Carpenters’ Pension Fund of Illinois; Iron Workers Pension Fund, Local 11; Peoria Police Pension Fund; Laura Wood; Harkishan Parekh, derivatively on behalf of Centene Corporation v. Michael Neidorff; Jeffrey A. Schwaneke; Robert K. Ditmore; David Steward; John R. Roberts; Tommy G. Thompson; Frederick H. Eppinger; Richard Gephardt; Orlando Ayala; Vicki B. Escarra; K. Rone Baldwin; Carol E. Goldman; Centene Corporation, a Delaware corporation
No. 20-3216
United States Court of Appeals For the Eighth Circuit
April 7, 2022
Submitted: September 23, 2021
v.
Defendants - Appellees
Appeal from United States District Court for the Eastern District of Missouri - St. Louis
Before SHEPHERD, WOLLMAN, and KOBES, Circuit Judges.
SHEPHERD, Circuit Judge.
Following the merger of Centene Corporation (Centene) and Health Net, Inc. (Health Net), certain shareholders of Centene (collectively, Appellants) brought five
I.
Centene is a Delaware corporation that sells health insurance policies for Medicaid, Medicare Advantage, and Medi-Cal, among other products. Prior to its merger with Centene, Health Net sold health insurance policies to individuals, families, and businesses; offered behavioral health, substance abuse, and employee assistance programs; and offered plans for the provision of prescription drugs. In November 2014, Centene‘s President and CEO, Michael F. Neidorff, contacted Health Net‘s CEO, Jay Gellert, to discuss their respective businesses. On June 8, 2015, Neidorff informed Gellert that Centene was interested in pursuing a potential business combination with Health Net. Throughout the remainder of June 2015, the Board met on several occasions to discuss the proposed transaction. On July 1, 2015, the Board unanimously approved a merger of the two companies, and the next day, Centene and Health Net put out a joint press release announcing the merger.
Centene and Health Net issued a joint proxy statement (the Proxy Statement) on September 21, 2015, asking for shareholder approval of the merger. The Proxy
On April 26, 2016, Centene filed a SEC Form 10-Q (the April 10-Q) reporting its first-quarter financial performance. There, Centene stated that due to the timing of the merger‘s closing, only preliminary estimates of Health Net‘s assets and liabilities as of the date of acquisition were available for reporting and such estimates were subject to change. The April 10-Q did not address any premium deficiency reserves (PDRs)2 that may have been necessary to cover Health Net liabilities, even though Centene‘s audit committee had determined on April 25, 2016, the day before the form was filed, that the PDRs for Health Net needed to be set, at a minimum, to $117 million. Following the filing of the April 10-Q, Neidorff and other Centene officers assured the public of the merger‘s success on multiple occasions.
On July 26, 2016, Centene released its second-quarter financial results. These results disclosed a $390 million increase in reserves for Health Net‘s increased liabilities, including a $90 million increase in reserves for disputed claims arising from Health Net‘s dealings with substance abuse treatment centers and a $300 million PDR booked to account for potential losses related to underperforming contracts. Following this disclosure, Centene‘s stock price dropped more than 8%, amounting to a loss of over $1 billion in stockholder value. Neidorff later admitted
After the district court consolidated Appellants’ separate derivative actions, Appellants filed their Verified Consolidated Amended Stockholder Derivative Complaint (the Amended Complaint). Significantly, Appellants did not demand that the Board bring the desired lawsuit, instead arguing that demand would be futile because a majority of the Board could not have impartially considered whether to bring such suit. At the time Appellants filed the Amended Complaint, the Board consisted of nine directors: inside-director Neidorff and eight outside directors. Appellees include Neidorff and outside-directors Robert K. Ditmore, David L. Steward, John R. Roberts, Tommy G. Thompson, Frederick H. Eppinger, Richard A. Gephardt, and Orlando Ayala (collectively, the Director Defendants). Outside-director Jessica Blume, who was not a director when the Proxy Statement issued in September 2015, is not named as a defendant.
Appellees filed a motion to dismiss the Amended Complaint, arguing that Appellants failed to plead demand futility. The district court granted Appellees’ motion and dismissed the case with prejudice, finding that Appellants failed to plead facts with sufficient particularity that would excuse pre-suit demand. Appellants timely brought the present appeal, arguing that the district court erred in finding that the Amended Complaint failed to demonstrate demand futility.
II.
We review a district court‘s grant of a motion to dismiss de novo, accepting all allegations within the complaint as true. Gomes v. Am. Century Cos., 710 F.3d 811, 815 (8th Cir. 2013). “To survive a motion to dismiss, a complaint must plead ‘enough facts to state a claim to relief that is plausible on its face.‘” Id. (quoting
Before reaching the merits of the issue, we must first determine the proper framework for assessing demand futility. Because Centene is a Delaware corporation, Delaware law applies. See Cottrell ex rel. Wal-Mart Stores v. Duke, 829 F.3d 983, 989 (8th Cir. 2016). For many years, Delaware courts applied one of two tests for demand futility, with the appropriate test dictated by the composition of the board upon which demand was to be made (the demand board). The first test, set forth in Aronson v. Lewis, applied where the complaint challenged a decision made by the demand board and required plaintiffs to plead particularized facts demonstrating a reasonable doubt that “(1) the directors are disinterested and independent [or] (2) the challenged transaction was otherwise the product of a valid exercise of business judgment.” Rales v. Blasband, 634 A.2d 927, 933 (Del. 1993) (alteration in original) (quoting Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000)). Alternatively, the second test, set forth in Rales v. Blasband, applied “where the board that would be considering the demand did not make a business decision which is being challenged in the derivative suit.” 634 A.2d at 933-34. The Rales test required the court to “determine whether or not the particularized factual allegations of a derivative stockholder complaint create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its
After the district court entered its order dismissing the Amended Complaint, the Delaware Supreme Court eliminated this distinction and announced a new, “universal” test that encompasses both the Aronson and Rales tests. See United Food & Com. Workers Union & Participating Food Indus. Emps. Tri-State Pension Fund v. Zuckerberg (Tri-State), 262 A.3d 1034, 1058-59 (Del. 2021). This new test consists of three questions to be analyzed on a director-by-director basis3 when making a demand futility determination:
- whether the director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand;
- whether the director faces a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand; and
- whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct that would be the subject of the litigation demand or who would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand.
With the proper framework established, we now turn to the question of whether Appellants have pled demand futility as to each of their five claims.4 No detailed analysis is needed as to the first Tri-State question because the Amended Complaint makes no allegation that at least half of the Board received a material personal benefit from the conduct alleged. Similarly, we need not delve into the
This leaves the second Tri-State question, which is the same question addressed by the district court and briefed by the parties: whether at least half of the Board (i.e., five of the nine directors) faces a substantial likelihood of liability as to any of Appellants’ five claims. See 262 A.3d at 1059. As a preliminary matter, though Appellants allege on appeal that all nine directors face a substantial likelihood of liability because they knew of material problems with Health Net‘s business and concealed them from stockholders, the Amended Complaint does not name Blume as a defendant or explain how she could have participated in such conduct prior to joining the Board. Because Blume does not face a substantial likelihood of liability as to any of Appellants’ five claims, our focus is on the remaining eight directors (the Director Defendants).
A.
Appellants’ first claim alleges that the Director Defendants violated
A plaintiff who alleges a claim under
“The question of materiality ... is an objective one, involving the significance of an omitted or misrepresented fact to a reasonable investor.” TSC Indus., 426 U.S. at 445. An alleged misrepresentation must have been, “at the time and in the light of the circumstances under which it is made . . . false or misleading with respect to any material fact.”
Here, Appellants allege that the Proxy Statement “failed to disclose (i) the existing problems regarding claims from Health Net‘s substance abuse facilities; (ii) poorly designed and unprofitable policies in California and Arizona; (iii) potentially massive tax liabilities in California; and (iv) Health Net‘s purported involvement in a scheme to defraud Medicare.” R. Doc. 45-1, at 32. Appellants argue in their reply brief that these alleged omissions rendered both the pro forma analyses included in the Proxy Statement and the Proxy Statement as a whole “incomplete and misleading.” Appellants’ Reply Br. 16. “As a general rule, we will not consider arguments raised for the first time in a reply brief. We are not precluded from doing so, however, particularly where, as here, the argument raised in the reply brief supplements an argument raised in a party‘s initial brief.” Barham v. Reliance Standard Life Ins. Co., 441 F.3d 581, 584 (8th Cir. 2006) (citation omitted). Here, we consider Appellants’ argument in their reply brief to be further development of an argument raised in their opening brief, and therefore, it is appropriate for our consideration. See Appellants’ Br. 35.
Appellants’ argument that the alleged omissions rendered the entire Proxy Statement misleading is a “blanket” assertion that lacks the specificity required by the PSLRA. See Campbell, 916 F.3d at 1124. As to Appellants’ argument that the alleged omissions rendered the pro forma analyses misleading, we find that the cautionary language included in the Proxy Statement “renders the alleged omissions immaterial as a matter of law.” Chambers v. AMDOCS Ltd. (In re AMDOCS Ltd. Sec. Litig.), 390 F.3d 542, 548 (8th Cir. 2004) (per curiam). “[C]autionary language must ‘relate directly to that by which plaintiffs claim to have been misled.‘” Parnes v. Gateway 2000, Inc., 122 F.3d 539, 548 (8th Cir. 1997) (citation omitted). Here, the Proxy Statement contains language in bold type
Appellants additionally allege that the Proxy Statement “falsely or misleadingly states that: ‘[t]he combination of Health Net and Centene would maintain and enhance Health Net‘s strong commercial business in California, which could also serve as a model for other states in which similar opportunities can be identified.‘” Appellants’ Br. 35 (alteration in original). Our review of the Amended Complaint, however, reveals that though Appellants note this statement in the
As to Appellants’ argument that the failure to update the Proxy Statement rendered it materially misleading, Appellants have not cited, and we have not found, any authority supporting the proposition that
For the reasons set forth above, Appellants have failed to plead facts showing that the Proxy Statement contained a material misrepresentation or omission and, consequently, have failed to plead particularized facts demonstrating that at least half of the Board faces a substantial likelihood of liability on their
B.
Appellants’ second claim alleges that all Appellees, including the Director Defendants, breached their fiduciary duties of good faith, fair dealing, loyalty, and due care when they allowed Centene to enter the merger based upon “inadequate due diligence and flawed process,” overpay for Health Net, disseminate a “materially false and misleading” Proxy Statement, and “issue materially false and misleading
As to the duty of care, under Delaware law, a corporation may include a provision in its charter protecting directors from personal liability for breach of the duty of care.
the plaintiff must plead with particularity that the directors “acted with scienter, meaning ‘they had actual or constructive knowledge that their conduct was legally improper.‘” In other words, directors are liable for “subjective bad faith” when their conduct is motivated “by an actual intent to do harm,” or when there is an “intentional dereliction of duty, a conscious disregard for one‘s responsibilities.” Pleading bad faith is a difficult task and requires “that a director acted inconsistent with his fiduciary duties and, most importantly, that the director knew he was so acting.”
McElrath v. Kalanick, 224 A.3d 982, 991-92 (Del. 2020) (citations omitted). Thus, in order to show that the Director Defendants face a substantial likelihood of liability based upon breach of the duty of loyalty, Appellants must have pled particularized facts showing that each director allowed Centene to disseminate materially false and misleading information in bad faith, meaning with actual intent to do harm or with conscious disregard of his or her responsibilities.
We have reviewed the Amended Complaint in its entirety and agree with the district court that Appellants
allege only that the directors knew or should have known of Health Net‘s actual status, the risks of continuing with the merger, and
R. Doc. 95, at 26-27. Appellants’ allegations of mere knowledge fall short of the “high hurdle” plaintiffs must clear when pleading bad faith in the demand excusal context. McElrath, 224 A.3d at 993. Appellants repeatedly allege that the Director Defendants acquired knowledge of the problems with Health Net from attendance at board meetings, but even assuming that the Director Defendants had this knowledge, Appellants plead no particularized facts showing that the Director Defendants failed to disclose these facts to shareholders in bad faith—that is, with intent to do harm or in conscious disregard of their responsibilities.11 Therefore, we agree with the
Appellants have waived any argument pertaining to a Caremark12 claim. A Caremark claim is one in which it is alleged “that the directors allowed a situation to develop and continue which exposed the corporation to enormous legal liability and that in doing so they violated a duty to be active monitors of corporate performance.” 698 A.2d at 967. This claim “is possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.” Id. Appellants make no argument on appeal contesting the district court‘s conclusion that the Amended Complaint fails to allege particularized facts showing that a majority of the Board faces a substantial likelihood of liability for failing to exercise their oversight duties in bad faith, and thus, we need not consider the matter. See Falco, 795 F.3d at 868.
C.
Appellants style their third claim as a derivative claim for breach of the fiduciary duties of loyalty, good faith, and candor in connection with federal securities law violations.13 Specifically, they allege that Appellees, including the
“The duty of disclosure is, and always has been, a specific application of the general fiduciary duty owed by directors.”14 Malone, 722 A.2d at 10. “A director‘s
When directors request discretionary stockholder action, [such as approval of a merger,] they must disclose fully and fairly all material facts within their control bearing on the request. This application of the fiduciary duties of care and loyalty is referred to as the “fiduciary duty of disclosure.” Directors breach their fiduciary duty of disclosure when the “alleged omission or misrepresentation is material.”
. . . .
Another context is a communication not associated with a request for stockholder action, such as when directors make periodic financial disclosures required by securities laws. In this context, the fiduciary duty of disclosure does not apply. But under the board‘s duties of care and loyalty, the directors must still deal honestly with stockholders.
Id. at 1168-69 (citations omitted). Therefore, it is clear that the duty of disclosure only applies to communications requesting stockholder action and the more general duties of care and loyalty apply to communications not requesting stockholder action.
Here, the only communication made by the Director Defendants requesting stockholder action was the Proxy Statement. Thus, Appellants’ argument that the Director Defendants breached their duty of disclosure by allowing Centene to publish false and misleading statements in the April 10-Q is misguided. The only duties that applied to the Director Defendants when filing the April 10-Q were the duties of care and loyalty, see id., and as discussed in Section II.B., Appellants have failed to plead particularized facts demonstrating that at least half of the Board faces a substantial likelihood of liability for breaching these duties.
“Corporate fiduciaries can breach their duty of disclosure under Delaware law . . . by making a materially false statement, by omitting a material fact, or by making a partial disclosure that is materially misleading.” “Material facts are those facts for which ‘there is a substantial likelihood that a reasonable person would consider [them] important in deciding how to vote.‘”
. . . .
“To state a claim for breach of the fiduciary duty of disclosure on the basis of a false statement or representation, a plaintiff must identify (1) a material statement or representation in a communication contemplating stockholder action (2) that is false.” . . . “[C]onclusory allegations need not be treated as true, nor should inferences be drawn unless they truly are reasonable.”
Pfeffer, 965 A.2d at 684-85 (first and second alterations in original) (citations omitted). Our analysis here is similar to that under supra II.A. From what we can discern,15 Appellants argue that the Proxy Statement misleadingly states that “[t]he combination of Health Net and Centene would maintain and enhance Health Net‘s strong commercial business in California, which could also serve as a model for other states in which similar opportunities can be identified” and omitted information that would have revealed material facts about Health Net‘s business. Appellants’ Br. 35 (alteration in original). As noted above, Appellants do not allege
As for the omitted information regarding Health Net‘s business, see R. Doc. 45-1, at 32, “[o]mitted information is material if a reasonable stockholder would consider it important in deciding whether to tender his shares or would find that the information has altered the ‘total mix’ of information available,” Pfeffer, 965 A.2d at 686 (citation omitted). Here, though we recognize that Appellants generally allege in the Amended Complaint that the Director Defendants’ alleged concealment of these omissions caused Centene to overpay for Health Net, see R. Doc. 45-1, at 4-5, 8, they have not pled facts demonstrating that a reasonable stockholder would consider these omissions important in deciding to tender his shares or that the information would have altered the “total mix” of information available, nor have they made such an argument in their briefing. See Pfeffer, 965 A.2d at 686. Though our analysis of Claim 3 differs somewhat from that of the district court, we find that the Amended Complaint does not sufficiently plead particularized facts demonstrating that at least half of the Board faces a substantial likelihood of liability for breach of the duty of disclosure and affirm the district court‘s dismissal as it pertains to this claim. See Carlsen, 833 F.3d at 910 (“[W]e may affirm a judgment on any ground supported by the record . . . .” (first alteration in original) (citation omitted)).
D.
Appellants’ fourth claim alleges that two of the eight Director Defendants, Neidorff and outside-director Richard Gephardt, along with three Centene officers sold and disposed of Centene stock while in possession of insider information. Under the second Tri-State question, which requires that at least half of the demand board face a substantial likelihood of liability on an alleged claim in order for
To state a claim for insider trading liability in this context, Appellants “must show that: 1) the corporate fiduciary possessed material, nonpublic company information; and 2) the corporate fiduciary used that information improperly by making trades because she was motivated, in whole or in part, by the substance of that information.” Kahn v. Kolberg Kravis Roberts & Co., 23 A.3d 831, 838 (Del. 2011) (citation omitted). This standard is different from the foregoing standards, which each require either proof of material misrepresentations or omissions or scienter, or both. Therefore, because the arguments that the remaining Director Defendants would have to pursue in order to bring this claim would not require them to prove that they themselves made material misrepresentations or omissions with or without scienter, we find Appellants’ argument unavailing; “the factual predicate underlying” Claim 4 is not “so intertwined” with that of Claims 1-3 that pursuit of Claim 4 would expose the remaining Director Defendants to risk of liability under Claims 1-3. See In re CBS S‘Holder Class Action & Derivative Litig., No. 2020-0111-JRS, 2021 WL 268779, at *50 (Del. Ch. Jan. 27, 2021), as corrected (Feb. 4, 2021). We agree with the reasoning of courts that have addressed a similar factual situation, and because the Amended Complaint alleges an insider trading claim against just two of the eight Director Defendants, we affirm the district court‘s finding that Appellants have failed to demonstrate that a majority of the Board faces a substantial likelihood of liability under Claim 4. See In re China Auto. Sys. Inc. Derivative Litig., No. 7145-VCN, 2013 WL 4672059, at *10 (Del. Ch. Aug. 30, 2013) (finding plaintiffs who pled only that two of five directors engaged in insider trading had not demonstrated demand futility); Markewich ex rel. Medtronic, Inc. v. Collins, 622 F. Supp. 2d 802, 814 (D. Minn. 2009) (concluding that demand was not futile where majority of board did not face substantial likelihood of liability for insider trading).
E.
In their fifth claim, Appellants allege that all Appellees, including the Director Defendants, were unjustly enriched at the expense and to the detriment of Centene “as a result of the compensation and remuneration they received while breaching fiduciary duties owed to Centene and through their sale or disposition of [Centene] stock at artificially inflated prices.” R. Doc. 45-1, at 90. Under Delaware law, “[a]t the pleadings stage, an unjust enrichment claim that is entirely duplicative of a breach of fiduciary duty claim—i.e., where both claims are premised on the same purported breach of fiduciary duty—is frequently treated ‘in the same manner when resolving a motion to dismiss.‘” Calma ex rel. Citrix Sys., Inc. v. Templeton, 114 A.3d 563, 591 (Del. Ch. 2015) (citation omitted). Therefore, because we find that Appellants have failed to demonstrate that at least half of the Board faces a substantial likelihood of liability on Appellants’ breach of fiduciary duty claims, we find the same as to Appellants’ unjust enrichment claim as it pertains to the alleged breaches of fiduciary duties. Cf. id. at 592 (finding it plausible that plaintiff could recover under unjust enrichment claim where plaintiff had stated a claim for breach of fiduciary duty). Likewise, because we find that at least half of the Board does not face a substantial likelihood of liability under Appellants’ insider trading claim, we further find the same as to Appellants’ unjust enrichment claim as it pertains to alleged insider trading and affirm the district court‘s findings as to Claim 5. See In re China Auto, 2013 WL 4672059, at *10.
Because Appellants have failed to plead particularized facts demonstrating that at least half of the Board faces a substantial likelihood of liability as to any claim brought in the Amended Complaint, we affirm.16
Notes
Tri-State, 262 A.3d at 1060-61 (first and second alteration in original) (first quoting Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart (Beam II), 845 A.2d 1040, 1050 (Del. 2004); then quoting Kahn v. M & F Worldwide Corp., 88 A.3d 635, 649 (Del. 2014) (overruled on other grounds by Flood v. Synutra Int‘l, Inc., 195 A.3d 754 (Del. 2018))).To show a lack of independence, a derivative complaint must plead with particularity facts creating “a reasonable doubt that a director is . . . so ‘beholden’ to an interested director . . . that his or her ‘discretion would be sterilized.‘”
. . . The plaintiff must allege that “the director in question had ties to the person whose proposal or actions he or she is evaluating that are sufficiently substantial that he or she could not objectively discharge his or her fiduciary duties.”
Appellants allege that the Board members lack independence from one another because a majority have been on the Board for “at least 12 consecutive years“; they have instituted “self-serving measures that foster their entrenchment,” such as “imposing a staggered board“; and each Board committee has had the same chairperson for at least 12 years. R. Doc. 45-1, at 77-78. Appellants further make the bare assertion that the Board members are “personal friends” with “entangling financial alliances, personal and business interests and other dependencies.” R. Doc. 45-1, at 84. Without more, these allegations do not demonstrate a lack of independence. See Beam II, 845 A.2d at 1050-52 (“Allegations of mere personal friendship or a mere outside business relationship, standing alone, are insufficient to raise a reasonable doubt about a director‘s independence.“); In re MFW S‘Holders Litig., 67 A.3d 496, 509-10 (Del. Ch. 2013) (“[T]he simple fact that there are some financial ties between the interested party and the director is not disqualifying.“); In re BJ‘s Wholesale Club, Inc. S‘holders Litig., No. 6623-VCN, 2013 WL 396202, at *6 n.63 (Del. Ch. Jan. 31, 2013) (finding allegation that board members had served on board together nearly twenty years insufficient to raise reasonable doubt as to director‘s independence).
R. Doc. 79-3, at 117.There can be no assurance that the underlying assumptions or projected results will be realized, and actual results will likely differ, and may differ materially, from those reflected in the unaudited financial projections, whether or not the merger is completed. As a result, the unaudited financial projections cannot necessarily be considered predictive of actual future operating results, and this information should not be relied on as such.
. . . In the view of Centene‘s management and Health Net‘s management, the respective forecasts prepared by them were prepared on a reasonable basis based on the information available to Centene‘s management and Health Net‘s management, respectively, at the time of their preparation. The unaudited financial projections, however, are not facts and should not be relied upon as being necessarily indicative of actual future results, and readers of this joint proxy statement/prospectus are cautioned not to place undue, or any, reliance on this information. The inclusion of the unaudited financial projections in this joint proxy statement/prospectus is not an admission or representation by Centene or Health Net that such information is material.
606 A.2d 75, 84 (Del. 1992). Further, “[t]he duty of disclosure is not an independent duty, but derives from the duties of care and loyalty,” Pfeffer v. Redstone, 965 A.2d 676, 684 (Del. 2009) (alteration in original), and, as discussed supra note 10, the duty of good faith is a subsidiary element of the duty of loyalty, so Appellants’ reference to the “duty of loyalty, good faith, and candor” is redundant.[T]he term “duty of candor” has no well accepted meaning in the disclosure context. Its use is both confusing and imprecise given the well-established principles and duties of disclosure that otherwise exist. Thus, it is more appropriate for our courts to speak of a duty of disclosure based on a materiality standard rather than the unhelpful terminology that has crept into Delaware court decisions as a “duty of candor.”