Jerald KING, Derivatively on behalf of CEPHALON INC., Appellant v. Frank BALDINO, Jr.; William P. Egan; Martyn D. Greenacre; Vaughn M. Kailian; Kevin E. Moley; Charles A. Sanders; Gail R. Wilensky; Dennis L. Winger; Cephalon Inc., a Delaware Cоrporation.
No. 09-3834.
United States Court of Appeals, Third Circuit.
Dec. 14, 2010.
535
Submitted Under Third Circuit LAR 34.1(a) Dec. 13, 2010.
II.
For the above reasons, we will affirm the district court.
David C. Katz, Esq., Joseph H. Weiss, Esq., Weiss & Lurie, New York, NY, Brian D. Long, Esq., Seth D. Rigrodsky, Esq., Rigrodsky & Long, Wilmington, DE, for Appellant.
Jill M. Baisinger, Esq., J. Gordon Cooney, Jr., Esq., Morgan, Lеwis & Bockius, Philadelphia, PA, Daniel M. Silver, Esq., McCarter & English, Wilmington, DE, for Appellees.
Before: RENDELL, JORDAN and HARDIMAN, Circuit Judges.
OPINION OF THE COURT
RENDELL, Circuit Judge.
King appeals the order of the Magistrate Judge granting the defendants’ motion for judgment on the pleadings because King failed to plead that a pre-suit demand on the board would have been futile.1 For substantially the reasons set forth in the Magistrate Judge‘s thorough and well reasoned opinion, King v. Baldino, 648 F.Supp.2d 609 (D.Del.2009), we will affirm.
I.
Under Delaware law, which applies in this case bеcause Cephalon is a Delaware corporation, whether a plaintiff has adequately pleaded demand futility depends on “whether or not the particularized factual allegations ... 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 judgment in responding to a demand.” Rales v. Blasband, 634 A.2d 927, 934 (Del.1993). In this case, the District Court found that King failed to plead facts showing that the defendants lacked independence, King, 648 F.Supp.2d at 618-19, and King does not challenge that determination on appeal.
Instead, King‘s appeal focuses on the second prong, whether he pleaded that the defendants were insufficiently “disinterested” to respond to a demand. To plead that directors are not sufficiently “disinterested,” a plaintiff must plead facts establishing that they “face a ‘substantial likelihood’ of personal liаbility.” Guttman v. Huang, 823 A.2d 492, 501 (Del.Ch.2003). In other words, the facts pleaded must establish a “substantial likelihood” of success on the merits of plaintiff‘s claims. In this case, the hurdle for establishing that the directors face a “substantial likelihood” of liability is particularly high, because the type of claim that King asserts—based on officers’ and directors’ alleged failure properly to oversee the corporation—is “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.” In re Caremark Int‘l Inc. Derivative Litig., 698 A.2d 959, 967 (Del.Ch.1996). A plaintiff may only establish a “substantial likеlihood” of liability on such a claim by pleading particular facts that show:
- that the directors knew or
- should have known that violations of law were occurring and, in either event,
- that directors toоk no steps in a good faith effort to prevent or remedy that situa-
tion, and - that such failure proximately resulted in the losses complained of.2
A plaintiff may satisfy this standard by alleging fаcts that show an utter failure to oversee the corporation, e.g., “the company entirely lacked an audit committee or other important supervisory struсtures, or ... a formally constituted audit committee failed to meet.” David B. Shaev Profit Sharing Account v. Armstrong, No. 1449-N, 2006 WL 391931, at *5 (Del. Ch. Feb. 13, 2006) (footnotes and citations omitted). Alternatively, a plaintiff may plead facts showing thаt “the directors were conscious of the fact that they were not doing their jobs,” and that they “ignored ‘red flags’ indicating misconduct in defiance of their duties.” Id. (quoting Guttman, 823 A.2d at 506-07). “Red flags” in this context are “facts showing that the board ever was aware that [the corporation‘s] internal controls were inadequate.” Stone v. Ritter, 911 A.2d 362, 370 (Del.2006).
II.
We agree with the Magistrate Judge that King‘s cоmplaint failed to satisfy that standard. As a preliminary matter, the complaint‘s demand futility allegations are framed in rote, conclusory language from the caselaw. Thеy do not contain “particularized facts,” and, more specifically, do not “identify which individual director defendants breached his or her fiduciary duties, and when those duties were breached.” King, 648 F.Supp.2d at 623.
King also did not allege with particularity facts indicating that Cephalon lacks adequate oversight systems. As the Magistrate Judge observed, the complаint acknowledges the existence of certain controls at Cephalon, including an Audit Committee and internal compliance auditors, but does not allege any procedural deficiencies in those mechanisms. Id. at 622-23. On appeal, King argues that the fact of violations of law, as evidenced by Cephalon‘s settlement with the fedеral government, establishes that Cephalon‘s internal control systems were inadequate. But this understates the plaintiff‘s pleading requirement. Delaware law requires the plaintiff to allege particularized facts concerning the inadequacies in the corporation‘s oversight mechanisms. Having failed to do so, King‘s complaint cannоt survive defendants’ motion for judgment on the pleadings. See id. at 621-22 & n. 58, 59 (citations omitted).
King further failed to allege “red flags,” in the sense of “facts showing that the board ever was aware that [the corporation‘s] internal controls were inadequate.” Stone, 911 A.2d at 370. The purported “red flags” that King cites all involve the company‘s marketing and sales practices. King does not аllege any specific connection between any of those practices and the board. In the absence of facts showing that the board was aware of any of those actions, the Magistrate Judge‘s holding that King‘s complaint was inadequate was correct.
As the Magistrate Judge observed, this case is like a number of derivative cases brought in Delaware courts that have been dismissed because they seek “to equate a bad outcome with bad faith.” King, 648 F.Supp.2d at 626. Like the plaintiffs in those other casеs, King “fail[s] to realize that the directors’ good faith exercise of oversight responsibility may not prevent employees from violating the laws, or from causing the corporation to incur significant financial liability, or both.” Stone, 911 A.2d at 373, quoted in King, 911 A.2d at 626. Without particularized facts that the directors knew or should have known about the misconduct and consciously failed tо act, King cannot establish that the defendants face a “substantial likelihood” of personal liability on his claims.
III.
Finally, there is some discussion in the briefs as to whether King should havе the opportunity to amend his complaint. It appears that King requested leave to amend in the District Court, but only in one sentence in the conclusion of his respоnse to defendants’ motion for judgment on the pleadings. King has not submitted a proposed amended complaint or explained, to the Magistrate Judge or to this Court, how an amended pleading would cure the defects in his original complaint. Given those failures, the Magistrate Judge did not abuse her discretion in granting defendants’ motion with prejudice. Cf. Jones v. ABN Amro Mortg. Grp., Inc., 606 F.3d 119, 125-26 (3d Cir.2010) (no abuse of discretion to deny leave to replead where “there was ‘no indication’ that repleading would correct the defects“).
IV.
For the foregoing reasons, we will affirm the order of the District Court.
RENDELL, Circuit Judge.