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Hutton v. McDaniel

United States District Court, D. Arizona

August 28, 2017

Robert Hutton, Plaintiff,
v.
Terry McDaniel, et al., Defendants.

          ORDER

          JAMES A. TEILBRORG SENIOR UNITED STATES DISTRICT JUDGE

         Pending before the Court are Nominal Defendant Inventure Foods, Inc. (“Inventure”) and Defendants Terry McDaniel, Steve Weinberger, Timothy A. Cole, Ashton D. Asensio, Macon Bryce Edmonson, Paul J. Lapadat, Harold S. Edwards, David L. Meyers, and Itzhak Reichman's (the “Individual Defendants'”) Motion to Dismiss Shareholder Derivative Complaint (“Motion to Dismiss, ” Doc. 33 at 1-24), an alternative Motion to Stay, (id. at 24-26), and Request for Judicial Notice, (“Request, ” Doc. 34). Plaintiff Robert Hutton has filed a response to both Motions, (“Response, ” Doc. 35), and a response to Defendants' Request, (Doc. 36). Defendants have filed respective replies. (See Docs. 38; 39). Finally, consistent with Plaintiff's Request for Leave to Amend if the Court grants Defendants' Motion to Dismiss, Plaintiff has filed a Proposed Verified Amended Stockholder Derivative Complaint. (Doc. 47-1). The Court now rules on Defendants' Motions and Request.

         I. BACKGROUND

         This is a shareholder derivative action on behalf of nominal party Inventure against the company's officers and directors. (Doc. 2 at ¶ 1). Plaintiff states five claims for relief against Individual Defendants: (1) Individual Defendants breached their fiduciary duties by failing to oversee Inventure and prevent the company from engaging in unlawful acts, (id. at ¶¶ 86-92); (2) Defendants McDaniel, Cole, Asensio, Edmonson, Lapadat, Edwards, and Meyers (the “Director Defendants”)[1] violated Section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a), (id. at ¶¶ 81-85); (3) Individual Defendants breached their fiduciary duties by disseminating false or misleading information, (id. at ¶¶ 86-92); (4) Individual Defendants wasted corporate assets, (id. at ¶¶ 93-96); and (5) Individual Defendants were unjustly enriched, (id. at ¶¶ 97-100).[2]

         Plaintiff did not make a demand on Inventure's Board to pursue these claims before filing suit. (Id. at ¶ 74). Plaintiff maintains that any such demand would have been futile because the majority of Inventure's Board faces a substantial likelihood of personal liability. (Id. at ¶¶ 74, 75). Defendants disagree and have moved to dismiss Plaintiff's Complaint under Federal Rule of Civil Procedure (“Federal Rule”) 23.1 for failure to properly plead demand futility and under Federal Rule 12(b)(6) for failure to state a viable claim for relief. (See Docs. 33; 38).

         A. The Parties

         Inventure is a leading marketer and manufacturer of specialty snack foods. (Doc. 2 at ¶ 2). The company is incorporated in Delaware, and its principal executive offices are in Phoenix, Arizona. (Id. at ¶ 16). Inventure operates in two segments: frozen products and snack products. (Id.). The frozen products segment produces frozen fruits, vegetables, beverages, and desserts while the snack products segment produces potato chips, kettle chips, potato crisps, potato skins, pellet snacks, and sheeted dough products. (Id.). Inventure has manufacturing plants in Arizona, Florida, Georgia, Indiana, Oregon, and Washington. (Id.).

         Lead Plaintiff Robert Hutton has owned Inventure stock since at least March 13, 2014.[3] (Id. at ¶¶ 15, 52). Plaintiff remains a current stockholder of the company. (Id. at ¶ 15).

         The Individual Defendants are or were officers and/or directors of the company during the relevant period. Defendant McDaniel has been Inventure's CEO and a director since May 2008. (Id. at ¶ 17). Defendant Weinberger has been Inventure's CFO since August 2006. (Id. at ¶ 18). Defendant Cole has been Inventure's Interim Chairman of the Board since January 2017 and a director since May 2014. (Id. at ¶ 19). Defendant Asensio has been an Inventure director since February 2006 and was Chairman of Inventure's Audit Committee from July 2006 until at least April 2016. (Id. at ¶ 20). Defendant Edmonson has been an Inventure director since July 2006 and was a member of Inventure's Audit Committee from at least April 2012 until May 2014. (Id. at ¶ 21). Defendant Lapadat has been an Inventure director since May 2013 and was a member of Inventure's Audit Committee from May 2013 until at least April 2016. (Id. at ¶ 22). Defendant Edwards has been an Inventure director since May 2014 and was a member of Inventure's Audit Committee from May 2014 until at least April 2016. (Id. at ¶ 23). Defendant Meyers was Inventure's Chairman of the Board from September 2013 until January 2017, a director from May 2013 until January 2017, and a member of Inventure's Audit Committee from May 2013 until September 2013. (Id. at ¶ 24). Defendant Reichman was Inventure's Chairman of the Board from May 2010 until May 2013 and a director from October 2007 until May 2014. (Id. at ¶ 25).

         B. Factual Background

         In November 2013, Inventure acquired a frozen food packaging facility located in Jefferson, Georgia (the “Jefferson Facility”). (Id. at ¶¶ 4, 39). On March 13, 2014, Inventure filed its 2013 Form 10-K with the U.S. Securities and Exchange Commission (the “SEC”). (Id. at ¶ 52). This annual report was signed by all Inventure Board members and disclosed special obligations related to food manufacturing. (Id.). On or about September 17, 2014, Inventure held a secondary offering to sell Inventure stock. (Id. at ¶ 54). In connection with the secondary offering, Inventure filed a registration statement and prospectus supplement (the “Offering Documents”) with the SEC. (Id.). The Offering Documents incorporated the 2013 Form 10-K and were signed by Defendants McDaniel and Weinberger. (Id.).

         Nearly one year following Inventure's acquisition, on October 22, 2014, the Georgia Department of Agriculture (the “GDA”) inspected the Jefferson Facility and “found a wide variety obvious unsanitary conditions that are known to breed dangerous bacteria and foodborne contaminants.” (Id. at ¶ 45). On March 2, 2015, a complaint was filed with the U.S. Food and Drug Administration (the “FDA”) concerning the “unsafe and unsanitary conditions” at the Jefferson Facility. (Id. at ¶ 46). On March 10, 2015, Inventure filed its 2014 Form 10-K with the SEC. (Id. at ¶ 53).

         On April 17, 2015, the GDA and FDA conducted a joint inspection of the Jefferson Facility. (Id. at ¶ 47). This inspection lasted eight hours and discovered “unsanitary and unsafe conditions substantially similar to the” GDA's October 2014 inspection findings. (Id.). A few days later, on April 21, Inventure filed a Proxy Statement with the SEC. (Id. at ¶ 57). The 2015 Proxy Statement solicited stockholder votes to elect or re-elect Inventure's seven directors. (Id.; Doc. 33-3 at 8). One day later, on April 22, Inventure's Board met to discuss food safety issues at the Jefferson Facility. (Doc. 2 at ¶ 48). Also on April 22, Inventure's Board approved a press release that was released on April 23. (Id.). The press release announced that Inventure was initiating a voluntary “recall of nearly 200, 000 pounds of food manufactured in the Jefferson Facility” (the “Recall”). (Id. at ¶ 49). The press release explained that there was a finding of Listeria monocytogenes (“Listeria”) in its Jefferson Facility. (Id. at ¶ 65). The press release continued that “Listeria is an organism that can cause infections in young children, frail or elderly people, and others with weakened immune systems.” (Id.). Over the next two days, Inventure's share price dropped from $11.59 to $8.71 per share. (Id. at ¶ 66). On June 23, 2015, the GDA inspected the Jefferson Facility and reported that “all [food safety] violations had been corrected as of that date.” (Id. at ¶ 51).

         On July 1, 2015, the GDA informed Inventure “that water samples at the . . . Jefferson Facility tested positive for coliform bacteria[, ] . . . the standard indicator of insanitary conditions in drinking water.” (Id. at ¶ 52). Inventure filed its 2015 Form 10-K with the SEC on March 10, 2016. (Id. at ¶ 53). A month later, on April 11, Inventure filed a 2016 Proxy Statement with the SEC. (Id. at ¶ 61). The 2016 Proxy Statement solicited stockholder votes to elect or re-elect Inventure's seven directors. (Id.; Doc. 33-4 at 8).

         The FDA again inspected the Jefferson Facility between June 20 and 24, 2016. (Doc. 2 at ¶ 51). On July 8, 2016, the FDA “informed Inventure that [it] found Listeria on twelve of ninety-nine individual swabs taken from the Jefferson Facility.” (Id.). Following receipt of this information, Inventure destroyed the contaminated food, all of which had not yet been shipped into the marketplace. (Id. at ¶¶ 9, 51).

         Plaintiff subsequently made a demand pursuant to Delaware Code Annotated Title 8, Section 220 (a “Section 220 demand”) on Inventure.[4] (Id. at ¶ 4). After receiving documents pursuant to the Section 220 demand, Plaintiff commenced this action.

         II. DEFENDANTS' REQUEST FOR JUDICIAL NOTICE

         Defendants request the Court take judicial notice over six documents or facts, or, alternatively, consider them under the doctrine of incorporation by reference: (1) Inventure's November 12, 2013 press release filed with the SEC as an attachment to a Form 8-K, (Doc. 34-1); (2) Inventure's April 23, 2015 press release filed with the SEC as an attachment to a Form 8-K, (Doc. 34-2); (3) Inventure's 2015 Proxy Statement, (Doc. 34-3); (4) Inventure's 2016 Proxy Statement, (Doc. 34-4); (5) BSL Investments, II, LLC v. Fresh Frozen Foods, Inc., No. 1:15-CV-2136-AT, 2016 WL 9008197 (N.D.Ga. June 16, 2016), aff'd, 679 F. App'x 979 (11th Cir. 2017) (per curiam), (Doc. 34-5); and (6) a second amended complaint filed in the Superior Court of Arizona in Maricopa County case Westmoreland County Employee Retirement Fund v. Inventure Foods, Inc., No. CV2016-002718. (Doc. 34 at 1-4). Defendants also attach the following three exhibits to their Reply: (1) Inventure's October 28, 2014 Board Meeting Minutes, (Doc. 38-1); (2) Inventure's April 22, 2015 Board Meeting Minutes, (Doc. 38-2); and (3) the GDA Manufactured Food Inspection Form from the GDA's October 22, 2015 Jefferson Facility inspection, (Doc. 38-3). Plaintiff does not dispute the authenticity of any of these documents or facts but, rather, argues that the Court should deny Defendants' requests “to the extent Defendants are seeking judicial notice of the truth of the contents of these documents.” (Doc. 36 at 4).

         While a motion to dismiss is ordinarily limited to the allegations in the complaint, other documents may be considered if their “‘authenticity . . . is not contested' and the plaintiff's complaint necessarily relies on them.” Lee v. City of L.A., 250 F.3d 668, 688 (9th Cir. 2001) (quoting Parrino v. FHP, Inc., 146 F.3d 699, 705-06 (9th Cir. 1998)). A court may take judicial notice of information “not subject to reasonable dispute because it (1) is generally known within the trial court's territorial jurisdiction; or (2) can be accurately and readily determine from sources whose accuracy cannot reasonably be questioned.” Fed.R.Evid. 201(b). “A court shall take judicial notice if requested by a party and supplied with the necessary information.” Id. at 201(d).

         Under the incorporation by reference doctrine, if a document is referenced in a complaint, a court may “properly consider the [document] in its entirety.” In re NVIDIA Corp. Sec. Litig., 768 F.3d 1046, 1058 n.10 (9th Cir. 2014); see also City of Roseville Emps.' Ret. Sys. v. Sterling Fin. Corp., 963 F.Supp.2d 1092, 1107 (E.D. Wash. 2013) (“Once a document is deemed incorporated by reference, the entire document is assumed to be true for purposes of a motion to dismiss, and both parties-and the Court-are free to refer to any of its contents.”). Specifically, courts may take into account “documents whose contents are alleged in a complaint and whose authenticity no party questions, but which are not physically attached to the [plaintiff's] pleading.” Knievel v. ESPN, 393 F.3d 1068, 1076 (9th Cir. 2005).

         Defendants request that the Court deem Plaintiff's Complaint to have incorporated some of Defendants' proffered documents by reference. (Doc. 34 at 2-3). In particular, the Complaint refers to Inventure's 2015 Proxy Statement, (Doc. 2 at ¶ 41), 2016 Proxy Statement, (id.), the April 23, 2015 press release, (id. at ¶¶ 48-49, 65, 67), Inventure's October 28, 2014 Board Meeting Minutes, (id. at ¶ 45), Inventure's April 22, 2015 Board Meeting Minutes, (id. at ¶ 48), and the October 22, 2014 GDA inspection form, (id. at ¶ 45). Plaintiff does not contest the authenticity of these documents and, thus, the Court will deem these three documents to be incorporated by reference. The Court will “treat [these] document[s] as part of the complaint, and . . . assume that [their] contents are true for purposes of” Defendants' Motion to Dismiss. United States v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003).

         Defendants' remaining proffered documents are appropriate for judicial notice. Courts routinely take judicial notice of such things as public SEC filings, corporate press releases, and court proceedings. See, e.g., In re Copper Mountain Sec. Litig., 311 F.Supp.2d 857, 864 (N.D. Cal. 2004). Further, Plaintiff does not dispute the authenticity of any of these documents. Thus, the Court will take judicial notice of the existence-but not the truth of the facts recited therein-of the November 12, 2013 press release, the specified orders in the BSL Investments, II, LLC case, and the second amended complaint filed in the Westmoreland case[5]. See Klein v. Freedom Strategic Partners, 595 F.Supp.2d 1152, 1157 (D. Nev. 2009) (“When a court takes judicial notice of a public record, ‘it may do so not for the truth of the facts recited therein, but for the existence of the [record], which is not subject to reasonable dispute over its authenticity.'” (quoting Lee, 250 F.3d at 690)).

         III. MOTION TO DISMISS PURSUANT TO FEDERAL RULE 23.1

         Plaintiff acknowledges that no pre-suit demand was made upon Inventure's Board. (Doc. 2 at ¶¶ 75-79). Defendants move to dismiss the Complaint on the grounds that Plaintiff was required to create a reasonable doubt that a majority of Inventure's Board could have remained independent and disinterested in responding to Plaintiff's demand, and Plaintiff has failed to adequately plead that a majority of the directors on Inventure's Board was incapable of responding to a demand.[6] (See Doc. 33 at 1-13). In particular, Defendants argue that Plaintiff has failed to allege particularized facts that would show Director Defendants face a substantial risk of liability relating to Plaintiff's claims. (See id.; see also Doc. 2 at ¶¶ 75, 76).

         A. Demand Futility Legal Standard

         “The derivative form of action permits an individual shareholder to bring ‘suit to enforce a corporate cause of action against officers, directors, and third parties.'” Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 95 (1991) (emphasis in original) (quoting Ross v. Bernhard, 396 U.S. 531, 534 (1970)). “Devised as a suit in equity, the purpose of the 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.'” Id. (quoting Cohen v. Beneficial Loan Corp., 337 U.S. 541, 548 (1949)).

         However, there are limits to a shareholder's use of this derivative right. Use of the derivative right is unavailable unless the shareholder: “(a) has first demanded that the directors pursue the corporate claim and the directors have wrongfully refused to do so; or (b) establishes that pre-suit demand is excused because the directors are deemed incapable of making an impartial decision regarding the pursuit of the litigation.” Wood v. Baum, 953 A.2d 136, 140 (Del. 2008). “The purpose of the demand requirement is to affor[d] the directors an opportunity to exercise their reasonable business judgment and waive a legal right vested in the corporation in the belief that its best interests will be promoted by not insisting on such right.” Kamen, 500 U.S. at 96 (quotation marks omitted).

         Federal Rule 23.1 codifies this demand requirement in requiring that a shareholder derivative complaint “state with particularity: . . . 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 . . . the reasons for not obtaining the action or not making the effort.” Fed.R.Civ.P. 23.1(b). Although Federal Rule 23.1 provides the pleading standard required in a derivative action complaint, it does not provide the substantive rule for assessing what reasons are sufficient to excuse demand on the corporation. See Rosenbloom v. Pyott, 765 F.3d 1137, 1148 (9th Cir. 2014). The state of incorporation provides this substantive rule. Kamen, 500 U.S. at 109. Here, Inventure's state of incorporation is Delaware. (Doc. 2 at ¶ 16).

         Under Delaware law, a plaintiff complaining of board inaction and attempting to plead demand futility 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.'” In re Citigroup, 964 A.2d at 120 (quoting Rales v. Blasband, 634 A.2d 927, 933-34 (Del. 1993)); see also Del. Ch. Ct. R. 23.1. In other words, demand is excused if a plaintiff can show that a majority of directors on the board are interested in the alleged wrongdoing, not independent, or would face a “substantial likelihood” of liability if a lawsuit was filed. Rales, 634 A.2d at 936. To establish that a director faces a “substantial risk of liability, ” a plaintiff need only “make a threshold showing, through the allegation of particularized facts, that [his] claims have some merit.” Id. at 934.

         The particularity requirement in both Federal Rule 23.1 and Delaware Chancery Court Rule (“Delaware Rule”) 23.1 creates a heightened pleading standard. When a court considers a motion to dismiss for failure to comply with the demand requirements of Federal Rule 23.1 and Delaware Rule 23.1, “[p]laintiffs are entitled to all reasonable factual inferences that logically flow from the particularized facts alleged, but conclusory allegations are not considered as expressly pleaded facts or factual inferences.” Rosenbloom, 765 F.3d at 1148 (quotation marks omitted).

         1. Duty of Oversight

         Plaintiff alleges that demand is excused on his oversight claim because Director Defendants face a substantial likelihood of personal liability for failing to adequately oversee Inventure's food safety controls. (Doc. 2 at ¶¶ 77, 78). In particular, Plaintiff asserts that Director Defendants failed to exercise oversight over Inventure in two ways: (1) failing to implement an adequate system of internal controls, thereby preventing the Directors from being “aware of serious food safety risks and from acting to improve the deficient food safety controls, ” (Doc. 35 at 21 n.15; see also Docs. 2 at ¶ 77; 35 at 18- 22); and (2) failing to “timely and meaningfully address known significant food safety hazards” at the Jefferson Facility following the waving of various red flags, (Doc. 35 at 22; see also Docs. 2 at ¶ 77; 35 at 22-24). Defendants generally argue that Plaintiff's oversight claim fails because it is not supported by particularized facts. (See Doc. 38 at 7-8).

         The allegations that Director Defendants failed to prevent harm to Inventure is called a Caremark claim. Stone v. Ritter, 911 A.2d 362, 369-70 (Del. 2006) (discussing In re Caremark Int'l Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996)). Delaware courts have observed that this type of “failure of oversight” theory is “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.” In re Caremark, 698 A.2d at 967. A Caremark claim “requires a showing that the directors breached their duty of loyalty by failing to attend to their duties in good faith.” Guttman v. Jen-Hsun Huang, 823 A.2d 492, 506 (Del. Ch. 2003). “Put otherwise, the decision premises liability on a showing that the directors were conscious of the fact that they were not doing their jobs.” Id. To excuse demand based on an asserted Caremark claim, a plaintiff must plead particularized facts demonstrating, with “some merit, ” that the directors: (a) “utterly failed to implement any reporting or information system or controls; or (b) having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention.” Stone, 911 A.2d at 370 (emphasis in original). Here, Plaintiff has attempted to plead theories under both Caremark prongs.

         a. Utter Failure to Implement Internal System or Controls

         Plaintiff first presents an argument under the first Caremark prong, stating that Director Defendants utterly failed to adopt any reporting and compliance systems.[7] (Doc. 35 at 18-22). Plaintiff alleges that the documents produced in response to his Section 220 demand reveal an absence of any Inventure Board minutes or other Board materials relating to the monitoring of compliance with food safety regulations at the Jefferson Facility. (Id.). Plaintiff contends that the informational void supports a reasonable inference that Inventure's Board “conscious[ly] fail[ed] to ensure that it was informed about key food safety risks necessary for legal and regulatory compliance.” (Id. at 22).

         Delaware law does not require a board of directors to “monitor the monitors” after implementing a “well-constituted monitoring and reporting system.” Horman, 2017 WL 242571, at *9. Thus, “even if the reporting systems [a board] implemented and relied upon, without reason to suspect they were not working, did not ultimately detect corporate wrongdoing or bring [such wrongdoing] to their attention, ” a board cannot nonetheless be liable for breaching its fiduciary duties simply because such wrongdoing occurred. Id. In other words, under Delaware law, “[g]ood faith, not a good result, is what is required of the board.” In re Goldman Sachs Grp., Inc. S'holder Litig., No. 5215-VCG, 2011 WL 4826104, at *23 (Del. Ch. Oct. 12, 2011); see also David B. Shaev Profit Sharing Account v. Armstrong, No. Civ.A. 1449-N, 2006 WL 391931, at *5 (Del. Ch. Feb. 13, 2006) (“But the one thing that is emphatically not a Caremark claim is the bald allegation that directors bear liability where a concededly well-constituted oversight mechanism, having received no specific indications of misconduct, failed to discover fraud.”).

         Here, Plaintiff relies on a lack of documents produced following his Section 220 demand to allege that Inventure's Board failed to implement a system of internal controls. For example, Plaintiff alleges “of the thirty-eight Board minutes produced by the Company dated between 2013 and 2016, not one of them referenced the numerous violations at the Jefferson Facility prior to the acquisition or the October 2014 Inspection, including minutes for a Board meeting that occurred on October 28, 2014, the week after the October 2014 Inspection.” (Doc. 2 at ¶ 45). Based on this lack of information, Plaintiff argues that the Court should reasonably infer that Director Defendants may be substantially liable for breaching its oversight duties. (Doc. 35 at 20).

         The Court finds Plaintiff's argument unpersuasive. As a threshold matter, the October 28, 2014 meeting minutes cited by Plaintiff do not explicitly state that Inventure's Board discussed Jefferson Facility's food safety issues; however the minutes similarly do not preclude that such a discussion occurred. (See Doc. 38-1). For example, the October 28 minutes reflect that Defendant McDaniel provided an overview of Inventure's “operational successes and challenges year to date” and reported “on the year to date results for the Snack and Frozen divisions.” (Id. at 2-3). Plaintiff relies solely on these vague and amorphous descriptions in arguing that Inventure's Board never discussed the Jefferson Facility's food safety issues. See, e.g., eBay Domestic Holdings, Inc. v. Newmark, Civil Action No. 3705-CC, 2009 WL 3494348, at *3 (Del. Ch. Oct. 29, 2009) (recognizing that “[b]oard minutes contain high-level statements and are often generic in nature”). Thus, Plaintiff asks the Court to make two inferences: (1) the generalized Board minutes rule out that any discussion regarding the Jefferson Facility food safety issues took place; and (2) the lack of discussion is tantamount to a breach of Director Defendants' oversight duties.

         Next, Plaintiff has failed to cite to any case where a court has held that an allegation premised upon the absence of Section 220 records discussing a board's oversight-standing alone-meets the particularized allegations standard under Federal Rule 23.1. To the contrary, at least one Delaware court has held the opposite. See Horman, 2017 WL 242571, at *10 (“That the [p]laintiffs did not turn up any [b]oard documents specifically referencing continued compliance with [a governmental agreement] during a specific time period is not sufficient to allege that the system [of internal controls] was not in place . . . .”). Plaintiff instead cites In re China Agritech, Inc. Shareholder Derivative Litigation, in which the Court of Chancery of Delaware reasonably drew inferences of defendants' bad faith from the absence of produced books and records relating to audit committee meetings. C.A. No. 7163-VCL, 2013 WL 2181514, at *17 (Del. Ch. May 21, 2013). However, the China Agritech court noted that this “reasonable inference” was “reinforced” by the plaintiffs' other allegations, including: a letter from an outside auditor indicating an “illegal act” had occurred and that management had not yet taken “timely and appropriate remedial action”; discrepancies between public filings filed with governmental agencies; and implications from a proxy statement. See Id. at *18-22; see also In re Tyson Foods, Inc., 919 A.2d 563, 577-78 (Del. Ch. 2007) (inferring that a board never reviewed documents based on both the absence of information in records produced following a Section 220 demand and “detailed allegations” relating to an SEC Order and “logo vendor transactions”).

         Here, unlike the plaintiffs in China Agritech or In re Tyson, Plaintiff relies solely on the absence of books and records following the Section 220 demand-rather than additional, particularized factual allegations-to allege that Director Defendants face a substantial risk of liability for utterly failing to implement any reporting or information system or controls. Plaintiff has not met his burden, and, therefore, demand on Inventure's Board cannot be excused as futile based on the first Caremark prong. See, e.g., In re Gen. Motors Co. Derivative Litig., C.A. No. 9627-VCG, 2015 WL 3958724, at *14 (Del. Ch. June 26, 2015) (“Contentions that the [b]oard did not receive specific types of information do not establish that the [b]oard utterly failed to attempt to assure a reasonable information and reporting system exists . . . .” (quotation marks and citations omitted)); Armstrong, 2006 WL 391931, at *6 (holding that it is not enough for a plaintiff to plead “some hypothetical, especially zealous, board might have discovered and stopped the conduct complained of” to impose oversight liability).

         b. Director Defendants' Conscious Disregard of Red Flags

         Plaintiff next argues demand futility under the second Caremark prong. To establish demand futility under the second Caremark prong, a plaintiff must plead “(1) that the directors knew or should have known that the corporation was violating the law, (2) that the directors acted in bad faith by failing to prevent or remedy those violations, and (3) that such failure resulted in damage to the corporation.” Melbourne Mun. Firefighters' Pension Tr. Fund v. Jacobs, C.A. No. 10872-VCMR, 2016 WL 4076369, at *8 (Del. Ch. Aug. 1, 2016) (citing In re Caremark, 698 A.2d at 971). Plaintiffs often attempt to satisfy the elements of a Caremark claim by “plead[ing] [particularized facts] that the board knew of evidence of corporate misconduct-the proverbial ‘red flag'-yet acted in bad faith by consciously disregarding its duty to address that misconduct.” Reiter ex rel. Capital One Fin. Corp. v. Fairbank, C.A. No. 11693-CB, 2016 WL 6081823, at *8 (Del. Ch. Oct. 18, 2016). In this context, bad faith means “‘the directors were conscious of the fact that they were not doing their jobs, ' and that they ignored ‘red flags' indicating misconduct in defiance of their duties.” Armstrong, 2006 WL 391931, at *5 (quoting Guttman, 823 A.2d at 506- 07). Here, Plaintiff alleges four red flags, which purportedly form the basis for Director Defendants' substantial likelihood of oversight liability, including the following: (1) pre-acquisition food safety problems at the Jefferson Facility between 2009 and 2012; (2) the October 22, 2014 GDA finding of unsanitary conditions at the Jefferson Facility; (3) the March 2, 2015 FDA complaint; and (4) the April 23, 2015 Recall.[8]

         i. Pre-Acquisition Food ...


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