In re Danaher Corp. S'holder Derivative Litig.
| Decision Date | 28 June 2021 |
| Docket Number | C/w Case No. 1:20-cv-02846-TNM,Case No. 1:20-cv-02445-TNM |
| Citation | 549 F.Supp.3d 59 |
| Parties | IN RE DANAHER CORPORATION SHAREHOLDER DERIVATIVE LITIGATION |
| Court | U.S. District Court — District of Columbia |
It is black letter law that a board of directors manages a corporation's affairs. Derivative suits—when shareholders sue on a corporation's behalf for wrong done to the corporation—therefore impinge on a board's management prerogatives. The demand requirement balances the interests of directors in managing the corporation and the interests of shareholders in challenging abuses that harm it. A shareholder thus properly brings a derivative suit only when the board wrongfully refuses to act itself after the shareholder demands that it do so or when the shareholder is excused from making a demand because the board is too conflicted to act appropriately.
These principles take center stage here. Plaintiffs—some shareholders of Danaher Corporation—sue several of Danaher's directors. They argue that the Defendants falsely represented Danaher as a diverse corporation even though no African American serves on the Board. Defendants move to dismiss primarily because Plaintiffs failed to either make a demand on the Board to bring this suit or to plead with particularity that such demand would have been futile. The Court agrees. The Board—not shareholders—controlled the decision to act, and Plaintiffs thus had to make demand on the Board. Because they did not, the Court will dismiss the case.
Danaher "designs, manufactures and markets professional, medical, industrial and commercial products and services, with research and development, manufacturing, sales and distribution in 60 countries." Verified Shareholder Derivative Compl. ("Compl.") ¶ 2, ECF No. 1.1 It is incorporated in Delaware, and its principal offices are in Washington, D.C. Id. ¶ 23.
Plaintiff shareholders—City of Pontiac General Employees’ Retirement System and Harry Markarian ("Shareholders")—filed this shareholder derivative action against ten members of Danaher's 12-member Board of Directors2 and Nominal Defendant Danaher (collectively, the "Directors"). Id. ¶¶ 22–33; Pls.’ Opp'n to Defs.’ Mot. to Dismiss ( ) at 8, ECF No. 29.3 The Complaint acknowledges that Danaher has received "multiple awards and recognitions for diversity," including being recognized on Forbes’ list of the Top 200 Best Employers for Diversity in 2018 and 2019. Compl. ¶¶ 54–55. But the Shareholders contend that, because there are no black directors on Danaher's Board, the Directors have falsely represented Danaher as a company that promotes diversity. See, e.g. , id. ¶¶ 12–13, 53–64. Under the Shareholders’ theory, African American representation is the sine qua non of diversity; other racial, ethnic, gender, religious, and socioeconomic backgrounds do not count.
In particular, the Shareholders challenge company statements such as "We're passionate about recruiting, developing and retaining the most talented and diverse team possible"; "A diverse and inclusive workforce strengthens Danaher and ensures the best team continues to win"; and "We seek out a wide range of unique experiences, perspectives and talents, ensuring that diverse voices and viewpoints are heard and celebrated." Id. ¶¶ 54, 56 (cleaned up).
The Shareholders say that the Board does not have a "policy, formal or informal, with respect to the identification, selection or consideration of specific African American [Board] nominees." Id. ¶ 60. They cite Danaher's proxy statements, which—among other things—say that the Board does not have such a policy "with respect to diversity" and that it "does not make any particular weighting of diversity or any other characteristic in evaluating nominees and directors," but "subjectively takes into consideration the diversity ... of the Board when considering director nominees." Id. (cleaned up).
The Complaint raises three claims: (1) breach of fiduciary duty (Count I); (2) unjust enrichment (Count II); and (3) violation of § 14(a) of the Securities Exchange Act and SEC Rule 14a-9 (Count III). Id. at 44–46. The Shareholders seek broad relief, including damages and an order directing Danaher to replace three of its current directors with "two African Americans and one other racial minority," "[i]nvest $150 million in economic and social justice programs," and "[f]ill 15% of all new positions in the United States with African Americans." Id. at 46–47.
Before the Court is the Directors’ motion to dismiss. It is ripe for disposition.4
The Directors move to dismiss because the Shareholders fail to properly plead demand futility. See, e.g. , Defs.’ Mem. in Supp. of Mot. to Dismiss Pls.’ Verified Shareholder Compl. ( ) at 19, ECF No. 27-1. Federal Rule of Civil Procedure 23.1 governs derivative actions. It requires that a complaint "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." Fed. R. Civ. P. 23.1(b)(3). While Rule 23.1 provides the pleading standard, state law governs the substance of the demand requirement. Kamen v. Kemper Fin. Servs., Inc. , 500 U.S. 90, 108–09, 111 S.Ct. 1711, 114 L.Ed.2d 152 (1991). The parties agree that Delaware law applies. Defs.’ Mot. at 16 n.4; Pls.’ Opp'n at 15.
The Directors also move to dismiss under Federal Rule of Civil Procedure 12(b)(6). See, e.g. , Defs.’ Mot. at 20. To survive a motion to dismiss under Rule 12(b)(6), "a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face." Hurd v. District of Columbia , 864 F.3d 671, 678 (D.C. Cir. 2017) (cleaned up). A plaintiff must plead "factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).
Given the case's procedural posture, the Court accepts the Complaint's factual allegations as true and construes them in the light most favorable to the Shareholders. See L. Xia v. Tillerson , 865 F.3d 643, 649 (D.C. Cir. 2017). The Court need not, however, credit "a legal conclusion couched as a factual allegation." Iqbal , 556 U.S. at 678, 129 S.Ct. 1937 (cleaned up). The Court considers "only the facts alleged in the complaint, any documents either attached to or incorporated in the complaint and matters of which [it] may take judicial notice." Hurd , 864 F.3d at 678 (cleaned up). Evaluating a motion to dismiss is "a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Iqbal , 556 U.S. at 679, 129 S.Ct. 1937.
"A cardinal precept of the General Corporation Law of the State of Delaware is that directors, rather than shareholders, manage the business and affairs of the corporation." Aronson v. Lewis , 473 A.2d 805, 811 (Del. 1984), overruled on other grounds by Brehm v. Eisner , 746 A.2d 244 (Del. 2000). A stockholder bringing a derivative action "asserts a cause of action belonging to the corporation." Rales v. Blasband , 634 A.2d 927, 932 (Del. 1993). So a derivative action, "[b]y its very nature ... impinges on the managerial freedom of directors." Aronson , 473 A.2d at 811.
The demand requirement flows from this concern. A shareholder can bring a derivative suit only "where either the stockholder has demanded the directors pursue a corporate claim and the directors have wrongfully refused to do so, or where demand is excused because the directors are incapable of making an impartial decision regarding whether to institute such litigation." Stone ex rel. AmSouth Bancorporation v. Ritter , 911 A.2d 362, 366–67 (Del. 2006). In this way, "the demand requirement implements the basic principle of corporate governance that the decisions of a corporation—including the decision to initiate litigation—should be made by the board of directors or the majority of shareholders." Kamen , 500 U.S. at 101, 111 S.Ct. 1711 (cleaned up).
The Shareholders concede that they did not make demand on Danaher's Board, but they argue that it would have been futile. See, e.g. , Compl. ¶ 100. There are two tests for determining whether a complaint properly alleges demand futility. Wood v. Baum , 953 A.2d 136, 140 (Del. 2008). When a decision of the board of directors is the subject of a derivative suit—in other words, when "claims involv[e] a contested transaction"—the Aronson test applies. Id. Under it, courts consider "whether, under the particularized facts alleged, a reasonable doubt is created that: (1) the directors are disinterested and independent and (2) the challenged transaction was otherwise the product of a valid exercise of business judgment." Aronson , 473 A.2d at 814. In contrast, when there is an "absence of board action"—or, put differently, "where the subject of the derivative suit is not a business decision of the board"—the Rales test applies. See Rales , 634 A.2d at 933–34.
The parties apparently agree that Rales applies here. See, e.g. , Pls.’ Opp'n at 35; Defs.’ Reply in Supp. of Mot. to Dismiss Pls.’ Verified Shareholder Compl. ( ) at 11, ECF No. 30. Indeed, the Aronson test would be inappropriate because, as the Delaware Supreme Court explained, "[t]he absence of board action ... makes it impossible to perform the essential inquiry contemplated by Aronson —whether the directors have acted in conformity with the business judgment rule in approving the challenged transaction."5 Rales , 634 A.2d at 933.
Under Rales , demand is considered futile if a complaint alleges 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...
To continue reading
Request your trial