ORDER ON DEFENDANTS' MOTION TO DISMISS
THIS CAUSE is before the Court upon Defendants' Motion to Dismiss Plaintiff's Verified Shareholder Derivative Complaint (the "Motion"). See ECF No. [25]. The Court has reviewed the Motion, all supporting and opposing submissions, the record and applicable law, and is otherwise fully advised. For the reasons that follow, Defendants' Motion is granted.
I. BACKGROUND
Plaintiff brings the present action derivatively and on behalf of National Beverage Corp. ("NBC"), a Delaware corporation with its principal place of business in Fort Lauderdale, Florida.
(1) N. Caporella founded NBC in 1985. See Id. at ¶ 3. He is NBC's Chief Executive Officer, the Chairman of the board of directors, and the beneficial *1168owner of 73.6 percent of NBC's outstanding common stock as of August 8, 2016.2 See Id. at ¶ 1.
(2) Bracken is NBC's Executive Vice President of Finance. See Id. at ¶ 22.
(3) Cook is the Vice President-Controller and Chief Accounting Officer of NBC. See Id. at ¶ 24.
(4) J. Caporella is N. Caporella's son, President of NBC since 2002, and member of the board since 1987. See Id. at ¶ 21.
(5) Conlee has served on the NBC board since 2009. See Id. at ¶ 23. He has served as Chairman of NBC's Compensation and Stock Option Committee, and has been a member of the Audit Committee and Strategic Planning Committee during the Relevant Period. See Id.
(6) Hathorn has been on NBC's board since 1997. See Id. at ¶ 25. He previously served on the board from 1985 through 1993 prior to returning. See Id. Throughout the Relevant Period, Hathorn has served as Chairman of the Audit Committee, Deputy Chairman of the Compensation and Stock Option Committee and Nominating Committee, and has been a member of the Strategic Planning Committee. See Id.
(7) Sheridan has served on the NBC board since 2009, serving as Deputy Chairman of the Audit Committee and as a member of the Compensation and Stock Option Committee and Nominating Committee during the Relevant Period. See Id. at ¶ 26.
(8) Corporate Manager Advisors, Inc. ("CMA") is a Delaware corporation wholly-owned by N. Caporella, with its principal place of business in Fort Lauderdale, Florida. See Id. at ¶ 17. N. Caporella is the President of CMA, while Bracken is the Vice President. See Id. Pursuant to a management agreement (the "Agreement") between NBC and CMA, CMA provides the services of NBC's CEO and Chief Financial Officer (that is, N. Caporella and Bracken), as well as the services of other "unnamed senior and corporate personnel, who purportedly provide management, administrative, and creative functions" to NBC under the Agreement.3 See Id. at ¶ 2.
Many, if not all, of Plaintiff's allegations stem from alleged omissions or inconsistencies between the provisions of the Agreement and NBC's filings with the Securities and Exchange Commission ("SEC") during the Relevant Period. For instance, under the Agreement, CMA provides its management services and other functions to NBC for an annual fee of 1 percent of NBC's net sales. See Id. at ¶ 41. However, the proxy statements filed with the SEC during the Relevant Period state that CMA is "entitled to a fee for rendering advice and expertise in connection with significant transactions up and above the 1% of net revenues management fee." See Id. at ¶ 89.
*1169Moreover, Plaintiff alleges that the Agreement duplicates various responsibilities and functions between NBC and CMA-including administrative, sales, marketing, and legal services-for which NBC employees are already being compensated. See Id. at ¶¶ 45-68. Plaintiff further alleges that the Agreement contains a Standard of Care provision
Within the proxy statements filed with the SEC during the Relevant Period, NBC stated that the only perquisite received by its employees beyond retirement, health, and insurance benefits, was a car allowance. See Id. at ¶ 83. Nevertheless, Plaintiff alleges that NBC paid for N. Caporella's personal use of an aircraft partly owned by NBC while failing to disclose this use in the company's proxy statements.
As a result of these allegedly false acts, statements, and omissions, Plaintiff filed the present action against Defendants on behalf of NBC, bringing forth claims for breach of fiduciary duty (Count I) and corporate waste (Count II) under Delaware law, and violations of Section 14(a) of the Securities and Exchange Act (Count III) in connection with the proxy statements filed during the Relevant Period. See Id. at 44-47. On November 20, 2017, Defendants filed the Motion. See ECF No. [25]. Plaintiff timely filed his response, ECF No. [36], and Defendants timely filed their reply, ECF No. [37]. On May 15, 2018, the Court held a hearing on the Motion. See ECF Nos. [42]-[43]. The Motion is ripe for adjudication.
II. LEGAL STANDARD
Rule 8 of the Federal Rules of Civil Procedure requires that a pleading contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). Although a complaint "does not need detailed factual allegations," it must provide "more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Bell Atl. Corp. v. Twombly ,
*1170Iqbal ,
When reviewing a motion under Rule 12(b)(6), a court, as a general rule, must accept the plaintiff's allegations as true and evaluate all plausible inferences derived from those facts in favor of the plaintiff. See Miccosukee Tribe of Indians of Fla. v. S. Everglades Restoration Alliance ,
A court considering a Rule 12(b)(6) motion is generally limited to the facts contained in the complaint and the attached exhibits, including documents referred to in the complaint that are central to the claim. See Wilchombe v. TeeVee Toons, Inc. ,
III. DISCUSSION
Defendants have moved to dismiss all of Plaintiff's claims against them. As the primary basis for dismissal, Defendants assert that Plaintiff has not met the heightened pleading standards that govern derivative suits in Delaware. In the alternative, Defendants also allege that Plaintiff has failed to state his claims as a matter of law. The Court will first address Plaintiff's claims arising under Delaware law, and will then discuss Plaintiff's federal claim against Defendants.
A. Demand Futility under Delaware law.
It is undisputed that both of Plaintiff's claims for breach of fiduciary duty and for corporate waste are subject to Delaware's Court of Chancery Rule 23.1. "Because the shareholders' ability to institute an action on behalf of the corporation inherently impinges upon the directors' power to manage the affairs of the corporation[,] the law imposes certain prerequisites on a stockholder's right to sue derivatively." Kaplan v. Peat, Marwick, Mitchell & Co. ,
In Aronson v. Lewis ,
1. Director Independence.
The directors of the NBC board during the Relevant Period are N. Caporella, J. Caporella, Conlee, Hathorn, and Sheridan. "To establish demand futility under Aronson ... Plaintiff must impugn the ability of at least half of the directors in office when it initiated this action ... to have considered a demand impartially." Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera ,
At the hearing, Plaintiff admitted that he should have filed an amended complaint rather than make arguments for the first time in his response to the Motion that Conlee, Hathorn, and Sheridan were not disinterested due to their compensation and stock options. Nevertheless, when specifically asked by the Court, Plaintiff stated that there were no other facts he would have used or included in an amended complaint to support his demand futility allegations, and, as such, all the facts in support of those allegations were before the Court. The Court also notes that Plaintiff had ample time and opportunity to file an amended complaint, yet did not do so.
*1172See Delaware Cty. Employees Ret. Fund v. Sanchez ,
Plaintiff has not alleged that any of the directors apart from N. Caporella are "interested" in the Agreement or any of the transactions at issue.
In the demand futility context, directors are "presumed to be independent." Id. at 59. Under Delaware law, "[i]ndependence means that a director's decision is based on the corporate merits of the subject before the board rather than extraneous considerations or influences." Id. "[A] lack of independence can be shown by pleading facts that support a reasonable inference that the director is beholden to a controlling person or 'so under their influence that their discretion would be sterilized.' " Id. (quoting Rales v. Blasband ,
Plaintiff contends that Conlee, Hathorn, and Sheridan are "incapable of making an impartial decision to...vigorously prosecute" this action as a result of their "longstanding professional relationships" with N. Caporella. ECF No. [1], at ¶ 108. In particular:
(1) Conlee served for more than 20 years as lead director of Burnup & Sims, Inc., where N. Caporella was President and CEO from 1976 to 1994, and Chairman from 1979 to 1994. See Id. at ¶¶ 20, 108.
(2) Hathorn served as a director of Burnup & Sims, Inc., from 1981 to 1997, while also serving on NBC's board during its "formative years," 1985 to 1993. See Id. at ¶ 108.
(3) Sheridan was employed by Faygo Beverages, Inc., a wholly-owned subsidiary of NBC since 1987, from 1974 until his retirement in 2004. See Id. at ¶¶ 26, 108. Sheridan joined Faygo Beverages, Inc., in 1974 as Chief Financial Officer and was promoted to President in 1987 *1173when the company was acquired by NBC. See Id.
"Further,...Conlee, Hathorn and Sheridan are beholden to N. Caporella, as they are dependent on him for their position as NBC directors. The combination of their reliance on N. Caporella, as well as their longstanding professional relationship with him, render...Conlee, Hathorn and Sheridan incapable of objectively and fairly evaluating a demand by Plaintiff." See Id. at ¶ 109.
These allegations are not sufficient to satisfy Aronson 's first prong, as Delaware courts have dismissed derivative complaints containing allegations that are more particularized than those presented by Plaintiff in this case. For instance, in Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart ,
The Supreme Court of Delaware, however, held that even though the shareholder "attempted to plead affinity beyond mere friendship between Stewart and the other directors,...her attempt [was] not sufficient to demonstrate demand futility."
Allegations that Stewart and the other directors moved in the same social circles, attended the same weddings, developed business relationships before joining the board, and described each other as "friends," even when coupled with Stewart's 94% voting power, are insufficient, without more, to rebut the presumption of independence. They do not provide a sufficient basis from which reasonably to infer that Martinez, Moore and Seligman may have been beholden to Stewart. Whether they arise before board membership or later as a result of collegial relationships among the board of directors, such affinities-standing alone-will not render presuit demand futile.
Instead, Plaintiff's allegations-which are limited to the business relationships between N. Caporella and the three directors-"largely boil down to a 'structural bias' argument, which presupposes that the professional and social relationships that naturally develop among members of a board impede independent decisionmaking."
In his response to the Motion, Plaintiff states that the Court "should draw the inference that long-standing ties across two companies existed between N. Caporella and Conlee extending back approximately 40 years, Hathorn [and Sheridan] extending back over 30 years," and that these ties should put the directors' independence in doubt. ECF No. [36], at 17. It is true that "it may be possible to plead additional facts concerning the length, nature or extent of...previous relationships that would put in issue that director's ability to objectively consider the challenged transaction." Orman v. Cullman ,
Delaware law is clear that "[a]llegations of mere personal friendship or a mere outside business relationship, standing alone, are insufficient to raise a reasonable doubt about a director's independence."
2. Valid exercise of business judgment.
Plaintiff can still excuse pre-suit demand upon the NBC board if he can show that the Agreement and the other transactions at issue were not the result of a valid exercise of business judgment.
a. Breach of fiduciary duty.
In Count I, Plaintiff claims that Defendants breached their fiduciary duties by: (1) allowing for materially inadequate controls over NBC's policies and practices as evidenced by the lack of definition and duplication of functions between employees of NBC and CMA; (2) approving the Agreement every year during the Relevant Period even though it contains the illegal Standard of Care provision, one year termination clause, and potential additional fees to be earned by CMA in connection with significant transactions; and (3) allowing NBC to file false and misleading periodic reports such as the 2015-17 proxy statements with the SEC in violation of federal regulations. See ECF No. [1], at ¶ 112. As will be explained below, Plaintiff must show that directors Conlee, Hathorn, and Sheridan acted in bad faith when both approving the Agreement (allegation two) and in failing to provide the proper oversight (allegations one and three). This is a high standard, and one that Plaintiff has failed to meet.
The Delaware Court of Chancery's decision in Caremark
(a) the directors utterly failed to implement any reporting or information system or controls; or (b) having implemented such a system or controls, consciously failed to monitor or oversee *1176its operations thus disabling themselves from being informed of risks or problems requiring their attention. In either case, imposition of liability requires a showing that the directors knew that they were not discharging their fiduciary obligations. Where directors fail to act in the face of a known duty to act, thereby demonstrating a conscious disregard for their responsibilities, they breach their duty of loyalty by failing to discharge that fiduciary obligation in good faith. Thus, to establish oversight liability a plaintiff must show that the directors knew they were not discharging their fiduciary obligations or that the directors demonstrated a conscious disregard for their responsibilities such as by failing to act in the face of a known duty to act. The test is rooted in concepts of bad faith; indeed, a showing of bad faith is a necessary condition to director oversight liability.
Plaintiff's Caremark claim pertaining to the filing of false and misleading periodic reports, such as the 2015-17 proxy statements, with the SEC in violation of federal regulations is similarly deficient. First, Plaintiff admitted in the hearing that there is no evidence that the directors knew or authorized N. Caporella's personal use of the aircraft.
"In the absence of red flags, good faith in the context of oversight must be measured by the directors' actions 'to assure a reasonable information and reporting system exists' and not by second-guessing after the occurrence of employee conduct that results in an unintended adverse outcome." Stone ,
Plaintiff has also alleged that Defendants breached their fiduciary duties to NBC by approving the Agreement every year during the Relevant Period despite the Agreement containing the illegal Standard of Care provision, one year termination clause, and potential additional fees to be earned by CMA in connection with significant transactions. In Aronson ,
(i) for any breach of the director's duty of loyalty...(ii) for act or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware, (iv) for any transaction from which the director derived an improper personal benefit, or (v) for any act or omission occurring prior to the date when the provision becomes effective.
ECF No. [25-7], at 24 (Eighth Article).
Plaintiff has not met this high burden. Specifically, Plaintiff has not pled with particularity that the NBC board engaged in bad faith or intentional misconduct when they approved the Agreement's provisions. For instance, Plaintiff has not pointed the Court to any authority stating that there is anything wrong or improper (let alone illegal) with the Agreement's "onerous" one-year termination provision. Similarly, regarding the additional fees that CMA can potentially earn in connection with significant transactions, Plaintiff has not provided the Court with any specific financial information regarding the amount of fees CMA can earn or has earned for these "significant transactions." As a result, the Court cannot determine that the provision for additional fees is "so facially unfair as to constitute a lack of good faith" by the directors. See Teamsters ,
Plaintiff contends that the Standard of Care provision is illegal because it purports to exculpate NBC's officers when Delaware law only allows for the exculpation of directors in the corporate charter. Even disregarding the fact that the exculpatory provision in the Agreement is a contractual clause limiting liability (rather than an exculpatory provision in the charter) that is qualified by another clause in the Agreement stating that "each term...shall be valid and be enforced to the fullest extent permitted by law," the deficiency of Plaintiff's claim here is more basic. The Complaint does not allege that the directors had actual or even constructive knowledge that the Standard of Care provision was illegal, yet they included it anyway. See Solak v. Sarowitz ,
In sum, Plaintiff's claims that the aforementioned provisions are "unreasonable and unfair to NBC" are too sparse and *1179conclusory for the Court to determine that Conlee, Hathorn, and Sheridan's actions were "so egregious that there is a substantial likelihood of liability." Aronson ,
b. Corporate Waste.
At the hearing, the parties agreed that Count II for corporate waste is limited to NBC allegedly paying for N. Caporella's personal use of the company aircraft. "A board's decisions do not constitute corporate waste unless they are exceptionally one-sided." White v. Panic ,
Plaintiff admitted at the hearing that there is nothing to suggest that the members of the board knew or authorized N. Caporella's personal use of the aircraft. In other words, there is no board transaction for the Court to scrutinize. As a result, Plaintiff's corporate waste claim fails. See In re The Home Depot, Inc. S'holder Derivative Litig. ,
In sum, Plaintiff has not met his burden under either of Aronson 's prongs to excuse pre-suit demand on NBC's board. See Teamsters ,
B. Securities and Exchange Act.
In Count III, Plaintiff alleges that directors N. Caporella, J. Caporella, Conlee, Hathorn, and Sheridan violated Section 14(a) of the Securities and Exchange Act in connection with the proxy statements filed by the company with the SEC in 2015, 2016, and 2017. See ECF No. [1], at 46. Specifically, Plaintiff claims that these proxy statements were deficient because they failed to disclose: (1) that N. Caporella, J. Caporella, and Bracken were or are affiliated with Broad River; (2) that Broad River is the predominant owner of NBC's aircraft; (3) that N. Caporella utilized the airplane for personal trips; and (4) all of the provisions of the Agreement. See
"Section 14(a) and Rule 14-A-9 promulgated thereunder require that proxy statements not be false or misleading with regard to any material statement, nor omit to state any material fact necessary in order to make the statements therein not false or misleading. A fact or *1180statement is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote." In re The Home Depot, Inc. ,
Plaintiff alleges that the "omissions and misrepresentations were material to a reasonable investor in deciding to vote on the issues presented by the 2015, 2016 and 2017 Proxies, including the election of the Current Director Defendants."
For instance, in Edward J. Goodman Life Income Tr. v. Jabil Circuit, Inc. ,
The same is true in the instant case. Even assuming that (1) the directors had a duty to disclose the information Plaintiff believes should have been included in the proxies; (2) the omitted information was material; and (3) Plaintiff's allegations of materiality are sufficient to demonstrate transaction causation, Plaintiff has failed to show loss causation. Like in Jabil Circuit , the reelection of the directors was not an essential link to the supposed losses that Plaintiff complains of: that is, the "wast[ing] of corporate assets" stemming from the duplication of services or N. Caporella's personal use of the aircraft, see ECF No. [1], at ¶¶ 92, 126, "was not accomplished or endorsed by any proxy solicitation materials," Jabil Circuit, Inc. ,
IV. CONCLUSION
For all of the reasons stated, it is ORDERED AND ADJUDGED that
1. Defendants' Motion to Dismiss, ECF No. [25] , is GRANTED.
2. Plaintiff's Verified Shareholder Derivative Complaint is DISMISSED with prejudice .
3. The Clerk is directed to CLOSE this case. DONE AND ORDERED in Miami, Florida, this 5th day of June, 2018.
Notes
Plaintiff is a stockholder of NBC. See ECF No. [1], at ¶ 15.
N. Caporella owns 71.5 percent of NBC's outstanding common stock through Defendant IBS Partners Ltd. See ECF No. [1], at ¶ 18. IBS Partners Ltd. is a Texas limited partnership whose sole general partner is Defendant IBS Management Partners, Inc., a Texas corporation wholly-owned by N. Caporella. See Id. at ¶¶ 18-19.
NBC and CMA first entered into the Agreement in 1991. See ECF No. [1], at ¶ 40.
"The Manager [CMA] (including any person or entity acting for or on behalf of the Manager) shall not be liable for any mistakes of fact or errors of judgment, for losses sustained by the Company [NBC] or any subsidiary or for any acts or omissions of any kind, unless caused by intentional misconduct of the Manager engaged in by the Manager in bad faith." See ECF No. [1], at ¶ 71.
The proxy statements also allegedly failed to include complete and accurate information regarding the ownership of the aircraft. See ECF No. [1], at ¶ 87. Specifically, the proxies only mentioned that NBC was a 20 percent owner of the aircraft, yet failed to indicate that the rest of the aircraft was owned by Broad River Aviation, Inc., a company managed by N. Caporella and Bracken (and previously managed by J. Caporella). See Id. at ¶ 7.
The parties agree that Aronson controls the Court's demand futility analysis.
For instance, the Complaint was filed on August 2, 2017, see ECF No. [1], and due to an extended briefing schedule requested by the parties and granted by the Court, see ECF Nos. [8]-[9], the Motion was filed on November 20, 2017, the response was filed on January 8, 2018, and the reply was filed on January 29, 2018, see ECF Nos. [25], [36], [27]. Plaintiff also admitted on the record that he did not avail himself of
A director is interested in a transaction if "he or she will receive a personal financial benefit from a transaction that is not equally shared by the stockholders" or if "a corporate decision will have a materially detrimental impact on a director, but not on the corporation and the stockholders." Rales v. Blasband ,
See , e.g. , Crescent/Mach I Partners, L.P. v. Turner , Del.Ch., C.A. No. 17455, mem. op. at 30, Steele, V.C.,
That N. Caporella is a controlling shareholder does not affect the demand futility analysis. See Teamsters ,
Although the parties spent much time in theirs briefs arguing whether the "entire fairness" rule applies to the second prong of Aronson due to N. Caporella's status as a controlling shareholder, Plaintiff conceded at the hearing that the business judgment rule was applicable at this demand futility stage.
In re Caremark Int'l Inc. Derivative Litig. ,
Indeed, Plaintiff has alleged that employees are "presumably" being compensated for "duplicating responsibilities." ECF No. [1], at ¶ 70. Moreover, many of the allegations supporting Plaintiff's argument concerning the duplication of services predate the Relevant Period, so they do not aid the Court in determining whether these "overlaps" in responsibility are ongoing. See , e.g. , Id. at ¶¶ 50-51, 61, 63.
Plaintiff has alleged that the proxy statements contained false statements and omitted material facts regarding NBC's employee perquisites and N. Caporella's use of the aircraft. See ECF No. [1], at ¶ 88.
Only violations of subsections (i) and (ii) seem to be in question, as Plaintiff has not: mentioned Section 174 of the General Corporation Law of the State of Delaware anywhere in the Complaint; alleged that Conlee, Hathorn, or Sheridan derived personal benefits from the Agreement or the provisions at issue; or claimed that any acts or omissions occurred prior to the date the charter's exculpatory provision became effective.
Furthermore, in Wood v. Baum ,
Plaintiff brings Count II against N. Caporella, J. Caporella, Bracken, Cook, Conlee, Hathorn, and Sheridan. See ECF No. [1], at 45.
The 2016 and 2017 proxy statements show that the election of two directors was on the agenda at each year's annual meeting of NBC shareholders, see ECF Nos. [26-4], [26-5], whereas the 2015 proxy statement states that the election of one director and "a non-binding advisory vote on executive compensation" was on the agenda for that year's shareholder meeting, ECF No. [26-6].
In Cathcart , the Third Circuit addressed a Section 14(a) claim against corporate insiders based on their alleged non-disclosure of criminal activity and mismanagement of the company. "The plaintiff claimed that the absence of this information caused him to vote to reelect board members and approve corporate governance rules during the class period." Jabil Circuit, Inc. ,