MEMORANDUM AND ORDER
John D. Walker filed this shareholder derivative action on behalf of Textron, Inc. against two of the company’s officers and 11 of its 13 directors. The defendants have responded with a motion arguing that the complaint must be dismissed because Walker filed the action without first demanding that the company bring the suit itself. The issue that the case presents is whether Walker has sufficiently alleged that a pre-suit demand would have been futile.
Textron is a conglomerate that manufactures and sells helicopters, airplanes, light transportation vehicles, and lawn care machinery. It is also a major supplier to the automotive industry, and it has a large commercial finance business. Walker bases his claims on a stock purchase plan that the company’s board of directors approved on July 19, 2007, and a series of allegedly misleading statements that Textron’s CEO, Lewis B. Campbell, and CFO, Ted J. French, made concerning the company’s “backlog” of aircraft and helicopter orders.
A. The Stock Repurchase Plan
On July 19, 2007, Textron’s board approved a stock repurchase plan that authorized the company to repurchase up to 24 million shares of its own stock. Complaint (“Compl.”) ¶ 57, Doc. No. 1. At the time, the country was facing a substantial risk of a recession. Id. ¶ 55. As early as March 6, 2007, former Federal Reserve Chairman Alan Greenspan estimated that there was a “one-third probability” of a U.S. recession. Id. Shortly thereafter, the Los Angeles Times published a poll in which sixty percent of the respondents stated that they believed a recession was likely during 2007. Id. Despite these warning signs, from July 19, 2007 through September 27, 2008, Textron’s officers, acting pursuаnt to the stock repurchase plan, purchased approximately $608 million worth of Textron stock at an average share price of $46.84. Id. ¶¶ 57, 113.
During the repurchase period, Campbell sold 726,249 shares of his own stock for $47,185,741.96. Id. ¶ 103. This amounted to 53.48% of his Textron holdings, and 58% more shares than he had sold during the previous sixteen month period. Id. ¶ 104.
B. The Backlog Statements
Textron’s Cessna and Bell segments manufacture aircraft and helicopters. Cessna produces approximately 40% of Textron’s revenues and Bell produces approximately 20%. Id. ¶ 50. When a customer orders an airplane or a helicopter from Textron, the company requires the customer to put down a non-refundable deposit, and the order is added to the company’s reported backlog.
Campbell and French made numerous allegedly misleading public statements concerning the backlog between July 2007 and October 2008 that artificially inflated the value of Textron’s stock. Walker claims that the allegedly misleading statements were also tacitly approved by the board’s audit committee, which had been charged with “discussing] earnings press releases, as well as financial information and earnings guidance provided to analysts and rating agencies with management and the independent auditor, as appropriate.” Id. ¶ 35.
The statements at issue highlighted the size and growth rate of the reported backlog, which grew from a combined $14 million in July 2007 to $23.5 million in October 2008. Id. ¶¶ 60-91. In treating the backlog as a reliable indicator of the company’s prospects for future growth, Campbell and French emphasized the quality of the underwriting that was performed with each customer’s order and the low number of cancellations that the company was then experiencing. Id. ¶¶ 84-85, 89.
On July 19, 2007, Textron issued a press release announcing the board’s authorization of the stock repurchase plan. Id. ¶ 60. In the press release, Campbell commented on the board’s decision noting that “[t]hese actions by our Board demonstrate confidence in our ability to execute and underscore the company’s commitment to value creation through a balanced strategy of growth and returning cash to the shareholder.” Id. The release also announced that Textron had raised its earnings guid
As the general economy began to weaken, Campbell and French continued to assure investors that the company’s reviews of prior economic downturns left it with confidence that the backlog was large enough to support their growth projections. Id ¶ 67-74. On January 24, 2008, Textron issued an earnings press release announcing its financial results for the preceding quarter. Id ¶ 67. The release reported a $4.1 billion increase in Cessna’s backlog from fiscal year 2006. Id During an investor conference call that same day, Campbell once again touted the backlog’s growth, remarking that Textron’s “ending aircraft backlog of 16.4 billion, [was] up 41% from a year ago.” Id ¶ 69. Campbell also commented on the resiliency of the backlog, noting that contracts for Cessna orders would include “nonrefundable initial deposits of $1 million.” Id ¶ 70. Campbell assured investors that “[w]hile we expect a softening and maybe even a temporary downturn in the U.S. economy in 2008, we believe we are particularly well positioned given our strong aircraft and military backlogs.” Id ¶ 67. French also assured investors that while “the U.S. economy is now weaker and it’s certainly more uncertain ... we have good revenue visibility based on our solid growing backlogs....” Id ¶ 72.
Throughout the spring and summer of 2008, Campbell and French continued to tout the size and strength of the backlog, notwithstanding the onset of a recession. Id ¶¶ 76-86. Campbell reported that “strong performance in our aircraft and defense businesses, [and] the size and resiliency of our backlog ... give us the confidence to maintain our overall outlook for the rest of the year and beyond.” Id ¶ 82. Campbell also claimed that he “[did] not view cancellations as a significant risk to [Textron’s] outlook.” Id ¶ 84.
During the fall of 2008, Campbell and French continued to assure investors that the company was on a firm financial footing based on the purported backlog. Id ¶¶ 87-92. On October 16, 2008, Campbell noted that he “remain[ed] comfortable with next year’s production plan at [that] point” because “[w]e are fortunate at this time to have ... a very large and robust backlog” and the reported cancellations to that point wеre “not even noteworthy.” Id ¶¶ 88-89. Campbell also remarked that his confidence in the backlog was buttressed by the fact that Textron required buyers to provide a nonrefundable deposit and “an understanding of where [the buyer is] going to get [its] financing.” Id ¶ 90.
Despite these assurances, on November 5, 2008, Campbell admitted at an industrial conference that buyers were delaying purchases because of “trouble getting financing.” Id ¶ 93. On January 29, 2009, Tex-tron reported a decrease in the combined backlog of approximately $300 million, from $23.5 billion to $23.2 billion. Id ¶ 95. In an earnings call that same day, Campbell attributed the decrease in the backlog to 23 cancellations and an “unprecedented number of deferrals.” Id Textron’s backlog continued to shrink as a result of cancellations and deferrals from $23.2 billion in the fourth quarter of 2008 to $16.1 billion in the second quarter of 2009. Id ¶ 97.
Although Textron’s securities filings recognized that “[d]elays in aircraft delivery schedules or cancellations of orders may adversely affect our financial results” and “[a]ircraft customers ... may respond to weak economic conditions by delaying delivery of orders or canceling of orders,” id ¶ 52, Walker alleges that the statements Campbell and French made about the
C. Walker’s Claims
Walker presents seven claims for relief. Counts I-IV are based on the allegedly misleading statements that Campbell and French made concerning the backlog. These counts charge that Campbell, French, and the five directors who were also members of the audit committee (the “Audit Committee Defendants”) violated Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 (“Exchange Act”), and breached fiduciary duties they owed to Textron under Delaware law. Count V charges Campbell and 10 of the company’s 12 other directors (collectively the “Director Defеndants”) with breach of fiduciary duty for authorizing the stock repurchase plan and failing to prevent stock purchases from being made pursuant to the plan. Count VI charges French and the Director Defendants with corporate waste, and Count VII seeks to recover against the same defendants for unjust enrichment.
II. STANDARD OF REVIEW
Shareholder derivative actions filed in federal court are governed by Rule 23.1 of the Federal Rules of Civil Procedure. See Fed.R.Civ.P. 23.1(b)(3)(B). If the applicable state law calls for a pre-suit demand, Rule 23.1 requires that a plaintiffs reasons for not making a demand must be pleaded with particularity. Id.; see, e.g., In re Sonus Networks, Inc. S’holder Derivative Litig.,
In ruling on a motion to dismiss for failure to plead demand futility, I apply the familiar standard that governs motions to dismiss for failure to state a claim under Fed.R.Civ.P. 12(b)(6). Thus, I construe the complaint in the light most favorable to Walker when evaluating his contention that a pre-suit demand would have been futile. See, e.g., IOM Corp. v. Brown Forman Corp.,
III. DISCUSSION
The question presented by defendants’ motion to dismiss is whether Walker has pleaded demand futility with the particularity required by Rule 23.1. The parties agree that the substantive legal standards that define the demand requirement and identify the circumstances under which a demand will be excused are supplied by Delaware law beсause Textron is a Delaware corporation. See, e.g., Kamen v. Kemper Fin. Servs.,
Delaware’s General Corporation Law recognizes that directors, not stockholders, manage the business and affairs of the corporation. See DeLCode Ann. tit. 8, § 141(a) (West 2011); Alabama By-Prods. Corp. v. Cede & Co.,
The Delaware Supreme Court has adopted two tests of demand futility. Challenges to a board decision or a conscious failure to act are subject to the two-part “Aronson test.” Under this test, demand futility can be established through either facts that give rise to a reasonable doubt as to whether the board was “disinterested and independent” or facts that raise a reasonable doubt as to whether the challenged conduct was “the product of a valid business judgment.” Aronson,
Certain legal principles apply under both Aronson and Rales. First, “futility is gauged by the circumstances existing at the commencement of a derivative suit.” In re Am. Int’l Group, Inc. Derivative Litig.,
B. Application
Walker’s claims can be divided into two groups for purposes of analysis. Counts I-IV are based on defendants’ alleged mis
1. Counts I-IV
Walker bases his demand futility argument with respect to Counts I-IV solely on his claim that the directors were not disinterested because they face a substantial likelihood of personal liability on the counts even though a majority of the directors are not named in the counts as defendants.
Counts I and II allege that Campbell, French, and the individual members of the audit сommittee violated Sections 10(b) and 20(a) of the Exchange Act. Walker does not allege that any of the directors other than Campbell made any of the statements on which these claims are based. Thus, Campbell is the only Director Defendant who can be held directly liable as a maker of the statements under Section 10(b). See Janus Capital Group, Inc. v. First Derivative Traders, — U.S. —,
Although the other Director Defendants could, in theory, face liability as control persons under Section 20(a), the complaint also fails to plead viable Section 20(a) claims against the majority of the directors who were not charged with either making or tacitly approving the statements. Section 20(a) imposes derivative liability on control persons for violations of the Exchange Act committed by others. Hill v. Gozani
Walker’s suggestion that a majority of the directors face a substantial likelihood of control person liability under Section 20(a) also fails to support his demand futility argument because he has failed to plead with particularity that the directors who neither made nor authorized the statements qualify as control persons. The SEC has explained that “control” is defined as “the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.” 17 C.F.R. § 230.405. Case law applying Section 20(a) makes clear that the issue of control “is an intensely factual question, involving scrutiny of the defendant’s participation in the day-to-day affairs of the corрoration and the defendant’s power to control corporate actions”. SEC v. Todd,
Counts III and IV allege that Campbell, French, and the individual members of the audit committee violated their fiduciary duties of loyalty, good faith, and due care by making, reviewing, or approving the allegedly misleading statements. Tex-tron’s directors cannot face personal liability for due care violations, however, because the company’s charter includes a provision authorized by Delaware’s General Corporation Law that immunizes prevents directors from facing liability for such violations. See Del.Code Ann. tit. 8, § 102(b)(7) (West 2011). Accordingly, Walker’s contention that the company’s directors facе a substantial likelihood of liability for breach of fiduciary duty turns on whether his complaint sufficiently pleads that the directors violated either the duty of loyalty or the duty of good faith.
Loyalty is a core fiduciary obligation that directors owe to the corporation they serve. Directors may face liability for breaching the duty of loyalty either by taking personal advantage of opportunities that rightfully belong to the corporation, see, e.g., McGowan v. Ferro,
Walker does not plead with particularity that a majority of Textron’s directors acted from self-interest. Nor does he plead any facts that would support a claim that they acted with bad intentions, intentionally disregarded a known duty, failed to implement an adequate reporting system, or consciously failed to oversee the company’s activities.
B. Counts V-VII — The Stock Repurchase
Walker, bases Counts V-VII on the board’s July 19, 2007 authorization of the stock repurchase plan and its later failure to prevent repurchases under the plan. Count V charges the Director Defendants with breach of fiduciary duty, and Counts VI and VII charge all of the defendants with corporate' waste and unjust enrichment. I analyze Walker’s demand futility argument with respect to these claims under both prongs of the Aronson test to the extent that the claims are based on the board’s decision to approve the stock repurchase plan. Claims that board members are liable for failing to prevent stock purchases under the plan after French and Campbell made the allegedly misleading statements are governed by the Rales test which, as I have explained, recapitulates the first prong of Aronson.
1. First Prong of Aronson
Walker attempts to satisfy the first prong of Aronson with respect to Counts V-VII by again arguing that a majority of the directors were not disinterested because they face a substantial likelihood of liability on these counts. I disagree.
Obviously, Walker’s claim that a majority of the directors face a substantial likelihood of liability with respect to Counts V-VII is stronger than his similar claim with respect to Counts I-IV because Walker has named a majority of the directors as defendants with respect to these counts. However, a claim of director interest requires more than a mere assertion that a majority of the board would have faced claims for damages if they had authorized the corporation to sue. See In re Citigroup,
a. Count V
Walker charges in Count V that the directors violated their fiduciary duty of loyalty and its subsidiary duty of good faith by approving the stock repurchase program “while Textron’s share price was artificially inflated as a result of false and misleading statements regarding Textron’s backlog and business prospects.” Compl. ¶ 149.
The complaint, however, contains no allegations that any of the board members other than Campbell received any personal benefit or engaged in any impermissible self-dealing when they аpproved and implemented the repurchase program. See Aronson,
*577 [the Board members] violated and breached their fiduciary duties of loyalty, reasonable inquiry, oversight, good faith and supervision by knowingly or recklessly authorizing or failing to halt the repurchase of shares while Textron’s share price was artificially inflated as a result of false and misleading statements regarding Textron’s backlog and business prospects.
Id. ¶ 149.
Because nothing in Walker’s complaint could be characterized as a particularized factual allegation that the directors other than Campbell were in any way disloyal or acted in bad faith, I cannot say that a majority of the directors face a substantial likelihood of liability for breach of fiduciary duty either for approving the stock repurchase plan or for failing to prevent repurchases under the plan.
b. Count VI
Walker claims in Count VI that the Director Defendants “wasted corporate assets by: directing Textron to repurchase over $608 million of its own stock at artificially inflated prices, including $342 million shares repurchased during the third fiscal quarter....” Id. ¶ 154.
Waste claims are most often associated “with a transfer of corporate assets that serves no corporate purpose; or for which no consideration at all is received.” Brehm v. Eisner,
Walker’s complaint does not allege any facts sufficient to meet this standard. Walker does not claim that Textron ever paid more than the prevailing market price for its shares, nor doеs Walker provide particularized factual allegations that would indicate that a majority of the board knew at any time that Textron’s stock price was artificially inflated. See In re Am. Int’l Group,
c. Count VII
Count VII asserts a claim for unjust enrichment. Walker alleges that a majority of the directors “were unjustly enriched as a result of the compensation and director remuneration they received while breaching fiduciary duties owed to Textron.” Compl. ¶ 159. “Unjust enrichment is the unjust retention of a benefit to the loss of another, or the retention of money or property of another against the fundamental principles of justice or equity or good conscience.” Jackson Nat. Life Ins. Co. v. Kennedy,
Walker has not alleged with particularity that a majority of the directors face a substantial likelihood of liability for unjust enrichment. Most notably, Walker has failed to plead facts that would allow me to infer that a majority of the directors were “enriched” as a result of their approval of the stock repurchase plan. None of the directors are alleged to have sold stock to the company as part of the repurchase plan.
2. The Second. Prong of Aronson
The second prong of the Aronson test essentially asks “whether plaintiffs have alleged particularized facts creating a reasonable doubt that the actions of the defendant were protected by the business judgment rule.” Brehm,
As I have explained, Walker does not claim that a majority of the directors lacked independence, and he has not plеaded facts with particularity that would support a claim that the directors were interested or failed to act in good faith when they approved the stock repurchase plan. Thus, the only reason why their decision to approve the plan might be unprotected by the business judgment rule would be if they failed to act with due care.
A director’s duty of due care entails only a procedural obligation to exercise due care. Smith v. Van Gorkom,
Walker claims that the Textron board did not exercise due care when it approved the stock repurchase plan because the board authorized the plan “in the face of widely predicted economic downturn” while “Textron’s share price was artificially inflated as a result of false and misleading statements regarding Textron’s backlog and business prospects.” Compl. ¶ 113; Pl.’s Memo. of Law in Opp. to Def.’s Mot. to Dismiss the Compl. at 30. Other than these conclusory allegations, however, nothing in the complaint suggests that the directors were not adequately informed when they approved the repurchase plan.
Absent frоm Walker’s complaint are particularized factual allegations that the “board failed to put in the time and effort necessary to properly evaluate the risks and benefits” of the stock repurchase or “allegations that the board was unaware of the material terms of the transaction or failed to obtain the advice of experts before approving it.” In re Dow Chem. Co. Derivative Litig., No. 4349-CC,
IV. CONCLUSION
For the forgoing reasons, the Defendants’ Motion to Dismiss the Complaint (Doc. No. 29) is granted. The clerk shall enter judgment in accordance with this Memorandum and Order and close the case.
SO ORDERED.
Notes
. Although Walker seeks to hold the individual members of the audit committee liable for tacitly authorizing the allegedly misleading statements, he does not claim that the fall board ever made a formal decision to approve the statements. Further, although he asserted in his brief that each of the Director Defendants “made a conscious decision to refrain from correcting or preventing the issuance of [the allegedly misleading statements],’’ Pl’s. Memo, of Law in Opp. to Def.’s M. to Dismiss the Compl. at 33, he conceded at oral argument that his complaint lacks any particularized allegations to support this assertion with respect to the majority of the board members who neither made or tacitly authorized the statements. Mot. Hr’g Tr. 72-73, Mar. 11, 2011 (Doc. No. 46). As a result, demand futility with respect to these claims is properly analyzed under Rales,
. Walker contends that the board’s failure to halt the stock repurchase plan should be analyzed under Aronson. See Mot. Hr'g Tr. 53-60, Mar. 11, 2011 (Doc. No. 46). However, Walker’s complaint doеs not contain any particularized facts indicating either that board approval was required for each individual repurchase or that a majority of the directors consciously failed to act to stop stock purchases under the plan. The defendants, on the other hand, represented that the July 18, 2007 minutes of a special board meeting demonstrate that the board gave management discretion to make stock purchases under the plan without further board approvals. Mot. Hr’g Tr. 62, Mar. 11, 2011 (Doc. No. 46). As a result, to the extent that Counts V-VII premise liability on the board's failure to halt the repurchase plan, my demand futility analysis will be guided by Rales.
.Walker also claimed for the first time during oral argument that the directors who were not sued in Counts I-IV wеre interested with respect to these counts because they face a substantial likelihood of liability with respect to Counts V-VII. This argument fails both because it is contrary to Delaware law, see Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart,
. While Walker alleges in his brief (in purely conclusory terms) that the company's directors “made a conscious decision to refrain from correcting or preventing the issuance of those misstatements, which they knew or were reckless in not knowing were correct,” Pl.’s Memo, of Law in Opp. to Def.’s M. to Dismiss the Compl. at 33, he retreated from this position at oral argument and stated that his theory of liability was not based on any allegations that a majority of the directors intentionally failed to correct the misleading
. Walker does allege that Campbell sold stoсk during the repurchase period, but it is not alleged that he sold it to Textron as part of the repurchase program.
. The Delaware Chancery Court has explained that the second prong of Aronson operates as a "safety valve” that excuses the demand requirement even when a majority of the board is deemed to be disinterested and independent under Aronson’s first prong. Guttman v. Huang,