IN THE COURT OF CHANCERYOF THE STATE OF DELAWARE
`
`EFiled: Jan 7 2008 7:16PMEST
`eea
`Transaction ID 17926123 (“/¢!i,.!
`Case No. 2776-CC
`eWe!
`}
`FeF ee
`ad”
`a
`SOFpELS
`a
`
`IN RE: TRANSKARYOTIC
`THERAPIES, INC.
`
`
`
`Consolidated
`Civil Action No. 2776-CC
`
`COMPENDIUM OF UNREPORTED OPINIONS TO THE OPENING BRIEF OF
`DEFENDANTS JONATHAN 8S. LEFF AND RODMAN W. MOORHEAD,TI
`IN SUPPORT OF THEIR MOTIONS FOR SUMMARY JUDGMENT
`
`Of Counsel:
`
`Robert H. Baron
`Gary A. Bornstein
`CRAVATH, SWAINE & MOORE LLP
`Worldwide Plaza
`825 Eighth Avenue
`New York, NY 10019
`(212) 474-1000
`
`Dated: January 7, 2008
`
`J. Travis Laster (73514)
`Matthew F. Davis (#4696)
`ABRAMS & LASTER LLP
`20 Montchanin Road, Suite 200
`Wilmington, Delaware 19807
`(302) 778-1000
`
`Attorneys for defendants Jonathan S. Leff and
`Rodman W. Moorhead, [ff
`
`{A&L-06050233}
`
`
`
`EFiled: Jan 7 2008 7:16PM EST
`Transaction ID 17926123
`Case No. 2776-CC
`
`
`
`

`

`INDEX
`
`CASES
`
`TAB
`
`Ash v. McCall,
` C. A. No. 17132, 2000 WL 1370341 (Del. Ch. Sept. 15, 2000)....................................1
`
`In re CompuCom Sys., Inc. S'holders Litig.,
` C. A. No. 499-N, 2005 WL 2481325 (Del. Ch. Sept. 29, 2005) ...................................2
`
`In re Formica S'holders Litig.,
` C. A. No. 10598, 1989 WL 25812 (Del. Ch. Mar. 22, 1989) ........................................3
`
`Golden Cycle LLC v. Allan,
` C. A. No. 16301, 1998 WL 892631 (Del. Ch. Dec. 10, 1998) ......................................4
`
`Goodwin v. Live Entm't, Inc.,
` C. A. No. 15765, 1999 WL 64265 (Del. Ch. Jan. 25, 1999) .........................................5
`
`In re IXC Commc'ns, Inc. S'holders Litig.,
` C. A. Nos. 17324, 17334, 1999 WL 1009174 (Del. Ch. Oct. 27, 1999) .......................6
`
`John Hancock Cap. Growth Mgmt., Inc. v. Aris Corp.,
` C. A. No. 9920, 1990 WL 126656 (Del. Ch. Aug. 24, 1990)........................................7
`
`Katell v. Morgan Stanley Group, Inc.,
` C. A. No. 12343, 1995 WL 376952 (Del. Ch. June 15, 1995) ......................................8
`
`Merchants Nat'l Props. Inc. v. Meyerson,
` C. A. No. 13139, 2000 WL 1041229 (Del. Ch. July 24, 2000) .....................................9
`
`In re Mobile Commc'ns Corp. of Am., Inc. Consol. Litig.,
` C. A. No. 10627, 1991 WL 1392 (Del. Ch. Jan. 7, 1991) ...........................................10
`
`Parnes v. Bally Entm't Corp.,
` C. A. No. 15192, 2001 WL 224774 (Del. Ch. Feb. 23, 2001).....................................11
`
`In re Vitalink Commc'ns S'holder Litig.,
` C. A. No. 12085, 1991 WL 238816 (Del. Ch. Nov. 8, 1991) ......................................12
`
`Yanow v. Scientific Leasing, Inc.,
` C. A. No. 9536, 1988 WL 8772 (Del. Ch. Feb. 8, 1988).............................................13
`
`Yanow v. Scientific Leasing, Inc.,
` C. A. Nos. 9536, 9561, 1991 WL 165304 (Del. Ch. July 31, 1991)............................14
`
`{A&L-00050233}
`
`

`

`TAB 1
`
`

`

`Not Reported in A.2d
`
`Page 1
`
`Not Reported in A.2d, 2000 WL 1370341 (Del.Ch.), 27 Del. J. Corp. L. 213
`(Cite as: Not Reported in A.2d)
`
`for
`Mammarella, P.A., Wilmington, Delaware,
`Defendants Tully M. Friedman, David 8. Pottruck,
`Carl E. Reichardt, Alan Seelenfreund and Jane E.
`Shaw, of counsel.
`Michaei D. Goldman, of Potter Anderson &
`Corroon
`LLP, Wilmington,
`Delaware,
`for
`Defendant Mark A. Pulido.
`
`H A
`
`sh v. McCall
`Del.Ch.,2000.
`
`MEMORANDUM OPINION
`CHANDLER,J.
`*] Shareholder plaintiffs Arlene Ash, Noel Saito,
`Kimberly Madajezyk and Sydney H. Dalman assert
`derivative claims on behalf of McKesson HBOC,
`Inc.
`(“McKesson HBOC” or
`the “Company”, a
`Delaware corporation, which was formed through
`the merger of McKesson Corporation “McKesson”
`) and HBOC & Co. (HBOC”) on January 12,
`1999. Approximately
`3
`1/2 months
`after
`McKesson's acquisition of HBOC became effective,
`McKesson HBOC issued the first of what appears
`Submitted March 15, 2000.
`Decided Sept. 15, 2000.
`to be
`three downward revisions of
`revenues,
`
`
`
`
`earnings, and=othernet income, financial
`information,
`for
`financial years 1996-1998. The
`complaint generally asserts claims related to these
`revisions. Pending before me is defendants' motion
`to dismiss.
`
`UNPUBLISHED OPINION. CHECK COURT
`RULES BEFORE CITING.
`Court of Chancery of Delaware.
`Arlene ASH, Noel Saito, Kimberly Madajezyk and
`Sydney H. Dalman,Plaintiffs,
`Vv.
`
`Charles W. MCCALL, Mark A.Pulido, Richard H.
`Hawkins, Heidi E. Yodowitz, Alfred E. Eckert II,
`Tully M. Friedman, Alton F. Irby ID, M. Christine
`Jacobs, Gerald E. Mayo, James v. Napier, David 8S.
`Pottruck, Carl E. Reichardt, Alan Seelenfreund and
`Jane E. Shaw, Defendants,
`andMCKESSON HBOC, INC., Nominal Defendant.
`No. Civ.A. 17132.
`
`and
`Ir,
`J. Kriner,
`Pamela S. Tikellis, Robert
`Timothy R. Dudderar, of Chimicles & Tikellis LLP,
`Wilmington, Delaware, for Plaintiffs.
`Joel
`Friedlander,
`of Bouchard Margules &
`Friedlander, Wilmington, Delaware; Samuel R.
`Miller, of Folger Levin & Kahn LLP, San
`Francisco, California,
`for
`the Former HBOC
`Outside Directors, of counsel.
`J. Lockwood, of
`Anthony W. Clark and Paul
`Skadden, ARPS, Slate, Meagher & Flom LLP,
`Wilmington, Delaware;
`Jonathan J. Lemer,
`of
`Skadden, Arps, Slate, Meagher & Flom LLP, New
`York, New York, and James E. Lyons, of Skadden,
`ARPS, Slate, Meagher & Flom LLP, San Francisco,
`California, for McKesson Hboc,Inc., of counsel.
`Alan J. Stone
`and Jessica Zeldin, of Morris,
`Nichols, Arsht & Tunnell, Wilmington, Delaware;
`Karen Steinberg Kennedy, of Paul, Weiss, Rifkind,
`Wharton & Garrison, New York, New York, for
`Defendant Charles W. McCall, of counsel,
`Grover C. Brown, of Gordon, Fournaris &
`
`Ordinarily, I would summarize here the complaint's
`allegations.
`In this
`instance, however, plaintiffs
`have filed a complaint without
`specifying their
`causes of action, despite having twice amended it,
`The complaint does not enumerate specific counts,
`nor does it present claims in any other readily
`discernable manner. Although the complaint
`is
`generously laden with conclusory allegations that “
`the facts described herein constitute breaches of
`directors’ duties of good faith, care and loyalty,”
`plaintiffs decline to connect
`the facts of the
`complaint with specific claims ofwrongdoing.
`
`Plaintiffs' answering brief, however, does suggest
`several claims, some of which appear to be based
`on alleged violations of directors’ oversight duties,
`while others are predicated exclusively on alleged
`
`© 2008 Thomson/West. No Claim to Orig. U.S. Govt. Works.
`
`
`
`
`
`
`
`

`

`Not Reported in A.2d
`
`Page 2
`
`Not Reported in A.2d, 2000 WL 1370341 (Del.Ch.), 27 Del. J. Corp. L. 213
`(Cite as: Not Reported in A.2d)
`
`fiduciary breaches in connection with McKesson's
`due diligence investigation of HBOC in the course
`of the merger process.
`I will briefly describe
`plaintiffs’ claims now, restating them later with the
`specificity that I believe necessary to rule on the
`pending motion.
`
`the directors of
`Generally, plaintiffs allege that
`HBOC and McKesson HBOC failed to exercise
`proper
`oversight of
`the
`companies’
`financial
`reporting process
`so as
`to prevent accounting
`improprieties;
`that
`the McKesson
`directors
`breached their duty of care in the course of
`investigating HBOC's books and records before the
`merger; and, finally, that McKesson's acquisition of
`HBOCconstituted an act of corporate waste.
`
`Management.
`
`Merger discussions between the two companies
`began in June
`1998 when McKesson solicited
`HBOC's interest in a business combination in order
`to enter the fast-growing market of software sales to
`the medical industry. These discussions ripened into
`due diligence during the first half of July. Shortly
`thereafter, however,
`the parties suspended merger
`talks,
`
`in October 1998, discussions
`Three months later,
`resumed when McKesson's Chairman and CEQ,
`Mark Pulido, contacted his counterpart at HBOC,
`Charles McCall,
`in order to rekindle interest in a
`deal. On October
`16, McKesson and HBOC
`announced a definitive merger agreement where
`Twelve of the fourteen individual defendants named
`McKesson would acquire HBOC in a tax-free,
`stock-for-stock
`merger
`then-valued
`at
`in this lawsuit comprised McKesson HBOC's full
`approximately $14 billion. Under the terms of the
`board of directors when plaintiffs filed their first
`agreement, HBOC would merge with a McKesson
`complaint on April 30, 1999,
`two days after the
`acquisition
`subsidiary
`and HBOC shareholders
`
`Company's of—earningsfirst publication
`
`
`would receive 0.37 shares of McKesson common
`restatements.
`The
`remaining
`two
`individual
`defendants
`were
`senior
`executive
`officers.
`stock in exchange for each share of HBOC common
`stock.
`Defendants have moved to dismiss the complaint in
`part for lack of standing and otherwise for failure to
`plead particularized facts warranting exception to
`the pre-suit demand requirement of Chancery Rule
`23.1.
`
`
`
`For reasons described more fully below,
`defendants' motion.
`I will,
`however,
`plaintiffs'
`complaint without prejudice,
`affording
`plaintiffs
`an
`opportunity
`to
`additional
`facts and to file a complaint
`legally sufficient.
`
`I grant
`dismiss
`thereby
`gather
`that
`is
`
`I, FACTUAL BACKGROUND
`
`A. The Merger
`
`*2 HBOC, a Delaware corporation headquartered in
`Atlanta before
`the merger, provides
`computer
`software and technology solutions to the healthcare
`industry. McKesson,
`a Delaware
`corporation
`is
`headquartered
`in
`San Francisco,
`primarily
`engaged in the business of healthcare
`supply
`
`agreement on
`signed the merger
`The parties
`October 18, 1998. On or around November 27,
`McKesson and HBOC dissemimated a joint proxy
`statement
`and
`on
`January
`12,
`1999,
`their
`shareholders voted to approve the merger, which
`became effective on that date. McKesson's name
`was changed to McKesson HBOC and HBOC, now
`a wholly owned subsidiary of McKesson HBOC,
`became
`the
`combined Company's health care
`information technology division,
`
`from each
`directors
`six
`the merger,
`After
`combined
`comprised the
`pre-merger
`company
`Company's board of directors. Five of the six
`former HBOC
`directors
`on
`the
`combined
`Company's
`board were
`non-executive,
`outside
`directors: Alfred E. Eckert HI, Alton F. Irby I, M.
`Christine Jacobs, Gerald E. Mayo, and James V.
`Napier. The one
`inside director, Charles W.
`McCall, was president, CEO, and chairman of
`HBOC before the merger and chairman of the
`combined McKesson HBOC,until his removal from
`the board on June 21, 1999.
`
`© 2008 Thomson/West. No Claim to Orig. U.S. Govt. Works.
`
`

`

`Not Reported in A.2d
`
`Page 3
`
`Not Reported in A.2d, 2000 WL 1370341 (Del.Ch,}, 27 Del. J. Corp. L, 213
`(Cite as: Not Reported in A.2d)
`
`Five of the six former McKesson directors on the
`combined
`Company's
`board
`were
`also
`non-executive,
`outside
`directors:
`Tully M.
`Friedman, David S. Pottruck, Carl E, Reichardt,
`Alan Seelenfruend, and Jane E. Shaw. Mark A.
`Pulido, president, CEO, and director of pre-merger
`McKesson held the same positions at McKesson
`HBOC after the merger. On June 21, 1999,
`the
`Company announced Pulido's resignation.
`
`B. McKesson HBOC's Accounting Restatements
`
`On April 28, 1999, McKesson HBOC announced
`that in connection with its year-end audit, DeLoitte
`& Touche (“DeLoitte’),
`the Company's auditor,
`discovered improperly recorded revenue for
`the
`financial year ending March 31, 1999. According to
`Company press releases, DeLoitte discovered the
`improprieties by mailing surveys to customers that
`purportedly
`bought HBOC software
`products.
`When DeLoitte
`compared the
`results
`to
`the
`Company's books,
`it became apparent
`that many
`sales had been improperly recorded. McKesson
`HBOc's share price fell by over $31, nearly half of
`its value, on the afterncon of the announcement.
`
`*3 In May 1999, the Company announced that more
`revisions would be made to earnings. Two months
`later, with its internal investigations concluded, the
`Company announced that it would have to make a
`further
`restatement
`covering the
`two previous
`financial years to correct for improperly recorded
`revenue. In all, McKesson HBOC had to disallow
`$327.4 million of revenue and $191.5 million of
`operating mcome.
`
`All of the earnings overstatements, disclosed by the
`Company between April
`and July
`1999,
`are
`attributable to HBOC. It appears that HBOC began
`overstating earnings in 1996 and continued to do so
`until
`shortly before the board of the combined
`McKesson
`HBOC
`first
`disclosed
`such
`overstatements on April 28, 1999, approximately 3
`1/2 months after
`the McKesson/HBOC merger
`closed on January 12, 1999.
`
`The bulk of the accounting irregularities, according
`to the complaint, stem from the decision of HBOC
`
`senior executives (and their subordinates) to book
`contingent sales as final sales, both before and after
`the merger with McKesson. These sales remained
`contingent, say plaintiffs, because they were made
`containing “side letters” providing for
`rights of
`retum and,
`thus, not properly booked as revenue
`under
`applicable
`accounting
`standards.
`The
`complaint also alleges that senior HBOC executives
`(and their subordinates} backdated sales contracts
`so that revenues could be falsely reported as having
`occurred in an earlier period.
`
`C. Lawsuits Mount and House Cleaning Begins
`
`earnings
`of
`round
`first
`the
`after
`Shortly
`restatements, over twenty law firms announced that
`they had been retained by McKesson HBOC
`shareholders to investigate and file class action
`lawsuits for violations of federal securities laws
`against the Company and certain of the individual
`defendants named in this lawsuit, among others.
`Defendants
`report
`that over
`seventy-five
`class
`action, derivative, and individual lawsuits have been
`filed in connection with these events at McKesson
`HBOC. Additionally,
`the U.S. Attorney for the
`Northern District of California and the SEC have
`launched investigations ofthe Company.
`
`On June 21, 1999, McKesson HBOC announced
`that
`its board of directors would fire defendant
`McCall and remove him as chairman, and that
`defendant Pulido would tender his resignation as
`president, director, and CEO, The Company also
`announced the resignation of defendant Richard H.
`Hawkins,
`executive
`vice president
`and
`chief
`financial officer. Pulido's and Hawkins’ resignations
`becameeffective July 15, 1999.
`
`The board of directors aiso fired several senior
`executives
`of
`the
`Company's
`information
`technology subsidiary (formerly HBOC) including
`Albert Bergonzi
`(president
`and chief operating
`officer), David Held (controller and chief financial
`officer), Jay Lapine (senior vice president, general
`counsel,
`and secretary),
`and Michael Smeraski
`(senior vice president of sales). Contemporaneous
`with these terminations,
`the board of directors
`appointed
`new
`executive management
`for
`
`© 2008 Thomson/West. No Claim to Orig. U.S. Govt. Works.
`
`
`
`
`
`

`

`Not Reported in A.2d
`
`Page 4
`
`Not Reported in A.2d, 2000 WL 1370341 (Del.Ch.}, 27 Del. J. Corp. L. 213
`(Cite as: Not Reported in A.2d)
`
`On April 17 and 18, 1997, The Atlanta Constitution
`McKesson HBOC; John H. Hammergren and David
`reported that on April 15, HBOC's stock price had
`L. Mahoney, previously executive vice presidents of
`declined nearly 8% on market speculation that the
`the Company, were appointed co-CEO's and elected
`to the board.
`CFRA report
`criticized HBOC’s
`accounting
`
`practices’™7The Constitution—_alsoAtlanta
`
`reported that several industry analysts, who publicly
`commented on the CFRA report, expressed doubt
`that
`it had identified any significant problem at
`HBOC,citing the Company's “strong fundamentals.”
`
`D. The “Red Flags”
`
`as
`overarching litigation theory,
`*4 Plaintiffs'
`articulated in their answering brief,
`is that “the
`directors of McKesson, HBOC and McKesson
`HBOC failed to institute and maintain appropriate
`financial controls and recommended the merger
`based upon a recklessly inadequate investigation in
`the
`face
`of
`clear wamings
`of
`accounting
`improprieties at HBOC.”N!
`
`FNI. Plaintiffs’ Brief at 1.
`
`These “clear warnings” or “red flags” are the
`linchpin of plaintiffs’ liability theory. Plaintiffs point
`to four “red flags” that HBOC senior officers and
`directors, and McKesson's board and management
`team (presumably in the course of due diligence),
`allegedly
`disregarded with
`some
`degree
`of
`culpability
`ranging
`from inattention to
`actual
`knowledge.
`
`The first of these “red flags” occurred in January
`1997 when Bloomberg, a financial news company,
`published a
`short
`article questioning HBOC's
`accounts receivable and near-term growth. Nothing
`more is alleged about this article.
`
`The second “red flag” occurred three months later
`in April
`1997 when the Center
`for Financial
`Research & Analysis,
`Inc.
`(“CFRA”™),
`an
`organization that researches and publishes reports
`(primarily for
`institutional mvestors)
`relating to
`financial
`and
`accounting
`issues
`of
`public
`corporations,
`issued a report on HBOC observing,
`among other things, that its balance of receivables
`had surged upward in recent periods.’8*The report
`was mailed fo CFRA clients on or about April 15,
`1997.
`
`FN2. Complaint Ex. A.
`
`FN3. Complaint Exs. C and D.
`
`Several analysts took the extraordinary step of
`publishing special
`reports contesting the CFRA
`analysis point by point. An HBOC spokesperson
`stated that
`the report “doesn't warrant comment.”
`Following these reassurances, HBOC's stock price
`rebounded fo nearly pre-CFRA report levels.
`
`Indefatigable (and apparently correct), on August
`19, 1998, CFRA issued a second report critical of
`HBOC's
`revenue recognition procedures. CFRA
`published
`this
`report,
`the
`third
`“red
`flag,”
`approximately sixteen months after the first report
`and two months before McKesson and HBOC
`signed their merger agreement.'N* Based upon a
`review of HBOC's public filings, CFRA reported,
`among other things, that HBOC's operations “may
`be deteriorating, as partially evidenced by a high
`and generally growing level of receivables relative
`to revenue."CFRA also observed that cash flows
`from operations
`trailed significantly behind net
`income in the first two quarters of calendar year
`1998,
`
`FN4. Complaint Ex. B.
`
`The final alleged “ted flag” flew on or around
`November 13, 1998, when HBOC announced that
`Jay Gilbertson, chief financial officer, president,
`and
`chief operating officer, would leave
`the
`company. Plaintiffs argue that “despite this clear
`signal of
`financial
`impropriety nether HBOC,
`McKesson,
`nor McKesson HBOC discovered
`and/or
`reported
`the
`fundamental
`accounting
`irregularities that were overstating HBOC's (and
`thereafter McKesson HBOC's) sales and revenue.”
`
`© 2008 Thomson/West. No Claim to Orig. U.S. Govt. Works.
`
`
`
`
`
`
`
`
`
`

`

`
`
`
`
`Not Reported in A.2d
`
`Page 5
`
`Not Reported in A.2d, 2000 WL 1370341 (Del.Ch.), 27 Del. J. Corp. L. 213
`(Cite as: Not Reported in A.2d)
`
`FN5
`
`FN5. Complaintat { 40.
`
`Il, CONTENTIONS OF THE PARTIES
`
`*5 Plaintiffs have not set forth claims, based on the
`above-summarized facts, with particularity. As
`noted previously, the complaint does not enumerate
`specific counts; nor does it present plaintiffs' claims
`in any other readily discernable manner. Despite its
`ambiguity,
`the complaint, read liberally but fairly,
`seemsto raise four claims.
`
`Plaintiffs’ first two claims can be distilled into a due
`care claim and a waste claim. The due care claim
`alleges that
`the directors of McKesson and the
`directors of HBOC breached their duty of care by
`failing to inform themselves of all
`reasonably
`available material
`information before deciding to
`enter into, and recommend, the merger. Put another
`way, plaintiffs contend that the directors breached
`their duty of care by failing to detect HBOC's
`accounting irregularities during the course of due
`diligence investigations performed in connection
`with the merger. Although this claim more logically
`applies to the McKesson directors, plaintiffs seem
`to insist that it is equally applicable to the HBOC
`directors.
`
`the
`claim against
`their waste
`assert
`Plaintiffs
`the
`contend
`that
`directors. They
`McKesson
`McKesson directors' decision to enter
`into and
`recommend the merger to McKesson's shareholders
`constituted an act of corporate waste. That
`is,
`plaintiffs contend that
`the McKesson director's
`decision to exchange properly valued McKesson
`shares for overvalued HBOC shares amounts to
`waste.
`
`Plaintiffs’ second set of claims addresses the less
`often visited issue of a board's oversight duty, a
`subset of the duty of care, but also potentially
`raising issues of directors' good faith. Plaintiffs first
`contend that
`the directors of HBOC failed to
`monitor
`adequately
`the
`company's
`financial
`reporting in order
`to ensure
`compliance with
`applicable
`federal
`laws
`and
`regulations
`for
`
`approximately a two-year period preceding the
`merger (the “First Oversight Claim’). Plaintiffs next
`maintain that
`the directors of McKesson HBOC
`failed to do the same for a three-and-one-half month
`period after
`the merger
`(the “Second Oversight
`Claim”).
`
`Defendants argue that this action must be dismissed
`for two reasons, First, and primarily, defendants
`seek dismissal under Chancery Rule 23.1 on the
`ground that plaintiffs have not made a pre-suit
`demand on the board of directors and have not
`alleged particularized facts establishing that demand
`would be futile. Second, defendants argue that none
`of the named derivative plaintiffs have proper
`standing to assert the First Oversight Claim (ie, the
`claim that HBOC directors breached fiduciary
`duties in failing to uncover and cure accounting
`irregularities before the merger).
`
`HL ANALYSIS
`
`Though all four of plaintiffs' claims generally assert
`duty of care breaches, I believe it
`is sensible to
`analytically separate the due care and waste claims,
`brought in connection with the merger transaction,
`from the two oversight claims, which do not
`challenge a specific board action or decision. I do
`so primarily because the demand futility analysis for
`oversight
`claims
`differs
`from demand futility
`analysis for due care and waste claims.
`
`A. Demand Futility Standardfor the Due Care and
`Waste Claims
`
`*6 A shareholder's right to bring a derivative action
`does not arise until he has made a demand on the
`board of directors
`to institute such an action
`directly, such demand has been wrongfully refused,
`or until
`the shareholder has demonstrated, with
`particularity,
`the
`reasons why pre-suit demand
`would be futile."N°Here, plaintiffs contend demand
`would be futile and, thus, should be excused.
`
`FN6.Court of Chancery Rule 23.1.
`
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`Not Reported in A.2d
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`Page 6
`
`Not Reported in A.2d, 2000 WL 1370341 (Del.Ch.), 27 Del. J. Corp. L. 213
`(Cite as: Not Reported in A.2d)
`
`In considering a motion to dismiss under Chancery
`Rule 23.1, as in the case of a Rule 12(b)(6) motion
`to dismiss,
`the Court confines its attention to the
`face of the complaint and accepts all well-pled
`allegations of fact as true. To survive a motion to
`dismiss under Rule 23.1, however, a plaintiff must
`plead with particularity the reasons why pre-suit
`demand would have been futile.?N7
`
`FN7.See id; see also Grimes vy. Donald,
`DelSupr., 673 A.2d 1207, 1213 (1996).
`
`Plaintiffs’ due care and waste claims arise in
`connection with an affirmative business decision
`made by a board of directors. Accordingly,
`I will
`analyze demandfutility under the two-prong, test set
`forth by the Delaware Supreme Court in Aronson v.
`Lewis.™8Under Aronson,
`pre-suit
`demand
`is
`excused
`if
`the
`shareholder
`alleges, with
`particularity, facts sufficient to create a reasonable
`doubt
`that
`(1) a majority of the directors are
`disinterested and independent, or (2) the challenged
`transaction is otherwise the product of the directors’
`valid exercise of business judgment.FN?
`
`FN8.Del.Supr., 473 A.2d 805, 814 (1984).
`
`FN9 Jd at 814.
`
`1, Are the Director Defendants Disinterested and
`Independent?
`
`If a plamtiff can raise a reasonabie doubt that a
`majority of directors was disinterested or capable of
`exercising independent business
`judgment with
`respect to the transaction in question, the pre-suit
`demand
`requirement
`is
`generally
`excused. A
`director is considered interested where he receives a
`personal financial benefit that is not equally shared
`by the stockholders./“!? A disabling conflict of
`interest
`is also said to exist when a corporate
`decision will haye a materially detrimental
`impact
`on a director, but not on the corporation and the
`stockholders.FNU
`
`FN10.See Aronson v. Lewis, 473 A.2d at
`
`812.
`
`FN11].Rales v. Blasband, Del.Supr., 634
`A.2d 927, 936 (1993).
`
`In this case, plaintiffs allege that defendants Pulido
`and McCall,
`the “masterminds” of the merger,
`received
`certain
`unique
`benefits
`upon
`consummation of
`the
`transaction. Specifically,
`plaintiffs allege Pulido held 1.49 miilion non-vested
`options to acquire McKesson common stock as well
`as 40,000 shares of restricted McKesson common
`stock. Upon consummation of the merger,
`these
`stock options vested and the share restrictions
`lapsed. Moreover, upon consummation of
`the
`merger, defendant McCall became entitled to the
`maximum amount payable under a McKesson bonus
`plan-$47,600.
`
`While not conceding that these facts render Pulido
`or McCall
`interested in the merger, defendants
`observe that
`the absence of any particularized
`allegations of
`fact
`indicating that any of
`the
`remaining ten directors were interested in the
`merger makes Pulido's and McCall's alleged interest
`legally irrelevant. Not the case, counter plaintiffs,
`arguing that Pulido and McCall “dominated” the
`other directors. Specifically, paragraphs 71 and 72
`of the complaint provide:
`*7 Fi. “The six former HBOC Directors lack the
`independence to impartially respond to the within
`shareholder demand due to their loyalty to, and
`domination by,
`their
`former Chairman defendant
`McCall who exerted during his tenure on the Board,
`and still exerts, such influence and control over
`these directors.”
`72. “The six former McKesson Directors lack the
`independence to impartially respond to the within
`shareholder demand due to their
`loyalty to, and
`domimation by, defendant Pulido and now also
`defendant McCall who exerts
`such significant
`control and influence over them as to render them
`unobjective.”
`
`Nowhere to be found in the pleadings or plaintiffs'
`opposition brief, however, are particularized facts
`supporting
`the
`conclusory
`allegations
`annexed
`above. Under the very clear guidance of the Aronson
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`Not Reported in A.2d
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`Page 7
`
`Not Reported in A.2d, 2000 WL 1370341 (Del.Ch.), 27 Del. J. Corp. L. 213
`{Cite as: Not Reported in A.2d)
`
`Court, conclusory allegations of domination and
`control are insufficient to excuse pre-suit demand:
`“in the demand futile context a plaintiff charging
`domination and control of one or more directors
`must allege particularized facts manifesting a ‘
`direction of corporate conduct in such a way as to
`comport with the wishes
`or
`interests of
`the
`corporation (or persons) doing the controlling.’The
`shorthand shibboleth of ‘dominated and controlled
`directors’ is insufficient.”*N'?
`
`EN12.Aronson v. Lewis at 816 (quoting
`Kaplan v. Centex, Del. Ch., 284 A.2d 119,
`123 (1971).
`
`Plaintiffs have not made a single factual allegation
`that ten of twelve board members, all of whom were
`non-management,
`outside
`directors,
`had
`any
`material self-interest in the merger. Nor have they
`alleged particularized facts that would establish that
`Pulido
`or McCall-the
`two allegedly interested
`directors-dominated
`the
`ten
`non-management,
`outside directors, neutralizing their ability to make a
`good faith judgment with respect
`to the merger
`transaction.*N®
`
`FN13.See, ¢g., Haber v. Bell, Del. Ch.,
`465 A.2d 353, 358 (1983) (dismissing suit
`for failure to make demand where only two
`of thirteen directors were alleged to have
`material interest in decision).
`
`events
`these
`complaint,
`first derivative
`surely belie plaintiffs naked assertion that
`McCall and Pulido dominated the board of
`either
`the
`premerger
`or
`post-merger
`companies.
`
`2, Is There a Reasonable Doubt that Approval of
`the Merger was the Product ofa Valid Exercise of
`Business Judgment?
`
`the Court must
`Under Aronson's second prong,
`determine whether the complaint raises a reasonable
`doubt that the “directors exercised proper business
`judgment
`in the transaction.°F8!°In this instance,
`the second prong of the Aronson test addresses the
`waste claim (purchase terms) and due care claim
`(informed decisions). I will first consider the waste
`claim leveled against former McKesson directors.
`
`FN15.Grabow vy. Perot, Del.Supr., 539
`A.2d 180, 189 (1988).
`
`a. The Waste Claim
`
`Although it is indeed axiomatic that a corporate act
`cannot be a product of sound business judgment and
`also constitute waste, allegations of waste must
`nonetheless
`comply with Rule
`23.1
`demand
`requirements. To excuse demand on grounds of
`corporate
`waste,
`plaintiffs must
`allege
`“*
`particularized facts that the consideration received
`by the corporation was
`‘so inadequate that no
`person of ordinary sound business judgment would
`deem it worth that which the corporation has paid.”
`> FNI6 Put another way, plaintiffs must show that
`the merger in question either served no corporate
`purpose
`or was
`so
`completely
`bereft
`of
`consideration thatit effectively constituted a gift. *N!7
`
`
`
`
`
`
`
`
`
`In short, plaintiffs have not alleged a single fact in
`support of their domination theory and, as Delaware
`courts have repeatedly observed, such assumptions
`will not be made in the context of pre-suit demand.
`Consequently, pre-suit demand is not excused under
`
`Aronson's on__plaintiffs’first prong based
`
`
`
`unadorned, conclusory allegation that a majority of
`director defendants’ were interested in the merger or
`not independentofallegedly interested parties.°N'4
`
`FN16.Benerofe v. Cha, Del. Ch., C.A. No.
`14614, mem. op. at 19, Chandler, V.C.
`(Sept. 12, 1996)
`(quoting Grobow, 539
`A.2d at 189).
`
`and
`removal
`FNi4. Although McCall's
`Pulido's resignation from the McKesson
`HBOC board post-date the filing of the
`
`FNI7.See In re 3Com Shareholders Litig.,
`Del. Ch., C.A. No. 16721, mem. op. at 11,
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`Not Reported in A.2d
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`Page 8
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`Not Reported in A.2d, 2000 WL 1370341 (Del.Ch.}, 27 Del. J. Corp. L. 213
`(Cite as: Not Reported in A.2d)
`
`Steele, V.C. (Oct. 25, 1999) (citing Lewis
`v. Vogelstein, Del. Ch., 699 A.2d 327, 336
`(1997)).
`
`that
`states
`*8 Paragraph 32 of the complaint
`the
`enter
`McKesson
`acquired HBOC
`“to
`fast-growing business of software sales
`to the
`healthcare industry.”"Evidently, plaintiffs
`concede
`that the merger had a perfectly sensible corporate
`purpose.
`
`(1996) (stating that an “elementary precept
`of corporation law [holds
`that]
`in the
`absence of facts showing self-dealing or
`improper motive, a corporate officer or
`director is not
`legally responsible to the
`corporation for losses that may be suffered
`as a result of a decision that an officer
`made or that directors authorized in good
`faith.”); see also Harbor Fin. Partners v.
`Auizenga, Del. Ch., C_.A. No. 14933, mem.
`op. at 34, Strine, V.C, (Nov. 11, 1999).
`
`It is paragraph 28 of the complaint, however, upon
`in my opinion,
`In any event, plaintiffs’ argument,
`which plaintiffs center their waste claim. There,
`they quote an analyst from Warburg Dillon Read,
`fundamentally misapprehends the nature of a waste
`claim, If Company A exchanges $100 for an asset
`an
`investment
`bank, who
`shortly
`after
`the
`from Company B that Company A believes is worth
`Company’s
`first
`round of corrective disclosures,
`$100,
`it
`is not “waste” if it
`later turns out that
`purportedly
`stated
`that
`‘[t]he marketplace
`is
`Company B's asset was worth only $10. Company B
`basically valuing HBOC as
`zero.’'N!8On the
`may have perpetrated a fraud on Company A or,
`strength of one analyst's hyperbole, made in some
`perhaps, Company A's directors breached their duty
`undisclosed and uncited medium, plaintiffs argue
`of care, but Company A or its directors did not
`that McKesson paid $14 billion for something (e.,
`commit “waste.”
`
`
`HBOC before=disclosure of accounting
`
`irregularities) that was really worth nothing (ie.
`HBOCafter disclosure of accounting irregularities).
`This, argue plaintiffs, constitutes waste. | disagree.
`
`
`
`FN18. Complaint J 28.
`
`When McKesson exchanged approximately $14
`billion of its stock for all of HBOC's outstanding
`stock, the market valued HBOC stock at or around
`that price. That
`is,
`the merger did not appear
`wasteful when it was
`entered into, put
`to a
`shareholder vote, and approved. The fact that the
`merger turned out badly or, indeed, abominably for
`McKesson simply does not and cannot mean that
`approval of the merger was an act of corporate
`waste at the time the McKesson board entered into
`it."N1°The facts alleged by plaintiffs do not make
`out a waste claim and do not demonstrate that the
`merger was other than a good faith effort to advance
`corporate interests or the product of a valid business
`judgment,
`at
`the time the board approved the
`transaction.
`
`Plaintiffs are examining a corporate transaction with
`perfect 20/20 hindsight an