United States District Court, D. Arizona
A. TEILBRORG SENIOR UNITED STATES DISTRICT JUDGE
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.
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”) 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).
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).
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
Plaintiff Robert Hutton has owned Inventure stock since at
least March 13, 2014. (Id. at ¶¶ 15, 52).
Plaintiff remains a current stockholder of the company.
(Id. at ¶ 15).
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).
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.).
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).
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).
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
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).
subsequently made a demand pursuant to Delaware Code
Annotated Title 8, Section 220 (a “Section 220
demand”) on Inventure. (Id. at ¶ 4). After
receiving documents pursuant to the Section 220 demand,
Plaintiff commenced this action.
DEFENDANTS' REQUEST FOR JUDICIAL NOTICE
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).
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).
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).
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).
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. 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
MOTION TO DISMISS PURSUANT TO FEDERAL RULE 23.1
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. (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).
Demand Futility Legal Standard
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)).
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
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).
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.
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).
Duty of Oversight
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).
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.
Utter Failure to Implement Internal System or
first presents an argument under the first Caremark
prong, stating that Director Defendants utterly failed to
adopt any reporting and compliance systems. (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).
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
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).
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
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”).
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
Director Defendants' Conscious Disregard of Red
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
Pre-Acquisition Food ...