White v. Panic, 66,2000.

Citation783 A.2d 543,374 Pa. 179
Decision Date03 October 2001
Docket NumberNo. 66,2000.,66,2000.
PartiesAndrew WHITE, Plaintiff Below, Appellant, v. Milan PANIC, Weldon B. Jolley, Thomas H. Lenagh, Roberts A. Smith, Richard W. Star, Andrei Kozyrev, Norman Barker, Jr., Birch E. Bayh, Jr., Alan F. Charles, Adam Jerney, Stephen D. Moses, Roger Guillemin, Jean-Francois Kurz, Charles T. Manatt, Michael Smith and ICN Pharmaceuticals, Inc., Defendants Below, Appellees.
CourtUnited States State Supreme Court of Delaware

Joseph A. Rosenthal, of Rosenthal, Monhait, Gross & Goddess, P.A., Wilmington; Irving Bizar (argued), of Bizar Martin & Taub, LLP, New York City, of counsel, for Appellant.

Jesse A. Finkelstein, and Srinivas M. Raju, of Richards, Layton & Finger, P.A., Wilmington; Warren L. Dennis (argued), Gregg M. Mashberg, and Michael C. Hochman, of Proskauer Rose LLP, Washington, D.C., of counsel, for Director Appellees.

Josy W. Ingersoll, and Christian Douglas Wright, of Young, Conaway, Stargatt & Taylor, LLP, Wilmington; Laurence P. Eagel (argued) of Bragar Wexler Eagel & Marganstern, LLP, New York City; Clifford R. Saffron, of ICN Pharmaceuticals, Inc., New York City, of counsel, for Appellee ICN Pharmaceuticals, Inc.

Before VEASEY, Chief Justice, WALSH, HOLLAND, BERGER and STEELE, Justices, constituting the Court en Banc. VEASEY, Chief Justice:

In this appeal, we consider whether a complaint in a derivative action presents sufficient particularized factual allegations to create a reasonable doubt that the director defendants were disinterested and independent or that their conduct was protected by the business judgment rule. The complaint alleges, based almost entirely on facts derived from an investigative report in a news magazine, that the board of directors affirmatively refused to take any measures to stop or sanction sexual misconduct by a corporate officer that allegedly subjected the corporation to potential civil liability and expense.

We agree with the holding of the Court of Chancery that the complaint does not allege sufficient particularized facts to raise a reasonable doubt that the board's actions were the product of valid business judgment. The facts alleged in the complaint do not support a reasonable inference that the board knew about the officer's misconduct but intentionally decided not to sanction the officer or to curb future misconduct. Similarly, there are insufficient facts alleged in the complaint to support an inference that the board acted in bad faith or wasted corporate assets by using corporate funds to pay settlements and expenses connected with the harassment suits.

It is not within our province to express a view on the morality of the alleged conduct of the corporate officer or the business decisions of the board in its handling of that conduct. Our role is to review de novo the legal sufficiency of the complaint in accordance with the standard of review established in our jurisprudence.1 Applying that standard we find that the allegations in this complaint do not meet the heightened pleading requirements to excuse pre-suit demand in derivative suits as required by Chancery Rule 23.1. That rule is designed to implement the principle that the cause of action belongs to the corporation, not the stockholder plaintiff and it is the board (unless a majority of its members are disqualified) that must decide whether to pursue the corporation's claim. The claim having been dismissed with prejudice for pleading deficiencies, the plaintiff now seeks from this Court the right to amend his complaint and to pursue avenues to develop the necessary facts.

Because this case does not present any novel legal issues and does not require us to clarify or to change our jurisprudence relating to the pleading requirements under Chancery Rule 23.1, the general rule against permitting plaintiffs to amend their complaint after a dismissal and an unsuccessful appeal applies. Accordingly, we affirm the judgment of the Court of Chancery dismissing the complaint with prejudice.

Facts

On July 6, 1998, U.S. News & World Report published a cover story2 describing several sexual harassment suits filed against Milan Panic, the founder and Chief Executive Officer of ICN Pharmaceuticals, Inc. ("ICN").3 ICN is an international enterprise engaged in the manufacture and marketing of pharmaceutical products. Based principally on the facts reported in the U.S. News article, Andrew White, an ICN stockholder, filed a derivative suit in the Court of Chancery naming the individual directors on the ICN board as defendants4 and naming ICN as a nominal defendant.

The following summarizes the facts alleged in the derivative complaint.5 According to the complaint, four women have filed suits against ICN alleging that Panic "repeatedly propositioned or groped them and rewarded or punished female employees based on whether they complied or complained."6 ICN has apparently disclosed publicly that it has paid a total of $3,500,000 to settle eight harassment suits against Panic.7 The complaint does not provide any details about the nature of the legal claims against ICN, the amount of each settlement, or the status of pending litigation. There are also no allegations that Panic has ever been found liable for sexual harassment or has conceded that he engaged in any misconduct.

The plaintiff posits that, although ICN officials knew about Panic's alleged misconduct as early as 1992,8 the board made a concerted effort to protect Panic by using corporate funds to settle the suits against Panic and ICN and by implementing policies designed, at least in part, to minimize exposure of Panic's alleged activities. To support the assertion that the board knew of Panic's behavior, one of the director defendants in this case, Norman Barker, Jr., is quoted in the complaint as saying: "[T]he problem with Panic is he can't keep it in his pants." Allegedly to avoid unwanted publicity about Panic's conduct, ICN has implemented a policy requiring employees to submit all grievances to sealed arbitration. According to the complaint, Panic and other directors have conceded in deposition testimony that the board has never sanctioned Panic for the alleged misconduct.

The board has also not required that Panic reimburse ICN for the corporate funds expended in defending and settling the suits based on his alleged misconduct. To the contrary, the plaintiff alleges that the board approved a short-term loan from ICN to Panic so that he could pay a $3,500,000 settlement in a paternity suit. With the approval of the board, ICN then guaranteed a loan from a third-party bank to Panic (as a replacement for the short-term loan) and deposited $3,600,000 from the corporate treasury as collateral for the loan. In return, Panic pledged 150,000 stock options with an exercise price of $15.17 per share.9

Panic and the board moved to dismiss the complaint under Chancery Rule 23.1 on the ground that the plaintiff did not file a demand on the board before proceeding with his derivative suit and did not show that demand was excused as futile. The Court of Chancery held that demand was not excused in this case because the particularized factual allegations in the complaint do not raise a reasonable doubt that the board was disinterested or that the board's actions were the product of valid business judgment.10 The court therefore granted the defendants' motion to dismiss the complaint with prejudice. The plaintiff now appeals the Court of Chancery's dismissal with prejudice of his complaint.

Scope of Review

We review de novo the decision of the Court of Chancery to dismiss a derivative suit under Rule 23.1.11 At the motion to dismiss stage of the litigation, "[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."12 Of course, we "need not blindly accept as true all allegations, nor must [we] draw all inferences from them in plaintiffs' favor unless they are reasonable inferences."13

The plaintiff argues that the Court of Chancery erred by applying too strict a pleading standard in its interpretation of the complaint in ruling on the defendants' motion to dismiss. Based on its conclusion that the plaintiff did not conduct a sufficient investigation before filing the derivative action at issue here, the Court of Chancery explicitly refused to "give a broad reading to the facts alleged in the complaint" and declined to "infer from them the existence of other facts that would have been proven or disproven by a further pre-suit investigation."14 Relying on this statement, the plaintiff contends that the court erroneously imposed a heightened pleading burden when it decided the defendants' motion to dismiss.

The Court of Chancery was certainly justified in chastising the plaintiff for his lackluster pre-suit efforts.15 Nevertheless, a perceived deficiency in the plaintiff's pre-suit investigation would not permit the Court of Chancery, or this Court on appeal, to limit its reading of the complaint or to deny the plaintiff the benefit of reasonable inferences from well-pleaded factual allegations.16 If the plaintiff fails to undertake appropriate investigation before filing suit, the plaintiff will simply have fewer "particularized facts" from which the court may draw reasonable inferences.

Of course, it is not clear from the statement in the Court of Chancery's opinion that the Court actually limited its interpretation of the complaint in a manner inconsistent with the accepted standards described above. In any event, we find that the trial court's limitation was, at most, harmless error because this Court must "decide de novo whether the Complaint was properly dismissed for failure to set forth particularized facts to support the plaintiff['s] claim that demand is excused."17

Application of Chancery Rule 23.1 Pleading...

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