) for any transaction from which the
director derived an improper personal benefit." Del.
Code § 102(b)(7). Thus, in a nondisclosure case such as
this one, "plaintiffs must plead particularized factual
allegations that support the inference that the disclosure
violation was made in bad faith, knowingly or
intentionally." Citigroup, 964 A.2d at 132
(quotation marks and citation omitted).
Against Which Board is Demand Futility Tested?
board of directors sitting when Plaintiffs filed their most
recent amendment in March 2016 consists of 11 individuals,
four of whom were not on the board when Plaintiffs filed
their original complaint in April 2012. In addition, one
individual (Defendant Villarreal) has left the board since
April 2012. Compare Doc. 71-1 at 13 with
Doc. 71-2 at 15. Thus, as a preliminary matter, the Court
must determine whether demand futility is tested against the
April 2012 board or the March 2016 board.
parties agree that Braddock v. Zimmerman, 906 A.2d
776 (Del. 2006), provides the framework for deciding this
issue. In Braddock, the Delaware Supreme Court
explained that "when an amended derivative complaint is
filed, the existence of a new independent board of directors
is relevant to a Rule 23.1 demand inquiry only as to
derivative claims in the amended complaint that are not
already validly in litigation." Id. at 786. A
claim is "validly in litigation" if (1) "the
original complaint was well pleaded as a derivative action,
" (2) "the original complaint satisfied the legal
test for demand excusal, " and (3) "the act or
transaction complained of in the amendment is essentially the
same as the act or transaction challenged in the original
complaint." Id. A claim is not validly in
litigation unless it "can or has survived a motion to
dismiss." Id. at 779.
argue that none of Plaintiffs' claims were validly in
litigation prior to the filing of the second amended
complaint in March 2016 because neither the original
complaint nor the first amended complaint adequately pleaded
demand futility. Doc. 70 at 14. Perhaps because they view the
choice of board as largely "a moot point, "
Plaintiffs offer only a half-hearted response. Doc. 75 at 23.
Plaintiffs argue that they are excused from establishing
demand futility against the current board because the
original complaint was not dismissed. But that fact does not
mean that the original complaint "satisfied the legal
test for demand excusal." Braddock, 906 A.2d at
778. "[T]he filing of an amended complaint may trigger a
new requirement to make demand if the earlier complaint could
not have survived a motion to dismiss, even if it had not
actually been dismissed." In re NYFIX, Inc.,
567 F.Supp.2d 306, 311 (D. Conn. 2008) (citing
Braddock, 906 A.2d at 778).
Plaintiffs argue that the original complaint adequately
pleaded demand futility. Doc. 75 at 24. But it is their
burden to show as much, In re Affiliated Computer Servs.,
Inc. S'holders Litig., No. CIV.A. 2821-VCL, 2009 WL
296078, at *8 (Del. Ch. Feb. 6, 2009), and they have not
carried it. Plaintiffs fail to cite even a single allegation
from the original complaint that they believe satisfies Rule
23.1(b). See Doc. 75 at 24. Because Plaintiffs have
failed to show that their claims were validly in litigation
before March 2016, demand futility must be tested against the
already noted, the current board includes four individuals
who joined after the events at issue in this case. These
individuals are considered disinterested as a matter of law.
See Sandys v. Pincus, No. CV 9512-CB, 2016 WL
769999, at *15 (Del. Ch. Feb. 29, 2016) ("Siminoff and
Doerr are disinterested because they joined the board after
the alleged Caremark violations occurred."). As
a result, Plaintiffs must show that demand is excused as to
six of the seven remaining directors. Because each of these
remaining directors was on the board when the alleged
wrongdoing occurred, and continue on the board today, the
Court will refer to them in this order as the
their briefs, Plaintiffs acknowledged that they cannot
establish demand futility against the current board for the
insider trading claim because it concerns only four of the 11
directors. Doc. 75 at 24. At oral argument, Plaintiffs argued
that more than four directors are affected by this claim
because proof of the insider trading claim would necessarily
establish that the entire board had material, non-public
information - which would support a non-disclosure claim
against the rest of the continuing directors. Plaintiffs cite
no case where non-defendant directors were deemed unable to
make an impartial board decision based on evidence that might
be presented against defendant directors if a lawsuit were
authorized. Nor have Plaintiffs shown that the evidence that
might be presented in an insider trading claim would create a
substantial likelihood of personal liability for the
non-defendant directors. The Court cannot conclude that
Plaintiffs' novel theory, explained for the first time
during oral argument and not supported by specific evidence
or legal authority, rebuts the presumption that the
non-defendant directors would act in the company's best
interests in responding to the insider trading claim. See
Citigroup, 964 A.2d at 124 (recognizing this
Plaintiffs have not shown that more than four directors face
a substantial likelihood of personal liability on the insider
trading claim, the Court will dismiss the claim. The unjust
enrichment claim derives from the insider trading claim and
must also be dismissed. See Staehr v. Mack, No. 07
CIV. 10368 DAB, 2011 WL 1330856, at *10 (S.D.N.Y. Mar. 31,
2011) ("Demand futility for an unjust enrichment claim
based on insider trading allegations will rise and fall with
the insider trading claims.").
Demand Excused as to Plaintiffs' Fiduciary Duty Claim?
contend that demand is excused against the continuing
directors, which constitute a majority of the current board,
with respect to their fiduciary duty claim. Plaintiffs allege
that these Defendants breached their fiduciary duties by