Strong ex rel. Tidewater, Inc. v. Taylor

• Decision Date: 02 July 2012
• Docket Number: Civil Action No. 11–392.
• Citation: 877 F.Supp.2d 433
• Parties: Jonathan STRONG derivatively on behalf of TIDEWATER, INC., Plaintiff v. Dean E. TAYLOR, et al., Defendants and Tidewater, Inc., Nominal Defendant.
• Court: U.S. District Court — Eastern District of Louisiana

877 F.Supp.2d 433

Jonathan STRONG derivatively on behalf of TIDEWATER, INC., Plaintiff

v.Dean E. TAYLOR, et al., DefendantsandTidewater, Inc., Nominal Defendant.

Civil Action No. 11–392.

United States District Court,

E.D. Louisiana.

July 2, 2012.

Andrew Allen Lemmon, Irma L. Netting, Lemmon Law Firm, Hahnville, LA, Albert Y. Chang, Chapin Fitzgerald Sullivan & Bottini LLP, San Diego, CA, for Plaintiff.

Cliffe Edward Laborde, III, Cliff Lacour, Laborde & Neuner, Lafayette, LA, Jeffrey E. McFadden, Sean Griffin, Steptoe & Johnson, LLP, Washington, DC, for Defendants.

ORDER AND REASONS

JANE TRICHE MILAZZO, District Judge.

Before the Court is Nominal Defendant Tidewater, Inc.'s (“Tidewater”) Motion to Dismiss (Doc. 29) and Defendants' Dean E. Taylor, Stephen W. Dick, Joseph M. Bennet, Kevin Carr, R.A. (Rich) Patarozzi, M. Jay Allison, James C. Day, Richard Du Moulin, Morris E. Foster, J. Wayne Leonard, Jon C. Madonna, Joseph H. Netherland, Nicholas J. Sutton, Cindy B. Taylor and Jack Thompson (collectively, “Individual Defendants”) Motion to Dismiss (Doc. 32).

For the following reasons, Nominal Defendant Tidewater, Inc.'s (“Tidewater”) Motion to Dismiss (Doc. 29) is hereby GRANTED. Individual Defendants' Dean E. Taylor, Stephen W. Dick, Joseph M. Bennet, Kevin Carr, R.A. (Rich) Patarozzi, M. Jay Allison, James C. Day, Richard Du Moulin, Morris E. Foster, J. Wayne Leonard, Jon C. Madonna, Joseph H. Netherland, Nicholas J. Sutton, Cindy B. Taylor and Jack Thompson Motion to Dismiss (Doc. 32) is hereby GRANTED.

BACKGROUND

Tidewater is a company incorporated in Delaware, but maintains its worldwide headquarters and principal executive offices in New Orleans, Louisiana. Tidewater renders offshore service vessels and marine support services to the global offshore energy industry. Tidewater provides these services in support of all phases of offshore exploration, field development, and production. Tidewater Marine International, Inc. (“TMII”) is a wholly-owned subsidiary of Tidewater. Tidewater does business in Nigeria and Azerbaijan through TMII.

Plaintiff alleges that Tidewater, via TMII, violated the Foreign Corrupt Practices Act (“FCPA”) by paying $160,000 in bribes to officials in Azerbaijan to resolve tax audits in Tidewater's favor, while knowing that some or all of the money would be paid to Azeri tax officials. (Doc. 1, ¶ 5.) These bribes were falsely identified as legitimate expenses, such as tax payments and travel expenses. (Doc. 1, ¶ 42.) Plaintiffs allege that the bribery took place in 2001, 2003 and 2005 when the Azeri Tax Authority initiated tax audits of TMII's business operations in Azerbaijan. ( Id.)

Plaintiff further states that Tidewater paid approximately $1.6 million in bribes to the Nigerian Customs Service to induce Nigerian officials to disregard customs regulations regarding the importation of vessels into Nigerian waters. (Doc. 1, ¶ 5.) Plaintiffs allege that this activity took place from approximately January of 2002 through March of 2006. (Doc. 1, ¶ 70.) Further, Plaintiffs note that none of Tidewater's financial statements during the relevant period filed with the SEC described the bribes or the purposes of the reimbursements. (Doc. 1, ¶ 75.)

In November 2010 Tidewater settled with the Securities and Exchange Commission (“SEC”), paying $8,104,362.00 in disgorgement and pre-judgment interest. (Doc. 1, ¶ 7.) Also in November, 2010 Tidewater entered into a Deferred Prosecution Agreement (“DPA”) with the United States Department of Justice (“DOJ”). (Doc. 32–7).¹ TMII paid a $7.35 million penalty as a part of the Deferred Prosecution Agreement. ( Id.)

Plaintiff Jonathan Strong (“Strong”) brought this shareholder derivative suit on February 16, 2011 arising from these violations of the FCPA and the Securities Exchange Act of 1934 (“Exchange Act”). Strong, a shareholder in Tidewater since 1999, brought this action against the officers and members of the Board of Directors of Tidewater alleging that they breached their fiduciary duties in that they: (1) knew or recklessly disregarded the fact that employees, representatives, agents and/or contractors were paying, had paid and/or had offered to pay bribes to Azerbaijani and Nigerian government officials to obtain favorable treatment for Tidewater (Doc. 1, ¶ 2.); (2) caused Tidewater to pay bribes and to disguise the bribe payments as legitimate expenses in Tidewater's books and financial disclosures (Doc. 1, ¶ 6); and (3) failed to maintain adequate internal controls to ensure compliance with the FCPA and Exchange Act (Doc. 1, ¶ 3). As a result of these actions, Plaintiff alleges that, in addition to the multi-million dollar penalties, Tidewater has suffered damages to its goodwill and reputation and has incurred significant expenses in connection with investigating illegal activities. (Doc. 1, ¶ 8.)

This shareholder derivative action seeks to recover damages on Tidewater's behalf against the Defendants for breaches of fiduciary duties, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment. (Doc. 1, ¶ 9.) Additionally, Plaintiff seeks injunctive relief in relation to Tidewater's implementation and administration of a system of internal controls and accounting systems sufficient to satisfy the requirements of the FCPA. (Doc. 1, ¶ 40.)

On September 1, 2011 Individual Defendants filed a Motion to Dismiss. (Doc. 32.) Tidewater filed a Motion to Dismiss adopting the arguments in Defendants Motion to Dismiss. (Doc. 29.) Plaintiff subsequently filed an opposition to both Motions (Doc. 37) and Defendants filed a Reply brief (Doc. 40).

LEGAL STANDARD

To survive a Rule 12(b)(6) motion to dismiss, a plaintiff must plead enough facts “to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 547, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). A claim is “plausible on its face” when the pleaded facts allow the court to “draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 129 S.Ct. at 1949. A court must accept the complaint's factual allegations as true and must “draw all reasonable inferences in the plaintiff's favor.” Lormand v. U.S. Unwired, Inc., 565 F.3d 228, 232 (5th Cir.2009). The Court need not, however, accept as true legal conclusions couched as factual allegations. Iqbal, 129 S.Ct. at 1949–50.

To be legally sufficient, a complaint must establish more than a “sheer possibility” that the plaintiff's claims are true. Id. The complaint must contain enough factual allegations to raise a reasonable expectation that discovery will reveal evidence of each element of the plaintiff's claim. Lormand, 565 F.3d at 255–57. If it is apparent from the face of the complaint that an insurmountable bar to relief exists, and the plaintiff is not entitled to relief, the court must dismiss the claim. Jones v. Bock, 549 U.S. 199, 215, 127 S.Ct. 910, 166 L.Ed.2d 798 (2007).

LAW AND ANALYSIS

Individual Defendants Motion to Dismiss argues two reasons as to why the law precludes Strong's shareholder derivative action. First, they assert that Plaintiff did not make a formal demand on the Tidewater board prior to filing suit as the Federal Rules of Civil Procedure and Delaware law require. While Plaintiff may show that his failure to make a demand is excused, Defendants argue that he has not plead “demand futility” with particularity.

Second, Defendants argue that the Plaintiff may not shift to Defendants the burden of disgorgement and penalties the federal regulatory authorities chose to impose upon Tidewater, and that it agreed to pay. They assert that the statutes under which the government sought and obtained remedies against Tidewater, the Exchange Act and the FCPA, do not authorize shifting of payment and that public policy precludes it. Additionally, they allege that the state law theories of liability by which Plaintiff attempts to circumvent this prohibition are preempted.

After assessing the record the Court finds that Plaintiff did not adequately plead demand futility as is required under the Federal Rules of Civil Procedure. Due to the Court's dismissal of Plaintiff's action based on these grounds, see infra. A, the Court declines to entertain the second argument made by the Defendants at this time.

A. DEMAND ON THE BOARD

Defendants assert that the allegations that Plaintiff makes do not rise to the level to excuse demand on the Board prior to filing suit. Defendants argue that Plaintiff fails to allege particularized facts specific to each Director Defendant thereby failing to demonstrate that a majority of the Board is not independent and disinterested. Additionally, Plaintiff fails to state particularized facts excusing demand based on each Director Defendant's knowledge of books and records or disclosure violations. They further allege that the Plaintiff fails to assert particularized facts excusing demand based on a fiduciary duty of oversight.

Plaintiff argues that demand was futile because, as Plaintiff's Complaint articulates, the Defendants face a significant likelihood of liability and lack independence for failing to maintain adequate controls and from their knowledge of the FCPA violations and violations under the Exchange Act. Specifically, Plaintiff notes that Defendant Taylor has substantial liability under the Sarbanes Oxley Act (“SOX”). Plaintiff concludes that the Defendants lack a legal and factual basis to escape a finding of demand futility.

I. Shareholder Derivative Suits and Demand Futility

Shareholder derivative suits authorize individual shareholders of a corporationto file suit on the corporation's behalf as “[a] means to protect the interests of the corporation from the misfeasance and malfeasance of faithless directors and managers.” Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 95, 111 S.Ct. 1711, 114 L.Ed.2d 152 (1991) (...